Without pre-empting potential legal issues, business owners can easily find themselves embroiled in costly and time-consuming legal disputes. This is particularly important for small business owners, who likely do not have the funds nor the reputation to survive legal battles.
Although legal issues are often industry and jurisdiction-specific, we have identified the most common legal issues in businesses and how you can avoid them:
1. Business structure
Whilst many new business owners typically give a lot of thought to matters such as customer drivers, trademarks, employees, and management, choosing a business form is either not prioritised or entirely skipped. However, defining your business structure is a critical first step in setting up your business. It has wide implications for your earning potential, taxes, and personal liability, and may often spell the difference between success and failure in today’s competitive market.
Common business structures include:
Sole proprietorship
A sole proprietorship is the most common type of entity. The basic premise is that the business is carried out in the sole owner’s name, meaning that the owner has total control over business operations and is personally liable for all liabilities/obligations of the business.
If you are running the business on your own, a sole proprietorship is the simplest form of legal entity to set up.
All sole proprietorships must register with the Inland Revenue Department’s Business Registration office. The business should be registered within one month from the date of commencement of business. If your business is yet to commence operation then your application for business registration will not be accepted by the IRD. The documents required for registration are as follows:
- Complete the application form i.e. Form 1(a)
- Pay the business registration fee and levy
- Submit identity proof. If you are the owner, you can submit your Hong Kong identity card. If you are non-Hong Kong resident, then a copy of your passport or identity card is issued by the relevant government authority.
If you are a non-resident sole-proprietor, then IRD may require you to submit additional information to ensure your business has commenced in Hong Kong and the date of commencement is correct. See the sample questions here for reference.
Failure to register a business is liable to a fine of $5,000 and to imprisonment for 1 year. Also, the business registration certificate should be renewed one month before expiry on an annual basis or once every three years, depending on whether the registration certificate is valid for one year or three years.
Partnership
A partnership is formed when two or more people create a business with the common goal of earning profit. Partners establish a contract between themselves that sets out the partnership’s operation and regulations. It is advisable to have a Partnership Agreement in writing to prevent disputes in future. Click the link for a template of Partnership Agreement and customize it according to your requirements.
The idea behind a partnership is that each partner contributes to the business in the form of capital, property, and skill. As a result of their contributions, they share the profits and losses of the business. Whilst the partnership itself is not a legal entity, the partners themselves are considered legal entities.
In Hong Kong, there are two types of partnership, namely general partnership and limited partnership. The principal legislation governing these partnerships is the Partnership Ordinance (Cap. 38) and the Limited Partnerships Ordinance (Cap. 37). There is a third type of partnership called the limited liability partnership. It is a special type of partnership and is only available to the law firms in Hong Kong. In Hong Kong, the Partnership needs to be registered with the IRD and the following documents are required:
- complete the Form 1(c) for application;
- pay the business registration fee & levy; and
- Provide proof of identity such as copies of Hong Kong identity cards of the partners and for non-residents provide a copy of the passport or identity card issued by the relevant government authority.
The timeline and penalty for registration is the same as for the registration of sole proprietorship.
Limited Liability Partnership (LLP)
Unlike general partnerships, limited liability partnerships are a type of partnership where a partner is not liable for any wrongful acts of other partners. The partnership is a separate legal entity in itself and has to be registered.
Corporation
A corporation is a business entity owned by shareholders. It is a separate legal entity (unlike a sole proprietor or a partnership) with limited liability. In general, a corporation should have directors, a company secretary, articles of association and a registered office to own and operate its assets and business.
In Hong Kong, the type of companies that can be formed under the Companies Ordinance (Cap. 622) are as follows:
- Private companies limited by shares
- Public companies limited by shares
- companies limited by guarantee without a share capital
- private unlimited companies with a share capital
- public unlimited companies with a share capital
When deciding the name of a company, it should be in accordance with the Guideline on Registration of Company Names for Hong Kong Companies.
