Sole proprietorship (also known as being a ‘sole trader’) is the most common form of business structure in the world: It is the business structure that applies whenever an individual goes into business for themselves and doesn’t incorporate a legal entity.
Despite its popularity, there are reasons to be hesitant before setting up as a sole proprietorship in Hong Kong: Sole proprietorship exposes individuals to significant liability, and is not a commercially trusted business form for foreigners in Hong Kong.
Nevertheless, it is a business structure that will suit some people: Here, we set out the process for registering a sole proprietorship in Hong Kong.
Key features of a sole proprietorship in Hong Kong
In a sole proprietorship, the ordinary (natural) person who sets up the business — the owner-operator — is the same legal personality as the business: There's no separate business entity from a legal perspective.
This means that the owner/operator has unlimited liability for debts: Any debts of the business become the personal debts of the owner/operator. This means that when the business becomes insolvent (unable to pay their debts as they fall due and payable), the owner-operator can be forced into personal bankruptcy.
The owner-operator also has unlimited liability under the law generally. The owner-operator signs all contracts, and is liable for damages for contract breach. The owner-operator also has compliance responsibilities, and it will be the owner-operator who can be fined or penalized by the authorities for failure to comply with tax and commercial obligations, not the company itself.
Sole proprietorships, like all business forms in Hong Kong, must be registered with the Inland Revenue Department's Business Registration Office. For compliant operation, all businesses in Hong require a business registration certificate (BRC), which is provided by the Inland Revenue Department.
There is a two-tiered tax for sole proprietors in Hong Kong: This means that sole proprietors pay 7.5 percent on their first HKD $2 million, and 15 percent thereafter.
Note, Hong Kong applies a territorial approach to taxation to sole proprietors, which means that the sole proprietorship is generally taxed only on profits ‘earned in’ Hong Kong.
Any substantial changes to the business require that the owner-operator notify the Inland Revenue Department of those changes within one month.
Can a foreigner register as a sole proprietor in Hong Kong?
Yes. Foreigners can register as a sole proprietor in Hong Kong, but there are some constraints on doing so that will make it unattractive to many international entrepreneurs.
First of all, a Hong Kong sole proprietorship is only available for a business that is actually operating in Hong Kong. As set out further below, the Inland Revenue Department requires a significant amount of information from non-residents to determine whether a business counts as ‘operating in’ Hong Kong.
Second, where an individual wishes to register a sole proprietorship in Hong Kong, they will need to appoint a ‘responsible person’ in Hong Kong to manage affairs on their behalf.
Third, if you wish to actually relocate to Hong Kong, you will need to apply for an investment visa. If it is your chosen business form, you must register your sole proprietorship before you apply for the investment visa. The eligibility criteria for the investment visa itself are quite strict: You will need to prove that you will make a substantial contribution to the economy of Hong Kong. For example, you will need to show that you will create jobs for the local workforce, or use the services of local businesses.
What is the procedure for setting up a sole proprietorship in Hong Kong?
The owner-operator must apply for registration as a sole proprietor in Hong Kong within one month of commencing business there.
To register the business must:
- Choose a business name. This should not infringe on any trademarks or intellectual property of other businesses, must not be offensive, and must not imply that the business is incorporated with limited liability;
- Provide identification information. For example, resident owner-operators must provide their hong kong identity card and non-resident owner-operators must provide passport information.
- Provide information about the business itself. Non-residents must provide a range of additional information to register a sole proprietorship including:
Ongoing compliance obligations
Once registered with the Inland Revenue Department, the business will need to get any special business licenses that may be required in certain industries (e.g., financial services).
The business must also ensure that it complies with its annual tax obligations: Tax returns must be submitted annually. If the business earns less than HKD $2 million annually, it is not required to submit financial statements with its return. If it earns that amount or more, it is required to attach certified copies of those statements.
Registering as a sole proprietor in Hong Kong is usually not the best option for a foreign business: It is only available for individuals, exposes the individual to unlimited liability, and has more requirements related to ‘doing business in Hong Kong’, than company incorporation.
Any business that decides to carry out a sole proprietor business in Hong Kong must register with the Inland Revenue Department and file tax returns every year. Where business details change, the Inland Revenue Department must be informed.