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Hong Kong Sole Proprietorship & Partnership

Hong Kong Sole Proprietorship & Partnership


Sole Proprietorship

or also commonly known as Sole Trader


Any individual carrying on a business on his/her own behalf will be a sole trader. Sole traders are self-employed and pay income tax on the profits made by the business.


Advantages

  • It is easy and quick to start trading as a sole trader as there are no formalities to comply with other than notifying the Tax Authorities.


  • The business itself is flexible. Any decisions and changes can be made easily as there is only one person to make the relevant choices.


  • All the profits generated by the business will belong to the sole trader.


  • Sole traders own their business and so are able to sell or transfer it as they wish.


Disadvantages

  • A sole trader has unlimited liability. This means that if the business should collapse, the sole trader could loose not only the cash and other assets invested in the business but all his/her personal assets as well, to meet the debts of the business.


  • As there is only one person with overall responsibility for the success of the business this may increase the pressure on that individual.


A sole-proprietorship is a business firm owned by one person or one locally incorporated company. There are no partners. The sole-proprietor has absolute say in the running of the business firm. Management rests on that one person and his liability is unlimited.


It is an easy procedure to register a sole-proprietorship. There is no requirement for a sole trader to maintain accounts for auditing purposes. For tax purposes, a balance sheet or statement of affairs as at the end of the year and a detailed profit and loss account must be submitted to the tax authorities.


If such a business fails or is declared bankrupt, the creditors can sue the proprietor for all debts incurred. A legal claim can be made against the personal assets of the proprietor. One of the advantages of this form of business is that there are fewer formalities in terms of its formation and registration.


Partnership


A partnership is made up of more than one person or company. Generally, all partners have equal rights in the management of the partnership. To avoid possible disputes, it is preferable that a partnership agreement is drawn up. Partnerships may have between two and twenty partners. Once there are more than twenty partners, the business entity must be registered as a company


A partnership is not a legal entity such that the partnership has to sue or be sued in the names of the partners. The liability of each partner is unlimited. A partnership consisting of foreign individuals or persons will not be registered by the Registrar unless there is a Singapore local resident manager.


The advantage of operating a sole proprietorship or partnership is that disclosures of financial statements to the general public are not required.


Losses incurred by such businesses can be set off against other personal income such as interest, rental and dividend as well as employment income (if any).


Advantages

  • Partnerships face fewer statutory controls than companies.


  • There is no requirement to audit or publish accounts or to register the Partnership Agreement. No returns are required to be made by partnerships, except for income tax.


  • The internal structure of partnerships is very flexible. Most of the rules for the structure of partnerships can be overridden if the partners agree otherwise.


  • Partnerships can be simple and cheap to set up. There is no requirement to have any written documentation, although a Partnership Agreement is advisable (see above).


  • Partners owe a duty of good faith to each other. Partners must also account to the partnership for any secret profits that they make from the partnership without the consent of the other partners, including any profits gained from any competing business.


Disadvantages

  • Partners face unlimited liability for all the debts of the partnership. This means that the personal assets of each partner are at risk.


  • Partners are jointly liable for partnership debts. This means that if one partner fails to pay his share of the partnership debt, the other partners must make up the shortfall.


  • Any individual partner can be sued for all the debts of the partnership.


  • The partnership does not have its own separate legal identity from the partners. Therefore, unless otherwise agreed, the partnership will come to an end each time a partner leaves.


  • The avenues available for access to further capital for expansion are restricted by the amount of security that can be given personally by the individual partners.



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