Business Setup Guide 2009 7 2
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Helping new businesses succeed … 2 July 2009 New Business Setup Guide
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Guide to new entrepreneurs on setting up a business in Hong Kong
Transcript of Business Setup Guide 2009 7 2
Helping new businesses
succeed …
2 July 2009
New Business Setup Guide
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
2:
Contents
Page
Introduction 3
Success Factors 4
The Business Plan 6
Cash Flow vs Profit 7
Business Structure Guide 8
Limited Company Guide 10
Taxation Guide 11
CEPA Guide 14
Contacts 16
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
3:
Introduction This guide is designed to provide some pointers to anyone considering starting his / her own business venture in Hong Kong. Information contained in the guide includes strategic considerations such as cash flow management, as well as technical aspects such as alternate type of business entities and taxation implications. The information contained in this guide is intended for guidance and it is essential that advice be obtained from local professional sources before any business is undertaken. The information in this guide includes legislation in force as of May 2009.
T.C. Ng & Company CPA Limited
T.C. Ng & Co. CPA Limited is a HK based CPA firm founded in 1964. Since then, it has been providing quality auditing, taxation and business consulting services to a large cross-section of HK and multi-national businesses.
Our principle is a total commitment to professional excellence and we place our firm’s professional responsibilities to our clients above all other business considerations. We believe in investing time to develop true long-term partnerships and trusted relationships with every client.
Entrepreneurs require different types of advice in different stages of their ventures. During startup stage, we can assist with corporate structures, accounting, taxation and company secretarial matters. Later on, we can assist in identifying strategies and targets for expansion and acquisition, including the raising of finance on the Hong Kong Stock Exchange.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
4:
Success Factors
Certain critical success factors are common in many new business startups that managed to grow past the startup stage and on to become a mature business.
A Distinctive, Compelling Proposition
Any new business startup normally already revolves around a new idea, but that is far from being enough. A good idea must be turned into a workable business proposition. To do so, the founder of the business must be clear about three important aspects:
What is the product or service?
Who are the customers?
What are the distinctive, compelling benefits for the customers?
Distinctive - a new product or service can be distinctive as one that stands out from its competition and not being a “me-too” product or service. Identifying a niche is the classic way to enter a market where many established players already exist. Other ways to be distinctive include being the cheapest or most expensive in their category.
Compelling – a new product or service can be compelling if it helps customers eliminate an existing problem or if it creates a well-defined tangible benefit. Tangible benefits are measureable benefits that clearly make a difference to customers.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
5:
Product / Industry Knowledge
The chance of success is far greater when the entrepreneur starts a business in a sector he/she is familiar with; as opposed to a business he/she is not experienced. Although some thriving businesses have attributed their successes to originality, novelty and risk-taking, for a startup, the disadvantages are stacked against the industry outsider. Experts in their own field have three distinct advantages in a start-up situation:
1. Their industry experience helps them to recognize opportunities.
2. Industry experience and knowledge helps overcome the inevitable hiccups in running a business.
3. Deep industry knowledge is needed to implement bold initiatives.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
6:
The Business Plan
At some stage of a new business venture’s life, the founder or founding team is likely to face the need to produce a business plan. It may be driven by the need to raise finance or even simply for better internal communication as the business expands and headcount grows. Given the variety of uses for a business plan, it is imperative the document be tailored to cater for the target audience. For example, bankers and venture capitalists are looking for a sound proposition, evidence of good management and a good marketing plan.
A business plan is easy to produce if it is split into manageable tasks and tackled separately.
The steps to develop a good business plan are as follows and in this order:
1. Define your business activities
2. Define the current status of your business
3. Define the external market, your competition and your market positioning
4. Define your objectives for the period of the plan
5. Develop a strategy for achieving the objectives
6. Identify risks and opportunities
7. Refine the strategies into working plans
8. Project revenues and costs and develop a financial plan
9. Project different business scenarios and their impact on the financial plan
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
7:
Cash Flow vs Profit
The difference between cash flow and profit is working capital, due to delays in getting paid by customers and the need to pay many expenses upfront. With new businesses, its negotiating power to obtain favorable credit terms from suppliers is limited. As a startup grows, the requirement for working capital also increases. The founder has to finance that growth either through further investment of capital (his own money) or through borrowing (bank loans).
Cash is King
Most companies crash not because they can’t turn a profit but because they run out of cash. Therefore the critical concern for most startups will be their ability to conserve and control cash.
