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LW5962

Business and Companies Law

Seminar 3
Business Organization

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Forms of Business Organisations
If you want to set up a new business, what
are the choices for the business structure?

Private company
Sole proprietorship

Public company

Listed company

Partnership 2
Considerations Advising on a Structure
• Who controls the business.
• Protection of personal and business
assets from creditors.
• Companies are perpetual, partnerships die.
• Administrative costs.

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Characteristics of a Good Structure
• Flexibility so that the structure can
accommodate changes to circumstances
with the minimum of consequences.
• Adequate asset protection to the owners
of the business.
• Minimises costs.

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Characteristics of a Sole Proprietor

• Legal formality: No. Only regn of business


name. (Regn of Business Names Ord)
• Ownership: No separate legal entity.
• Liability: Unlimited liability.
• Finance obtained by sole proprietor.

Owner Company
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Sole proprietor – Advantages
• Simplicity to establish and control.

Disadvantages
• Unlimited liability – business creditors can
attack the personal assets of the individual
as well as the business assets.
• It ends when the sole proprietor ceases
trading on retirement or death.

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Partnership—Meaning
Meaning: s 3(1), Partnership Ord (Cap 38)
“Partnership is the relation which subsists between
persons carrying on a business in common with a
view of profit.”
Persons: natural persons or artificial persons
Business: includes any trade, occupation or
profession. (s 2)
Profit: sharing of net profits is
prima facie evidence of p/s. (s 4)
Partnership Agreement

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Partnership–Characteristics
Co-Ownership: Not a legal entity. All
partners own the assets of the partnership
Number: < 20 partners (except solicitors &
accountants.
Firm: Partners with one another are called
collectively a firm, and the name under
which their business is carried on is called
the firm-name. (s 6)
own Firm
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Relationship among Partners
Action for Debt: Same entity, a partner
cannot sue or be sued by his firm.
Chan Sau Kut Ps & Ds were partners, not that of
creditor & debtor.
Fiduciary Duties: Partners own each other
fiduciary duties & must act for the benefit for
the firm. (trustee & beneficiaries)
Good Faith: Act in good faith & make full
disclosure. “Partners are bound to render
true accounts & full info of all things affecting
the partnership to any partner.” (s 30) 9
Relationship among Partners
Management & Control: Every partner may
take part in the management. Differences
may be decided by majority. (s 26(h))
Profit & Loss: Share equally in the capital &
profits, & contribute equally to the losses. (s
26(a))

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Liability of Partners to third parties
Joint & Several Liability: A partner
assumes unlimited liability on a j&s basis.
The firm must indemnify every partner. (s 26(b))
Agency: “Every partner is an agent of the
firm and his other partners for the purpose of
the business of the partnership.” (s 7)

Partner A

Creditor Internal relationship

Partner B
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Limited Partnerships
• Comprises of ltd partners and 1 or more
general partners who have unlimited
liability. (s 3(2), Ltd Partnership Ord (C37))
• Ltd partner is only liable up to capital
contributed. (s 3(2))
• Ltd partner cannot participate in
management of partnership, and if takes
part in management, will lose status as ltd
partner. (s 5(1))

Ltd partners Gen partner

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Partnership - Advantages
• More sources of capital than sole
proprietorship
• Cheaper to maintain than company

Partnership - Disadvantages
• Partnership is not a separate legal entity.
• Joint and several liability of the partners.
Each partner liable to third parties despite
any agreement between the partners.
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Types of Companies
• Private companies
• Public companies
• Listed companies
• Companies limited by shares
• Companies limited by guarantee
• Companies without limited liability
• Non-Hong Kong companies
New Companies Ordinance 2012 (“NCO”)
It came into operation in March 2014. It consists of
921 sections and 11 Schedules, compared to the
367 sections and 24 Schedules of the old CO. Using
modern, plain English style.
Characteristics of a Company
• Separate legal entity. Formed by registration
under the Companies Ordinance (Cap 622).
• Liability: Limited liability for shareholders.
• Shareholders have interest in a co but no direct
ownership of assets.
• Directors have the day to day control of the co.

