Guide to new entrepreneurs on setting up a business in Hong Kong

1. Helping new businesses
succeed …
New Business Setup Guide
2 July 2009

2. New Business Setup Guide
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
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 2:
www.tcng-cpa.com

3. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 3:
www.tcng-cpa.com

4. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 4:
www.tcng-cpa.com

5. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 5:
www.tcng-cpa.com

6. New Business Setup Guide
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
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 6:
www.tcng-cpa.com

7. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 7:
www.tcng-cpa.com

8. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 8:
www.tcng-cpa.com

9. New Business Setup Guide
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?
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 9:
www.tcng-cpa.com

10. New Business Setup Guide
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
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 10:
www.tcng-cpa.com

11. New Business Setup Guide
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 15%
estate located in HK
Salaries Tax Charged on all income arising in or derived from 15%
HK from an office, employment or pension
Profits Tax Charged on profits arising in or derived from HK Corporations 16.5%
from a trade, profession, or business carried on
in HK 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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 11:
www.tcng-cpa.com

12. New Business Setup Guide
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 & 100% of capital expenditure in year of
software, environmentally friendly plant & acquisition
machinery
Other Plant & Initial Allowance 60% of capital expenditure
Machinery
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%
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 12:
www.tcng-cpa.com

13. New Business Setup Guide
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
st th
Child Allowance 1 to 9 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
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 13:
www.tcng-cpa.com

14. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 14:
www.tcng-cpa.com

15. New Business Setup Guide
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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 15:
www.tcng-cpa.com

16. New Business Setup Guide
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)
andrewng@tcng-cpa.com 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)
edwinchiu@tcng-cpa.com 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)
eddieman@tcng-cpa.com 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.
Contact:
Andrew Ng, Director
Tel: (852) 25757383
andrewng@tcng-cpa.com 16:
www.tcng-cpa.com