Cash Flow Management
During the startup phase of a new business, it is critical to avoid running out of cash. It is important to review regularly the short-term cash requirements and then forecast longer-term cash flows based on credible and realistic financial information. If management is not yet familiar with the discipline of producing regular cash flow forecasts, it should consider external help. To speed up cash generation, management can negotiate longer credit terms with suppliers and at the same time, shorten the credit terms given to its customers. Businesses should keep track of their debtor day and creditor day indicators to ensure that anticipated results are achieved. Inventory is another major usage of cash, so businesses should manage their stock cycles as efficiently as possible by keeping inventory levels to a minimum and regularly clearing out old inventory to generate cash. In the short term, profit may need to be sacrificed for cash generation. Consider increasing prices, which may reduce volume sales, which will reduce working capital requirements and hence cash usage.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
8:
Business Structure Guide The most common types of business structure are:
Sole Proprietorship
Partnership
Company
Sole Proprietorship
The sole proprietor is the simplest and most flexible structure for new businesses. It consists of one individual carrying on business, who may engage employees but is personally responsible for all the business debts incurred and all the decisions made. The sole trader effectively takes all the risks and all the profit. The main advantage of sole proprietorship is flexibility – total control and full decision-making powers over policy, profits and capital investment. The legal formalities for a sole proprietor are:
i. Register the name of the business with the Business Registration Office
ii. Notify the Inland Revenue when the business begins operation and when an individual who is liable to salaries tax under the Inland Revenue Ordinance is employed
Most business regulations which govern business activities in Hong Kong will also apply to the sole proprietor, such as employment (Employment Ordinance; Employment Compensation Ordinance).
Partnership
A partnership is similar to sole proprietorship in the sense that it has no separate legal status. The partners are called a “firm” and partners are agents of the firm. All the partners in the firm are entitled to share in the profits equally unless they agreed otherwise.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
9:
Limited Company
A company is a separate legal person. The main advantages in using a company to conduct business include limited liability for shareholders; freedom to enter into business contracts in the company’s name and continuity of business. Disadvantages include the need for formal procedures; public disclosure and no withdrawal of capital. A limited company can take the following forms:
Limited company – limited by shares or guarantee
Unlimited company – with or without share capital
Private company
Public company
Points to consider when choosing a business structure:
1. What is the purpose of the business?
2. How long is the business expected to run?
3. Does the business involve many investors?
4. What are the sources of capital?
5. Who will share the profits?
6. Who will choose the employees?
7. Who will manage the day-to-day running of the business?
8. Who is to decide policy?
9. Do the owners want limited liability?
10. Who decides on the distribution of profits and re-investment into the business?
11. Can the founding parties freely transfer their interests to outsiders?
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
10:
Limited Company Guide
Setup and maintenance requirements for private and public companies:
1. Memorandum of Association signed by at least one subscriber
2. Number of subscribers:
Minimum number - private company: 1; public company: 1
Maximum number - private company: 50; public company: no limit
3. Minimum number of directors – private company: 1; public company: 2
4. Registered office maintained in HK
5. A company secretary must be appointed
6. An annual return must be filed
7. An annual general meeting (AGM) must be held each calendar year with the exception of the first AGM which must be held within 18 months of incorporation
8. Statutory book-keeping and record filing requirements under Companies Ordinance
9. Auditors qualified under the Professional Accountants Ordinance must be appointed to conduct annual audit of the company’s books and records
10. Annual audited accounts must be prepared in accordance with the requirements of the HKICPA
11. Audited accounts of a private company having a share capital are not filed with the Companies Registry, but has to be lodged with the Inland Revenue Department in support of the tax computation
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
11:
Taxation Guide
Introduction
HK levies three direct taxes on company profits and the income of individuals and partnerships under the Inland Revenue Ordinance.
2009/10
Property Tax Charged on rent received by owners of real estate located in HK
15%
Salaries Tax Charged on all income arising in or derived from HK from an office, employment or pension
15%
Profits Tax Charged on profits arising in or derived from HK from a trade, profession, or business carried on in HK
Corporations 16.5%
Unincorporated 15%
Hong Kong’s taxes apply only to income arising in or derived from Hong Kong. Provisional tax is payable in respect of all three taxes and is usually based on the assessable income of the previous year. Profit tax losses may be carried forward indefinitely subject to anti-avoidance provisions concerning the change of ownership of a company. There is no inheritance tax in HK following the abolition of Estate Duty in 2006. Capital Gains are not taxable unless they arise from the carrying on of a trade in which case they are treated as revenue items subject to Profits Tax.
Apart from the three main direct taxes, a number of indirect taxes are levied on goods and services. These include:
1. Property Rates
2. Tobacco Duty
3. Motor Vehicle First Registration Tax
4. Horse Racing & Football Betting Duties
If the source of profits is derived outside Hong Kong, no profit tax liability arises. However, the law governing this area is very specific and professional advice should be sought.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
12:
Depreciation Allowance
Depreciation allowances are available for expenditure on plant and machinery, industrial and commercial buildings.
2009/10 Rate
Industrial Buildings Initial Allowance 20% of capital expenditure on construction
Annual Allowance 4% of construction expenditure
Commercial Buildings Annual Allowance 4% of construction expenditure
Manufacturing machinery, computer hardware & software, environmentally friendly plant & machinery
100% of capital expenditure in year of acquisition
Other Plant & Machinery
Initial Allowance 60% of capital expenditure
Annual Allowance 10%, 20%, 30% on reducing value according to classification
Salaries Tax Rates
Salaries Tax is imposed on employees in respect of income from employment and is payable based on the lower of:
1. The standard rate of 15% for 2009/10 of net assessable income after allowable deductions, or
2. Net assessable income after allowable deductions and personal allowances, charged at the following rates for 2009/10:
2009/10 HK$ Rate Tax HK$
First 40,000 2% 800
Second 40,000 7% 2,800
Third 40,000 12% 4,800
Balance 17%
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
13:
Personal Allowances
Personal allowances are available to taxpayers liable to salaries tax or individuals who elect for personal assessment.
