How many shares and how much share capital should you issue for your new Hong Kong company registration? This is a common question we get when signing up a new HKVIP client, and want to make a complete post here to help people understand this going forward.
Here is a standard question I get:
I’m a bit confused by section 12: Share Capital and Initial Shareholdings on the Company’s Formation
Last Ltd issued 100 shares, which I paid up before the end of the first accounting period. Why is the shares issued & share capital subscribed different? Would the “unpaid” portion need to be paid up?
What Is Share Capital?
First, what is share capital? It is the amount of shares that a company has to pay out in case the company is going to go bankrupt or dissolve.
Banks and other financial institutions look at it when you are opening the company. Trading partners and others engaging in a long term business cooperation with you are looking at it.
Basically, it shows how “big” the company is, and how much the company can lose if there is every a bankruptcy. This amount of share capital would be paid into the dissolving of the company.
Do I Need To Pay The Share Capital When I Register The Company?
So the next part of the question is, do I need to put this money into a bank account or some kind of escrow when I open the new HK limited? No, the NCO (New Company Ordinance) makes new difference between the amount of shares issued and shares subscribed in Hong Kong company structures.
Normally People Just Stick to Default 10,000 Shares
The general advice we give clients is to stick to the standard 10,000 shares at 1 HKD each, which is a total of 10,000 HKD share capital.
It is just so common, and doesn’t raise any eyebrows. It isn’t too much of a risk either for the company directors and shareholders to “be on the hook” for 10,000 Hong Kong dollars (about $1,200 USD) if the company gets into financial trouble and needs to liquidate.
Let’s talk about a few of the other extremes.
Why People Issue More Shares
So why would someone want to be on the hook for more shares? There are a few reasons to have this logic,
First, certain business types require to have more share capital. We are working with one client who is doing a travel agency, and in order to get a travel agency license, one part of the requirement is to have 300,000 HKD share capital.
So now step back and think about it, this means that the government license department wants to make sure that this new “travel agency” company has some skin in the game. That if things get out of control in the business and there is a legal matter or cash flow issue, there is 300,000 HKD of share capital that can be paid in if there is a liquidation event.
Basically, the government wants the company owners to stand to lose more money than the typical 10,000 that most companies do.
Another reason is if you are raising capital investment. You are issuing more shares to a lot of shareholders, and also want to look bigger to the investment companies. This is a response I heard my startup friend tell me, and there are some open debates about that being such a big deal for an investor – so confirm that one before making the decision.
You may take on new business partners, and instead of transferring your own shares, you make more shares. This is done because it is just easier to do, and also because there are stamp duties (0.1%) and audits required to change current shareholders.
Reason For Having Less Than 10,000 Shares
Maybe you feel 10,000 shares is too much? There are some people who have told me that they only want to have 1 or 2 shares at a Hong Kong dollar each.
They said that they can always issue more shares later. That if they get a new business partner, they can issue a few more shares. The percentages still work out – if there are 2 shares and each owner has 1, it is still a 50% 50% ownership structure.
Why do I feel this isn’t the best case? I would feel banks see this as a higher risk, that the company owners have no “skin in the game” and it is a pretty high risk bank account to approve.
What Do You Think?
Those are the main thought processes on deciding how many shares to issue for your company. What are you thinking?
Most of you will probably just stick with the 10000 shares. Just be aware that as the company director and shareholder, you have this liability to pay the share capital if there is a company liquidation event.
Well, some of you don’t live in Hong Kong and then wonder how can they make me pay? Well, sure, anywhere in the world you can dodge paying the fees, but I wouldn’t expect o ever be able to do business in Hong Kong again if you run away from it.
I’d love to hear reactions and feedback in the comments below! To our mutual business success in Hong Kong and around the world!