“Should I start an unlimited company or a limited company?” is a question many new entrepreneurs face. What are the differences between a limited company and a sole proprietorship/partnership unlimited company? Which is better? If it’s no longer suitable, is it possible to “convert from unlimited to limited”?
General Accounting’s advice is that “it depends on the situation.” Both unlimited (sole proprietorship/partnership) companies and limited companies have their own advantages and disadvantages; it is not a one-size-fits-all scenario. As a professional accounting consultancy, our responsibility is to analyze the differences, pros, and cons based on each client’s background and provide a suitable company formation plan.
What are the differences between setting up an unlimited company and a limited company?
Based on years of experience in accounting and company formation, the differences between setting up an unlimited company and a limited company can be broadly compared across four major areas: “governing legislation, fees, tax filing, and debt liability.”
Differences between Limited and Unlimited Companies: Governing Legislation
| Unlimited Company | Limited Company | |
|---|---|---|
| Governing Legislation | Business Registration Ordinance (Cap. 310)1 | Companies Ordinance (Cap. 622 of the Laws of Hong Kong)2 |
| Legal Status | No independent status; linked to the owner or partners | Independent legal entity with its own legal status |
| Company Members | Owner or partners | Shareholders, directors, company secretary |
| Share Capital | None, due to unlimited liability | As required, minimum HK$1 |
| Incorporation Documents | Business Registration Forms3 Form 1(a) for Sole Proprietorship / Form 1(c) for Partnership |
Incorporation Form NNC1, Articles of Association, IRBR1, and IRBR200 |
| Registration Requirements | Sole proprietorship: at least one person aged 18 or above as owner; Partnership: at least two persons aged 18 or above as partners | At least one person (aged 18+) or company as shareholder and director, plus one individual as company secretary |
| Transfer and Succession | Sole proprietorships cannot be transferred or inherited | Can be transferred or inherited through share transfers |
More details: The Ultimate Guide to Hong Kong Business Registration Certificates: Latest BR Application, Fees, Documents, and Renewal Guide
Differences between Limited and Unlimited Companies: Fees
| Unlimited Company | Limited Company | |
|---|---|---|
| Agency Service Fee | Approx. HK$500 | Approx. HK$1,000 |
| Government Fees | HK$2,2004 | HK$3,9205 |
| Maintenance Fees |
1. Business Registration Fee: HK$2,200 2. Tax Filing Fee |
1. Business Registration Fee: HK$2,200 2. Audit Fee 3. Company Secretary Fee 4. Annual Return Fee: $105 |
| Business Bank Account Opening Fee | Generally the same | Generally the same |
More details: Company Formation Costs | Hong Kong Company Secretary Services
Limited vs. Unlimited Company Comparison: Tax Filing
| Unlimited Company | Limited Company | |
|---|---|---|
| Tax Return Form | Sole Proprietorship: BIR 60 Partnership: BIR 52 |
BIR 51 |
| Tax Rate | First $2M net profit: 7.5% Over $2M: 15% |
First $2M net profit: 8.25% Over $2M: 16.5% |
| Taxation Method | Company profits can be taxed independently or through Personal Assessment | Company profits are taxed completely independently from personal tax filing |
| Supporting Documents | No audit report required; only need to attach balance sheet, P&L, and tax computation | Must submit an audit report along with balance sheet, P&L, and tax computation |
| Tax Filing Fee (General SME) | $2,000 - $6,000 | $6,000 - $12,000 |
More details: Corporate Tax Filing | Accounting Services
Limited vs. Unlimited Company Comparison: Debt Liability
| Unlimited Company | Limited Company | |
|---|---|---|
| Owner/Shareholder Liability | Owner or partners have unlimited liability | Shareholders' liability is limited to their share capital |
| Closing Procedure | Submit Form IRC3113 to notify the Business Registration Office | Apply for a Notice of No Objection to Deregistration from the IRD, then submit Form NDR1 to the Companies Registry |
| Consequences of Insolvency | Personal bankruptcy; owner or partners must sell personal assets to repay debts | Apply for company liquidation; does not affect shareholders' personal assets |
More details: [Closing a Company] How to avoid failure in deregistration? Guide to closing bank accounts and asset handling
[Cancelling Business Registration] Closing procedures for Limited/Unlimited companies | 5 common mistakes to avoid!
8 Factors to Consider Before Choosing an Unlimited or Limited Company
In addition to the 4 major differences above, consider these 8 factors before starting your company:
Personal Background
Do you own many assets? Theoretically, the more assets you have, the more you should form a limited company to prevent personal assets from being affected by company debts.
