Sole proprietorship (also known as being a ‘sole trader') is one of the most common forms of business structure in the world. It is the business structure that applies whenever an individual goes into business for themselves.
This structure is extremely popular among freelancers and individuals that do not require a working visa to operate in Hong Kong.
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 and even small businesses.
Below 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 of the sole proprietorship: any debts of the business become the personal debts of the owner/operator.
➡️ This means that when the business becomes insolvent (unable to pay its debts as they fall due and payable), the owner-operator can be forced into personal bankruptcy.
These are major points to be considered by the person intending to set up a sole proprietorship in Hong Kong:
- 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). Related to its annual compliance, the company must renew the business registration certificate every year or every three years.
There is a two-tiered tax for sole proprietors in Hong Kong: This means that sole proprietors pay 7.5% on their first HKD $2 million and 15% thereafter.
Unlike a corporate body that is required to report profit from its business activities with a profits tax return, the sole proprietorship must report the income with an individual tax return.
Note Hong Kong applies a territorial approach to taxation to sole proprietors, which means that the sole proprietorship is taxed only on profits ‘earned in' Hong Kong.
For any substantial changes to the business requirements that the owner-operator notifies the Inland Revenue Department of those changes within one month.
Can a foreigner register as a sole proprietor in Hong Kong?
Yes, a foreigner 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, a sole proprietorship in Hong Kong 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' or an agent in Hong Kong to manage affairs on their behalf with the business registration office. For this process, this agent must provide an appointment letter stating this person will act as a representative, a copy of its Hong Kong identity card, and a residential address.
Third, if you wish to 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.
In general, sole proprietorships are easier to set up by foreigners that already obtained permanent residency or those who hold a dependent visa.
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 activities.
To register, the business must:
- Choose a business name. An appropriate business name should not infringe on any trademarks or intellectual property of other businesses and must not be offensive.
As the sole proprietorship is not a separate legal entity from the individual, the business name 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 the business registration office address, description, proposed business nature, and date of commencement of business activities.
It is important to mention that a person carrying a sole proprietorship business can still register more than one business, either as a sole proprietor or carrying other ventures in Hong Kong.
Each entity will have a different business name. For each one of the projects, the business owner should apply for a Business Registration Certificate.
Additionally, for specific activities, it is necessary to apply for a Business License in Hong Kong, for example, services related to education, restaurants, etc.
Consult with local service providers about this requirement according to the industry and services you intend to provide.
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, education, etc.).
The business entity 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 tax return.
If the sole proprietorship earns HKD $2 million annually or more, then it is required to attach certified copies of those statements, including profit and loss, the company's balance sheet, and its tax computation.
Important to note that the tax rate for a sole proprietorship in Hong Kong is 15% on the assessable profits.
Bank account opening for sole proprietorships
Sole proprietors can access a business bank account for their operation in Hong Kong.
Depending on the banking or payment institutions, they might require the company owner to provide supporting information for the business operations, including the business registration certificate of the entity, identification of the individual behind the sole proprietorship, business plan, etc.
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', compared to the incorporation of a limited liability company.
Any business that decides to carry out a sole proprietorship 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.
A great option to commence this project is to reach professional services firms that assist in verifying the proposed business name, in the company incorporation, obtaining the business registration certificate and business license, and assisting in the proper compliance of the sole proprietorship.
In case you are in search of a service provider, you can reach out to the Statrys team at firstname.lastname@example.org or look for a service provider on our Company Secretary Review Page.
What is a sole proprietorship in Hong Kong?
How do I register a sole proprietorship in Hong Kong?
When should you register a sole proprietorship in Hong Kong?
What are the advantages of a sole proprietorship in Hong Kong?
What are the disadvantages of a sole proprietorship in Hong Kong?
What are the ongoing obligations of a sole proprietorship in Hong Kong?