A limited company is a company that is registered (or incorporated) in accordance with the new Companies Ordinance ("the New CO"), which came into effect on 3 March 2014. Different types of companies are defined under sections 7 to 12.
The characteristics of a company that is limited by shares can be described as follows:
- A limited company has a separate legal status that allows it to enter into contracts, to sue or be sued, to own property and to borrow money in its own name. Small and medium-sized businesses are usually run as private limited companies, rather than public limited companies. A private limited company cannot offer shares to the public at large but may have up to 50 shareholders whose right to transfer their shares is limited.
- A private limited company must have a least one director. Section 457 restricts corporate directorship by requiring a private company (other than one within the same group as a listed company) to have at least one director who is a natural person.
- Under the New CO, the memorandum of association (“MA”) has been abolished for all companies. For existing companies (i.e. companies formed under the old regime), the conditions in the memorandum are deemed to be contained in the articles of association, except for conditions relating to authorised share capital and par value, which are regarded to be deleted for all purposes. For existing companies (i.e. companies formed under the old regime), the conditions in the memorandum are deemed to be contained in the articles of association, except for conditions relating to authorised share capital and par value, which are regarded to be deleted for all purposes (section 98 of the New CO).
- Companies to be incorporated under the New CO are required to have certain mandatory articles of association. For instance, the company name (section 81 of the New CO); details of the liabilities or contributions of the members(sections 83 and 84 of the New CO).
- Company directors must declare any actual or potential conflicts of interest in relation to the company to the board of directors. Nevertheless, company directors should try to avoid dealings which might have conflicts of interest in relation to their company.
- A limited company must keep minutes of the proceedings of all general meetings and meetings of the board of directors at its registered office.
- Certain companies are allowed to prepare simplified financial and directors’ reports. Companies which are qualified for simplified reporting are referred to in the New CO as companies "falling within the reporting exemption". Sections 359 to 366 and Schedule 3 set out the qualifying conditions for companies to prepare simplified financial and directors' reports.
- A limited company must not be registered without “limited” as the last word of their English name or “有限公司” of their Chinese name. However, the Registrar, may, by licence, exercise power to dispense with the use of the word "limited" or "有限公司".
- It is prudent to prepare a Shareholders Agreement that covers the disposal or transmission of shares, the settling of managerial and policy disputes and the protection of interests of minority shareholders. You should appoint a lawyer to prepare this Agreement.
Advantages of forming a limited company
- The most obvious advantage is that the liability of the shareholders for the company's debts is limited to the amount of their respective shareholding. The liability of the company as a whole is limited to its aggregate issued share capital and its assets.
- An individual can be both sole shareholder and sole director, and hence have total control and full decision-making power over the company's policies and profits.
- It is easy to transfer the interests of the business by transferring shares to existing or new shareholders without interfering with the corporate structure by signing an instrument of transfer and a bought and sold note (based on the latest audited balance sheet and management accounts) on which the requisite stamp duty has been assessed and paid, provided that the approval of the company is obtained and the relevant rules that are set out in the company's Articles of Association are followed.
- The continuity of the business is not affected by the death, bankruptcy, retirement or mental disorder of any shareholder.
Disadvantages of forming a limited company
- A limited company must pay profits tax at the corporate rate, which is higher than the rate for individuals paid by sole proprietors and partnerships (for more details on profits tax, please go to another topic – Taxation).
- Shareholders cannot withdraw their capital at will from the company (unless they sell their shares to others).
- The transfer of shares in a private limited company may be restricted by the right of pre-emption (if any) in the Shareholders Agreement, which states that the existing shareholders must be given the first option to buy shares. The Companies Ordinance also gives the board of directors the right to veto potential new shareholders unless the directors do so in bad faith.
- Due to the nature of limited liability, many creditors of private limited companies will ask for personal guarantees or bank guarantees from shareholders or directors of such companies, and those shareholders/directors will then have to bear the debt personally if the company is unable to pay it.
- It is obligatory to publicly disclose the company’s Articles of Association, registered office address, details of shareholders, directors….at the Companies Registry.
- There are prolonged and costly procedures for dissolving a limited company after the business has ceased or if it fails.
- Potential conflicts of interest may arise among the company, its shareholders and its directors.
- Minority shareholders may not have effective involvement in or control over decision-making or management.
- A company director may have to take personal liability for a contract that is drawn up in the company's name but subsequently proves not to be enforceable against the company (if a potential director signed a contract before the date of formal incorporation of the company, for example). Directors may also be personally liable for claims if they act negligently in the performance of their job duties.