More details: Benefits of Setting Up a Limited Company in Hong Kong
Investment Amount
Nature of business
Is it a specialized industry? For example, real estate, money exchange, or financial lending involve high-risk operations. If so, General Accounting suggests forming a limited company.
Investment Category
If the company involves investment business, such as taxi licenses, industrial buildings, or rental properties, General Accounting recommends registering a Hong Kong limited company. This allows the business or company to be transferred directly to a third party, saving on stamp duty for transfers.
Extended Reading: [Buying Property via Company] Budget adjustments to Ad Valorem Stamp Duty | Benefits and process of property transactions under a company name
Risk Tolerance
Assess your own risk tolerance. Business always involves profits and losses. In case of a loss, it is best to calculate how much you can afford to lose. The lower your risk tolerance, the more you should choose a limited company.
Business Expansion Plans
For businesses like R that may constantly bring in new investors, limited companies make it easy to add or remove shareholders and adjust share ratios. You can also issue preferred shares to different classes of investors.
Number of Partners
A one-person company is relatively simple to handle whether unlimited or limited. For partnerships of two or more people, you must consider decision-making power and operational details. A limited company is more advantageous as it operates based on the “Articles of Association.” General Accounting suggests that for businesses with multiple participants, a limited company is easier to manage.
Extended Reading: [Articles of Association] Understanding the 6 main purposes of the Articles of Association (AA)
Operating Costs
The setup and operating costs of an unlimited company are relatively low. If money is the only consideration, starting an unlimited company is definitely the first choice.
Can an unlimited company be converted into a limited company?
Legally, no. Unlimited (sole proprietorship/partnership) companies are established under the Business Registration Ordinance (Cap. 310)1, while limited companies are regulated by the Companies Ordinance (Cap. 622)2. Legally, “limited” and “unlimited sole proprietorship/partnership” are completely different legal entities. The concept of directly converting an unlimited sole proprietorship/partnership into a limited company is absolutely incorrect.
How to change from unlimited to limited? Solutions for converting an unlimited company to a limited company
Although you cannot directly convert a partnership/sole proprietorship unlimited company into a limited company legally, General Accounting can provide a similar service: transferring the business of an unlimited partnership/sole proprietorship to a limited company for continued operation.
Simply put, the owner or partners of a sole proprietorship/partnership can establish a new limited company with the same or a similar name, and then gradually transfer the unlimited company’s business to the limited company. This involves an overlapping transition period. The detailed process is as follows:
8 Procedures for Converting a Sole Proprietorship/Partnership Unlimited Company to Limited
Step 1: Incorporate a Limited Company
The owner or partners of the unlimited company establish a new limited company and bank account using the same or a similar name.
Step 2: Business Transfer
Gradually transfer existing clients and business from the unlimited company to the new limited company.
Step 3: Asset Transfer
Transfer existing assets of the unlimited company, such as vehicles or equipment, to the new limited company.
Step 4: Simultaneous Operation
Both the old and new companies operate simultaneously, with the ultimate goal of the limited company replacing the unlimited one.
Step 5: Clearing Liabilities
Step 6: Closing Bank Accounts
Step 7: Fulfilling Tax Obligations
After completing the submission of corporate/personal tax returns and paying all taxes, you can apply to close the unlimited company.
Step 8: Completion
After applying for business cessation with the Inland Revenue Department (submitting Form IRC3113), the process of transferring the unlimited company’s business to a limited company is complete.
Extended Reading: Unlimited Company Cessation Procedures
Frequently Asked Questions
Conclusion
The above is a comparison between unlimited and limited companies and the solution for “converting unlimited to limited.” Both have their pros and cons; risk management and costs should be considered before starting a business. If the industry involves high risk, a limited company provides a protective umbrella to prevent shareholders from facing unlimited liability. However, in the early stages of entrepreneurship when the scale is small and the outlook is uncertain, you can start with a sole proprietorship/partnership to test the waters, and then “convert the unlimited company to a limited company” once development is clear.
Further reading:
[Setting up a HK Company] 8 Key Points for Starting a Company in Hong Kong! DIY vs. Using an Agency
Offshore Company Development Trends | Understanding the 10 Major Benefits of Offshore Companies
Sources
1. Business Registration Ordinance
https://www.elegislation.gov.hk/hk/cap310
2. Companies Ordinance (Cap. 622 of the Laws of Hong Kong)
https://www.elegislation.gov.hk/hk/cap622
3. Inland Revenue Department
https://www.ird.gov.hk/eng/tax/bre_abr.htm#a3
4. IRD Business Registration Fee and Levy Table
https://www.ird.gov.hk/eng/pdf/brfee_table.pdf
5. Companies Registry
https://www.cr.gov.hk/en/services/fees.htm