Directors
Management
Shareholders
Assets
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Characteristics of a Company
The personality of a company
• Ownership: The co owns all properties.
• Co can make contracts and incur debts.
• Unless wound up, the co has perpetual
succession.
• Co can sue and be sued in its own name.

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Private Companies
S 11 NCO defines a private company as:
• (1) For the purposes of this Ordinance, a
company is a private
company if—
(a) its articles—
(i) restrict a member’s right to transfer shares;
(ii) limit the number of members to 50; and
(iii) prohibit any invitation to the public to subscribe
for any shares or debentures of the company; and
(b) it is not a company limited by guarantee.
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Private Companies
Restricts the right to transfer its shares
Re Smith and Fawcett Ltd (1942), the company’s
article provided that the directors might, in their
absolute and uncontrolled discretion, refuse to
register any transfer of shares. The directors
refused to register a transfer and the court refused
to intervene in the exercise of the directors’
discretion without evidence of bad faith.
Lord Greene MR said: ‘… a fiduciary power of this
kind must be exercised bona fide (in good faith) in
the interests of the company. Subject to that
qualification, an article in this form appears to me to
give the directors what it says, namely, an absolute
and uncontrolled discretion …’
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Companies Limited by Shares
• Memorandum of Association abolished under
the new Companies Ordinance
• Limited Liability: Members are not liable for
payment of any debts upon winding up (if share
fully paid at issue)
• Where shares partly paid for then in the event of
a winding up the co can make a call on the unpaid
amount and this must be paid
Note: partly paid shares are rare these days, most
are paid in full upon issue.
Companies Limited by Guarantee
• Ltd by Guarantee: is typically a co which has no
intention of distributing profits, e.g., charity
organizations, sporting organizations not for profit
• Limited Liability: limited only to the amount agreed
to contribute to its assets in the event of the co
being wound up.
¡ This amount will be specified in the memo.
¡ Charity v Non-profit Making Organization
Advantages of Private Company
• Can keep their financial information private
• S 662 NCO states that, a private co’s annual
return shall not have to include the audited
accounts.
• Whilst the audited accounts must be
presented to the shareholders within 18
months of incorporation at general meeting,
they do not need to be included in the
annual return.
Advantages of Private Company
• If the articles of asso allows the co to buy
back shares, it may do so, potentially giving
it more control in the destiny of its equity
• Do not need to issue a statement in lieu of
prospectus before issuing shares or
debentures
• Members may approve loans to directors
Public Companies
• The term “public company” is defined under s.12
NCO:
• For the purposes of this Ordinance, a company is
a public
• company if—
• (a) it is not a private company; and
• (b) it is not a company limited by guarantee.
• Remember, it is the members who have limited
liability, the co itself has unlimited liability
Listed Companies
Listed companies are companies who trade
on the HK Stock Exchange
!Must therefore abide by the rules of listing, e.g.
must issue a prospectus, have a certain amount
in equity, history of trading, etc. (outside the
scope of the course)
Eg HSBC Holdings plc (0005), Hang Seng Bank
Ltd (0008)
Non-HK Companies
• A co incorporated overseas and having a place of
business in HK must register as an HK co with the
Companies Registry within 1 month of establishing
the place of business
• Must deliver certain docs & info to the Registrar for
regn including the name & address of at least one
person resident in HK who is authorised to accept
service of doc on behalf of the co. That person can be
a firm or corporate practice of solicitors or professional
accounts
• Cert of registration will be issued by the Registrar.

Place of
Incor/ed overseas Cert of Regn
Business
Non-HK companies
• ss 774, 776 Companies (Non-Hong Kong
Companies) Regulation

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Business Licence
Business Registration Ordinance (Cap 310):
Must register the business with the Business
Registration Office within 1 month of the
commencement of the business (or, in the case
of companies, within one month of date of
incorporation)
Purpose: provide information for opening of tax
files

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Business Licence
One-stop Co & Business Regn Service
(2011.2): when new co is approved, Co Reg
issues Cert of Incorporation/Regn & BR Cert.

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