What is a Limited by Guarantee Company in Hong Kong?

It may seem challenging to decide on the type of entity to form to complement your business needs and objectives. But if you want to open a legally incorporated non-profit organization in Hong Kong, you should open a company limited by guarantee. 

This article will give you an in-depth look at a company limited by guarantee, tell you its advantages and disadvantages, and take a look at its structure. 

Limited by Guarantee Company

What is a company limited by guarantee? Well, a company that is limited by guarantee does not have any share capital. This makes it the fittest type of entity for non-profit organizations. The company does not have shareholders and is owned by guarantee members. If the company is wound up, the liability is limited to the amount members offer to give. Since it is a non-profit organization, no profit is distributed to the members. Instead, the money will be used to fund the objective of the organization further. Similar to other entities, the directors in a limited-by guarantee company have the same responsibilities, legal duties, and liabilities. The members do not receive any dividends or benefit financially; they are involved with the business because they are committed to the objectives of the company. 

Advantages of a Limited by Guarantee Company

There are many advantages of a Limited by guarantee company in Hong Kong, some of them are: 

#1 There are no shareholders - The main benefit of such an entity is that the company can have guarantors instead of shareholders. This makes it fitting for non-profits organizations that are of the voluntary type. The guarantees donate a fixed amount that the company can use to clear any debts in the case of insolvency. 

#2 It is a Separate and Clear legal entity - Another advantage of this type of entity is that it is considered a distinct separate legal entity. In other words, the owners of the company are not regarded as joint to the business. The company can hold property, employ people, and enter into contracts under its own name. Additionally, the directors of the company can be changed without affecting the activities and operations. This is so because the company uses its own name on the documents instead of the directors name. 

#4 It has a stable structure - The company is entitled to a stable structure as it is a voluntary association by the funding members. 

#5 There is limited liability for the members - The members of the business have limited liability. Additionally, the company boasts democratic control over its operations. 

Disadvantages of a Limited by Guarantee Company

Even though there are many benefits of this type of entity, some disadvantages can affect your decision. Some of them are:

#1 Ongoing standard requirements - The owner will have to notify the Companies Registry if the business wants to make any changes in the directors, company secretary, or the registered office. He will also have to do the same in the case of the filing of annual accounts and annual returns. 

#2 Profits - Any profits earned in the business can not be distributed among the owners. Also, the working capital can be limited in some cases 

#3 Time-Consuming Registration - To set up a limited by guarantee company and apply to be a charity, you will have to follow the Hong Kong company registration process. This process is not only time-consuming but also complicated.

Structure of a Limited by Guarantee Company in Hong Kong

The basic structure of a Limited by Guarantee company includes the following:

• One company secretary, one member, and two individual directors
• The member can either be a person or an organization
• There are no restrictions on the nationality of the member
• The company must have the Articles of Association
• They are not allowed to distribute profits
• The secretary of the company can either be an organization or a Hong Kong resident
• There must be a designated representative of the company that is a Hong Kong resident
• The registered office address should be in the city of Hong Kong
• The amount guaranteed by each member must be stated
• The company should file annual financial statements that have been audited with the Companies Registry (it is open to the public). 

Important Documents required for Incorporating the Company

The essential documents you will need in order to incorporate the limited by guarantee company are:

You will be required to have a certified copy of:

• Each member ID card for Hong Kong residents and passports for non-residents.
• Residential proof of each member (utility bills or phone bills)
• If the member is an organization, then the registered office address and the certificate of incorporation are also required.
• The company secretary and designated representative ID card copy and residential address proof
• The completed Incorporation Form
• Budget plan and Activity plan for the first year if the company is registered (This is only for those who have applied for the charity status under SEC 88 of IRO). 

Steps to register a Limited by Guarantee Company

To register a Limited by guarantee company under the Companies Ordinance, you will have to follow the following process:

#1 To avoid using a name the same or similar to a registered company, a name search should be conducted with the Companies Registry. 

#2 You must draft the articles of association, in which the objectives of the company must be stated

#3 You will have to prepare and file the NNC1G incorporation form (for a company not limited by shares). This should be signed by all the directors and members of the company. 

#4 File all the relevant documents, they should include:

• Appointment of the secretary and directors
• Application for a business registration certificate

When the application is approved, the Companies Registry will take about four to six weeks to issue you the Certificate of Incorporation. At the same time you receive this, the IRD (Inland Revenue Department) will issue a Business Registration Certificate.

How do you set up a Hong Kong Charity?

There are many ways to set up a charity in Hong Kong. To register a limited by guarantee company in Hong Kong, you will have to consider a governing instrument. Charities should have governing instruments that:

• Specifies the way assets will be dispensed in the case of dissolution (generally they are donated to other charities)
• Forbids the distribution of income and assets to the members
• Clearly states its objectives
• Requires the maintenance of proper and updated records of the operations (such as the accounting, donation receipts, etc.)
• Prohibits any of the members in the governing body of the company from receiving any sort of remuneration. 

Conclusion

To conclude, limited by guarantee companies are generally used for clubs, charities, membership organizations, sports associations, social enterprises, and NGOs. They are formed with the main objective of rendering services to the public without earning profits. 

You will have to adhere to all the procedures while applying to form a limited by guarantee company in Hong Kong. Suppose you think that it is the right type of entity for you. In that case, it is best to get professional help to assist you throughout the process as it can be complicated for those with inadequate knowledge about the registration process.