Business booming for you in Hong Kong? Want to add a new business partner or shareholder to your limited company? This is something that is common in business, and it is an exciting time.
But how do you change owners in your business? You may be curious the methods and steps needed – so today is a treat for you.
Let’s dig into how to update your shareholders for your Hong Kong business.
When Can You Change Shareholders?
Some wonder when they can update the shareholders of their company. We’ve had cases were just a couple weeks after the opened their company, a client will add a new partner.
Though we recommend not changing ownership while your bank account application is still pending. You can read all about Hong Kong bank account application headaches. This is because the bank is still doing its due diligence. Even a couple weeks later, until they approve you (let’s hope not declined!), so don’t cause more questions.
If you do need to add this person ASAP, you should also tell the bank that you are doing this. Depending on the bank’s policy, and the amount of shares the new business owner is taking, he or she may need to come to the bank in person.
Two Ways To Add A New Shareholder
So there are a couple ways you can do this.
Your company is still 100% either way. The total shares outstanding divided by the amount each owner has is the percentage ownership. Many clients ask the difference with these two methods, so let’s dig in.
Easier Way – Issue New Shares
The method we suggest is to issue new shares. By creating more shares, you simple “add on” a new business partner. Most businesses we help setup do the standard 10,000 shares at 1 HKD each (10,000 HKD share capital). You add on the amount of shares to make the total percentages what you want it to be.
So here’s an example – you are the sole owner with 100% shares at 10,000 HKD share capital. You want to take on a 50% owner (which can be a bit dangerous, please make a clear business deal with them), you would then issue 10,000 HKD more shares to this new partner. Now the company will have a 20,000 HKD share capital and each of you will own half of them.
The forms and government fees are lower here, and if you’re keeping your shares and just adding new partners, this is the method we will recommend you.
Other Way – Transferring Outstanding Shares
The other method is to transfer shares you already own. For example, you have the 10,000 HKD share capital representing 100% of the shares. You then choose to “sell” 50% of your company to this new partner and they put in the money (to the business or to you) and then you transfer 5,000 of your shares to them.
Now the total share capital is still 10,000 HKD and you each have 5,000 HKD of it.
Why would you choose this method instead of issuing new shares? Maybe you are selling your shares outright and want to get out of the business. Or your other business partners want to sell out. This is then recommended if you are having someone exit the business, and another person entering the business.
Also keep in mind, that if you company has already filed an audit, you need to disclose this and have everything up to snuff with your company to transfer shares. We have had podcasts in the past (one with Marshall Taplits I’m remembering) where he discusses some of the issues he had with transferring his shares. His Hong Kong companies wasn’t up to date in their audits. So he had to get the audits all done, all the partners had to sign, and then he could sell his shares.
So as a general rule of thumb, transferring shares is more expensive and more involved than issuing new shares.
More Share Capital Means More Director Liability
So some downsides worth noting on issuing new shares. By having more share capital outstanding, you don’t need to fund that right away, or ever. But if the company gets to be insolvent (can’t pay its bills), then the government of Hong Kong can request the directors to inject this amount. Which amount? The total of share capital the company directors promised to cover the debts the company has outstanding.
Put another way – if your company is going to go bankrupt, you as a owner and director will need to put in the amount of share capital that you have on record. But the limited liability of the limited company is up to that amount of share capital.
Adding a New Shareholder? Please Make Contract (Though Not Required)
So when I talk to clients, I always beg them to make it clear with their new business partners before issuing the new shares. What are the roles and responsibilities of each founder? How are decisions made?
Also, if it is a 50/50 split, what if there is a disagreement? How will you sort things out if you tie in the vote?
And the biggest question is, how can one of the partners buy more shares, or sell their shares, if they want to change things in the future? They call this a buy/sell agreement and there are many different ways.
Even if you’re not ever thinking of having a problem with this business partner, there is a saying it’s better to sort the details out in the honeymoon stage rather than waiting until there is a dispute. So sit down, face to face if possible, and work out the details.
How Do You Add New Shareholders?
Now it’s your turn! How do you add new shareholders in your business ventures? Have any standard procedures or contracts?
Sure there are a few different reasons to add a new partner:
By having a plan, and knowing who (and what) you need, you will make the decision of finding the right business partners. And over and over again, businesses fail not because of the business itself, but disputes within the founding team. So keep things clear from the beginning, and have aligned interests!
Good luck on this big decision of adding more partners to your company!