In general, a sole proprietorship appears to be an ideal business structure for a person who intends to be self-employed and intends to have a small business operation. This is due to the nature of a sole proprietorship of not being an incorporated or separate legal entity.

Freelancers also should considered whether their work should be reported as salary or they should register as self-employed as a sole proprietor. In that case there are a few areas to consider before registering a sole proprietorship in Hong Kong

Legal & Financing Considerations

• Legal status

As mentioned above, since a sole proprietorship is not a legal entity, the owner is personally liable for any debt the sole proprietorship is unable to settle. In addition, it offers no protection against the owner’s personal assets. Meaning that the creditors will have the right to chase after the owner’s personal assets if they are unable to settle its debts.

• Complexity and cost

Putting aside the legal status, a sole proprietorship is attractive to many small business owners, sole owners, and entrepreneurs mainly due to its ease, low set up, and maintenance costs. As the only requirement is to register its business with the Inland Revenue Department’s Business Registration Office (“the BR Office”) and to obtain and keep on renewing the Business Registration Certificate.

• Financing

That being said, due its nature and legal status, a sole proprietorship tends to find it more difficult to obtain finance for its business operations from investors and banks. This is due to the fact that investment into a sole proprietorship is not considered as a good investment in comparison to the risk it has to take.

• Succession planning

Again, due to the nature and the legal status, there is not much succession planning available for this business setup. This is due to the fact that the sole proprietorship will simply cease to exist when the owner stops the business operation or passes away.

• Visa issue for Expats

It is unlikely for expats to have a sole proprietorship in Hong Kong unless the expats are already holding a dependent visa. This is due to the fact that expats who wish to work in Hong Kong is required to have a valid visa (i.e. employment, investment or dependent visa). However, with employment visa, the expats are required to have an employer to sponsor the visa application.

In terms of an investment visa, there are certain criteria to the visa application, such as make substantial contribution to the Hong Kong economy and to create more jobs for the local workforce. Therefore, it is unlikely that the sole proprietorship is able to satisfy the condition for an employment or investment visa.

Accounting, Auditing & Tax Considerations

The first HKD 2 million profits derived will be subject to a rate of 7.5% and profits above HKD 2 million will continue to be subject to the standard rate of 15%, whilst a company is subject to the profits tax rate 8.25% and 16.5% respectively.

In terms from a reporting perspective, a sole proprietorship reports its profits through the individual tax return rather than the profits tax return. For sole proprietorships, whose income do not exceed HKD 2,000,000, no financial accounts are required to be attached when submitting the tax return. Whereas, for sole proprietorships, whose income exceed HKD 2,000,000, the sole proprietorship will then have to submit a certified copy of its balance sheet and profit & loss statement along with a tax computation.

That being said, unlike a company, sole proprietorship in Hong Kong is not required to have its accounts audited. However, it is recommended that the sole proprietorship maintains proper financial accounts and many entrepreneurs may opt for cloud accounting solutions as well as virtual bank accounts.

How to Register a Sole Proprietorship in Hong Kong?

As mentioned above, the only requirement to set up a sole proprietorship is to register the business with the BR Office within one month from the date of commencement of the business. 

Provided that all the information and documents are prepared correctly (i.e. completed application form including proposed business name, and a copy of the owner’s passport or Hong Kong identity card), the registration and issue the Business Registration Certificate can be completed within 1 day.

At the HKWJ Group, Triple Eight Limited would gladly assist you to prepare all the documentation, submission and subsequently follow up to successfully achieve your business registration in Hong Kong. We can also assist with the accounting as well as with corporate tax returns and other tax advisory such as mitigation of taxes for expats.