2009/10 HK$
Personal Allowance Single 108,000
Married 216,000
Single Parent Allowance 108,000
Child Allowance 1st to 9
th child (each) 50,000
year of birth (each) 50,000
Dependent Parent Allowance Aged over 60 or above 30,000
Aged 55 to 59 15,000
Additional Dependent Parent Allowance Aged over 60 or above 30,000
Aged 55 to 59 15,000
Dependent Grandparent Allowance Aged over 60 or above 30,000
Aged 55 to 59 15,000
Additional Dependent Grandparent Allowance Aged over 60 or above 30,000
Aged 55 to 59 15,000
Disabled Dependent Allowance 60,000
Dependent Sibling Allowance 30,000
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
14:
CEPA Guide
Entrepreneurs considering a new business startup can benefit from CEPA “Closer Economic Partnership Agreement” between the Mainland and Hong Kong. CEPA opens up the mainland markets for Hong Kong goods and services.
Trade in Goods
Under CEPA, goods of Hong Kong origin can be imported into the Mainland with zero tariff, effective from 1st January 2006. The key requirements to qualify for an exporter are:
Each consignment of goods exported to the Mainland must be accompanied by a Certificate of Hong Kong Origin – CEPA “CO(CEPA)”
CO(CEPA) is issued by the Trade & Industry Department or one of five Government approved certification organizations
o Hong Kong General Chamber of Commerce
o Federation of Hong Kong Industries
o Chinese Manufacturing Association of Hong Kong
o Chinese General Chamber of Commerce
o Indian General Chamber of Commerce
To obtain CO(CEPA), the HK manufacturer must first apply for Factory Registration “FR” with the Trade & Industry Department to demonstrate that its factory possesses sufficient capacity to produce the goods for export.
The goods / products exported under CEPA must finally satisfy the CEPA Rules of Origin “CEPA ROO”. ROO is a set of rules setting out the criteria and standards for a product to claim itself of a particular country of origin. CEPA ROO is a more preferential set of ROO for HK manufacturers claiming zero tariff import into Mainland under CEPA. There are currently 1537 items of goods covered under CEPA ROO eligible for zero tariff preferential treatment.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
15:
Trade in Services
For entrepreneurs considering setting up a business to provide services on the Mainland, CEPA enables HK service suppliers to enjoy preferential treatment in entering into the Mainland market in various service areas.
There are two classes of Hong Kong service supplier:
Juridical Person (companies, partnerships and sole proprietorships) – any legal entity duly constituted or organized under the applicable laws of HK and which has engaged in substantive business operations in HK for three to five years.
Natural Person (individuals)
HK service suppliers classified as juridical persons need to apply for a Certificate of Hong Kong Service Supplier “HKSS” before it can apply to the relevant Mainland authorities for providing services in the PRC with preferential treatment under CEPA. Application of HKSS is done through the Trade & Industry Department. HK service suppliers classified as natural persons are not required to apply for a HKSS. The individual just need to provide to the relevant Mainland authorities’ identification of his or her Hong Kong permanent resident status. Copies of the identification documents should be attested by a China appointed attesting officer recognized by the Mainland.
New Business Setup Guide
Contact:
Andrew Ng, Director
Tel: (852) 25757383
www.tcng-cpa.com
16:
Contacts We have a team of experienced finance professional led by three directors each with in-depth expertise in consulting, auditing and taxation. Any entrepreneur embarking on a new business startup venture can always benefit from a free consultation session with one of our directors or senior managers.
Andrew Ng CPA Practicing, FCA, BA
Director (T.C. Ng & Company CPA Limited) Director (TCN Consulting Services Limited)
Andrew has over 20 years’ experience in financial management, business process reengineering and IPOs, Andrew has assisted clients in statutory audits, making improvements to their finance function and business operation, achieving large bottom line improvements or assisting clients to go public.
Edwin Chiu CPA Practicing, FCCA, ACA
Director (T.C. Ng & Company CPA Limited)
Edwin joined the practice in 1980. During his years with the firm, he has developed extensive knowledge in serving clients in various industries, including HK listed companies, real estate development companies, manufacturing, trading, publishing, charitable foundations and other local enterprises. He is an independent nonexecutive director and Chairman of the Audit Committee of a Hong Kong listed company.
Eddie Man CPA Practicing, FCA, MSc
Director (T.C. Ng & Company CPA Limited)
Prior to joining the practice in 1992, Eddie worked in one of the 'Big Four' firms in England for four years after graduating with a Master Degree in Finance in University of Lancaster in England. He has over 16 years experience in the field of auditing, taxation and accounting services and has also been actively involved in tax investigation and review engagements.
