A sole proprietorship is the simplest structure: you register with the IRD's Business Registration Office within one month of starting business, and there is no statutory audit. But you are personally liable for all the business's debts without limit. A limited company is a separate legal entity, and a shareholder's liability is limited to any amount unpaid on their shares. In exchange, it must comply with the Companies Ordinance, including an annual audit, annual returns, a company secretary and a registered office. Profits tax is 7.5% on the first HK$2 million for unincorporated businesses and 8.25% for corporations, then 15% and 16.5%. You can't convert a sole proprietorship into a company. You incorporate a new company and cancel the old business registration once the sole proprietorship stops trading.
Side-by-side comparison
| Sole proprietorship / partnership | Private limited company | |
|---|---|---|
| Legal status | Not separate from the owner(s). The owner or partners can sue or be prosecuted because of the business. | A separate legal entity that can own property, sign contracts, sue and be sued in its own name |
| Liability | Unlimited: the owner is personally liable for business debts, even if the business becomes insolvent. Partners share debts jointly and severally. | Limited to any amount unpaid on the shares a member holds |
| Setting up | Register with the IRD Business Registration Office within 1 month of starting business | File the incorporation form with the Companies Registry; business registration is applied for at the same time |
| Government fees to start | Business registration fee and levy: HK$2,350 for a 1-year certificate (commencing 1.4.2026–31.3.2027) | HK$1,545 electronic incorporation fee plus the same HK$2,350 business registration fee and levy |
| Profits tax (two-tiered) | 7.5% on the first HK$2 million of assessable profits, 15% on the rest | 8.25% on the first HK$2 million, 16.5% on the rest |
| Statutory audit | Not required | Required every year (dormant companies excepted) |
| Ongoing filings | Renew business registration; file tax returns; report changes to the Business Registration Office | Renew business registration; annual return (NAR1); tax returns; report changes of directors, company secretary and registered office; keep statutory registers |
| Business records | Every business must keep sufficient records, in English or Chinese, for at least 7 years | |
When a sole proprietorship makes sense
The Trade and Industry Department's SME guide describes the sole proprietorship as the most flexible structure: simple to form, and the owner answers only to themselves. It suits testing an idea, freelancing or consulting where the main asset is your own skill, as long as you're comfortable with personal liability. A government guide for entrepreneurs notes you don't need company registration forms or auditors, which keeps costs down.
When a limited company makes sense
- Risk: contracts, staff, stock, leases or borrowing create debts you don't want to guarantee personally.
- Partners and investors: shares make it easier to bring in co-owners, and a change of directors or shareholders doesn't interrupt the company.
- Customers and banks: some clients prefer, or require, contracting with a limited company.
- Profit level: the rates differ by 0.75 percentage points on the first HK$2 million and 1.5 points above that, so tax alone rarely decides it. Factor in the audit and company secretary costs a company carries.
GovHK notes that the benefit of limited liability comes with obligations under the Companies Ordinance, including timely reporting of information about the company, its officers and shareholders.
Moving from a sole proprietorship to a limited company
- Incorporate a new company. The Companies Registry says that to carry on the business as a limited company you must apply to incorporate one. There is no conversion procedure. See how to set up a Hong Kong limited company.
- Move the business across, including customer contracts, supplier accounts, bank account, licences and staff. Take professional advice on transferring assets.
- Cancel the old business registration. When the sole proprietorship ceases, notify the Business Registration Office in writing within 1 month of the cessation date (or use Form IRC 3113 or eTAX). The fee and levy must be paid up to and including the year of cessation. The Registry suggests professional advice if you're unsure whether to cancel.
- Connected entities: if you keep both the old business and the company, they may be connected entities, and only one of them can elect the two-tiered profits tax rates for a year of assessment.
Related service: Sole Proprietorship & Partnership Setup and Tax Filing (Tax filing from HK$4,000 / year). Not sure which structure fits? An accountant can compare the tax, liability and running costs for your numbers, and we can register either one. The first consultation is free.
Frequently asked questions
Is a sole proprietorship cheaper to run than a limited company?
Usually. Both pay the same business registration fee and levy, but a limited company also pays the incorporation fee and must be audited every year, file an annual return and have a company secretary and registered office. A sole proprietorship has no statutory audit.
Which pays less profits tax?
On the same profit, an unincorporated business pays 7.5% on the first HK$2 million and 15% above, compared with 8.25% and 16.5% for a corporation. The difference is small, so liability and costs usually matter more.
Can I convert my sole proprietorship into a limited company?
Not directly. You incorporate a new limited company, move the business into it and, when the sole proprietorship ceases, notify the Business Registration Office within 1 month.
Is my personal property at risk in a sole proprietorship?
Yes. The owner is personally liable for the business's debts, and the liability is unlimited, even if the business becomes insolvent.
Sources (official)
- SME Link (Trade and Industry Department): Company Types
- GovHK: Starting a business (licensing, registration and regulations)
- HK Talent Engage (HKSAR Government): Business registration guide for entrepreneurs
- Companies Registry FAQ: Business registration and miscellaneous
- IRD FAQ: Two-tiered profits tax rates regime
- Companies Registry FAQ: Accounts and audit
- Companies Registry: Major fees
- IRD: Business Registration Fee and Levy Table
- IRD: Cancellation of Business Registration
- IRD: A Guide to Keeping Business Records (PAM 51C)
- Companies Registry / IRD pamphlet: Compliance with the Companies Ordinance and Business Registration Ordinance (PAM 25)
This guide is general information, not professional advice. Government fees and deadlines can change, so check the official sources linked above.