A sole proprietorship is a prevalent form of business in many countries including Hong Kong due to it being simple and straightforward to set up. There are minimal government fees and paperwork making it an attractive option for small-medium enterprises (SMEs) and self-employed.
One of the most prominent sole proprietor success stories is IKEA. Ingvar Kamprad owned the world-renowned furniture and homeware brand as a sole proprietor until his death in 2018. He built a global brand from a single store in Sweden. This form of business may have suited IKEA’s founder but would it suit your business?
Let’s consider the advantages and disadvantages of sole proprietorships, how they work, and who they best serve.
What is sole proprietorship?
A sole proprietorship is considered the easiest and simplest form of business. As the name suggests, the business is owned and operated by a sole person and the owner and the business are considered one. Although this is the most straightforward form of business, there is considerable risk associated as there is no protection of personal assets from risks and liabilities that arise from the business.
While the sole proprietor receives all the profits from the business, but at the same time, he is solely and personally responsible for all the liabilities, leaving the owners’ assets vulnerable to creditors among other liabilities.
Common types of businesses that operate as sole proprietors include SMEs such as local grocery and fashion retail stores, self-employed tradespeople, freelancers, artists and startups.
It is relatively simple and easy to register a sole proprietorship in Hong Kong. See Hong Kong Sole Proprietorship Registration guide.
Sole Proprietorship Advantages
- Simple to Establish: Sole Proprietorships are known for simple and easy setting up procedures.
- Easy Decision Making: Given that the sole proprietor retains complete control over all business affairs, decision making is fast and efficient, without having to seek approval from others.
- Sole Beneficiary of Profits: Sole proprietors do not have to share profits derived from the business.
- Less tax: Fortunately, you do not pay taxes on the full amount of your sole proprietorship’s income. Instead, you’ll only pay sole proprietorship tax on the profits of your business. In Hong Kong, sole proprietorship tax is 15% on assessable profits.
- Ease of Termination: Terminating a sole proprietorship is easier, less time consuming and less expensive than other business entities.
Be sure to do your homework when you begin to take advantage of the ease of launching a sole proprietorship. Do your research and talk to other founders with similar business models to get insightful tips and feedback. This will be useful for you to better understand the potential pitfalls and challenges you are looking at.
As you move through the startup phase, coworking spaces like WeWork can also provide support, giving you access to a global community of business leaders and offering flexible monthly leasing agreements. Meeting collaborators and building brand recognition happens naturally in WeWork spaces, and the ability to host meetings (or your own events) in beautifully designed workspaces is key to wooing investors and attracting new clients.
Likewise, there is an increasing number of incubators and accelerator programs in Hong Kong, focusing on different areas of interest:
Betatron – This accelerator program does not focus on any specific technology vertical.
Cyberport Incubation Programme – Program targeted for early-stage Hong Kong startups looking to grow in areas related to digital tech
DBS Accelerator and Fintech Innovation Lab – Focuses on technology startups
Founder Institute – Pre-seed startup accelerator, with chapters across 180+ cities. Works with entrepreneurs and startups in different stages of growth
SuperCharger – Fintech accelerator helping startups in both early-stage to established scale-up stage
Zeroth.ai – Asia’s first accelerator for early-stage startups in the field of Artificial Intelligence
Angelhack – The world’s most diverse hacker community, driving innovation of tech products through developer programs.
Joining one of these programs is a great way to get funding, find mentorship and a support network. The best way to succeed is by learning all you can about them.
Sole Proprietorship Disadvantages
- No Separate Legal Entity: Sole proprietorships are not separate legal entities and the owner and business are considered one and the same. Therefore the sole proprietor is responsible for all debts and liabilities.
- Unlimited Personal Liability: In cases of debts incurred, there is no protection of personal assets which includes your property.
- Limited Capital: The only source of capital is the sole proprietor’s personal finances and business generated profits. With limited working capital business growth and expansion could be delayed or deterred.
- Limited Life of the Business: There is no perpetual succession of sole proprietorships, which cease to exist on the death of the sole proprietor.
- Financing Difficulties: Due to the risks posed by this form of business, investors are less confident and sourcing for finance becomes more difficult. Alternative financing options, like bootstrapping and crowdfunding, should be considered for startups.
Bootstrapping a business is relying on personal savings or company sales for funding, rather than outside investors. Whereas crowdfunding is financing a business through many small donations or investments through a platform like Sparkraise, One Business Asia, FringeBacker and NextChapter.
- Sale/Transfer of All or Part of the Business: You can transfer the business only by the sale of business assets.
If you want to establish a low-risk small-scale business where you will be the only owner and have sufficient financial resources on hand, it might be easier and simpler for you to register your business as a Sole Proprietorship. However, bear in mind that your liability is unlimited and there is no protection of your personal assets.
But if you want to share the responsibilities of running a business or if you do not have adequate financial resources, then a Partnership would be the better option.
If you’d like to learn more about our flexible co-working spaces and networking events, please visit wework.hk to connect with us today.