In Hong Kong, a private company limited by shares is the most preferred way of incorporating a business because the company has a separate legal entity from its shareholder and the shareholder’s liability is limited to the unpaid amount of shares held by them.
It is important to ensure that the structure of a private limited company is in compliance with the Companies Ordinance (Cap. 622) For instance, it should have at least 1 shareholder and a maximum of 50 shareholders; at least 1 director should be a natural person over 18 years old etc.
A public limited company is listed publicly on the Stock Exchange of Hong Kong i.e. it can offer shares to the public.The liability of the shareholders is limited to the unpaid amount of shares held by every shareholder. It is subjected to various compliance requirements and needs to be more open and transparent to the public about its details in comparison with a private company.
In a company limited by guarantee, the member’s liability is limited by the articles of association of the company upto the amount of contribution to the company’s assets in the event of closure. As it does not have any share capital, it is preferred by charities or non-profit organizations.
The process for registering a private limited company is fairly straightforward. It requires you to provide:
- Incorporation Form i.e. Form NNC1 (local companies limited by shares) or Form NNC1G (local companies not limited by shares)
- Copy of the company’s articles of association; and
- Notice to the business registration office (IRBR1)
To understand the registration process, and requirements of directors and company secretary for a Hong Kong company in detail, check out our article on ‘How do I register a company in Hong Kong?’
Businesses may change the structure at any time, but it is important for it to be set up properly from the very beginning. Check out our article on ‘What are sole proprietorships, partnerships and limited companies? What are the pros and cons of each type of business?’ for the advantages and disadvantages of each business structure.
2. Employee issues
Given that employees make up a fundamental part of all businesses, there is potential for a variety of employee-related legal issues.
Classification
In order to avoid legal issues, you must classify your employees accurately as either full-time, part-time or an independent contractor. This will impact the terms of the Employment Contract, as well as employee entitlements such as minimum wage and overtime pay.
See our blog on Employee, Sole Proprietor, Independent Contractor, Freelancer: What is the difference? for more information on the difference between employees and independent contractors.
Termination
Should you wish to fire an underperforming employee, you should take particular care. Mishandling the process could result in a wrongful or unfair dismissal lawsuit. You can lessen your chances of legal repercussions by taking certain precautions e.g. draft a Notice of Termination, provide relevant reasons, and give the employee sufficient notice.
An employer can involuntarily terminate an employment contract ‘with cause’ by summarily dismissing an employee or ‘without cause’ by laying off an employee.
1. Getting Fired – Summary Dismissal
The Employment Ordinance (Cap. 57) (“EO”) provides that an employee can be terminated summarily without notice or payment in lieu of notice in the following scenarios:
(i) if an employee
- wilfully disobeyed a lawful and reasonable order
- misconducts himself
- is guilty of fraud or dishonesty
- habitually neglects in his duties
(ii) in other circumstances, where summary dismissal is available at common law.
Only in exceptional circumstances, an employee can be summarily dismissed by the employer such as in the case of serious misconduct, unjustified assault on fellow workers etc. Summary dismissal is a serious disciplinary action taken against the employee and it should not be taken lightly. If the action is challenged by the employee then the burden is on the employer to prove that the summary dismissal was justified.
2. Redundancy / Layoff
As per the EO, an employee may be dismissed due to redundancy in the following circumstances:
- the employer has ceased or intends to cease the business;
- the employer has ceased, or intends to cease, the business in the place where the employee was employed; or
- the requirement of the business for employees to carry out particular kind of work, or to carry out particular kind of work in a place where the employee was employed, ceases or diminishes or is expected to cease or diminish.
An employee is considered laid-off if the employee’s remuneration depends upon receiving the work from the employer for which he was employed and the employer has not provided work or wages for more than:
- half of the total number of normal working days in any four consecutive weeks
- one-third of the total number of normal working days in any 26 consecutive weeks.
The lock-out days, rest days, annual leave and statutory holidays will be excluded to calculate the above period.
However, the EO requires the employer to pay severance pay if an employee is dismissed due to redundancy / laid off in certain circumstances. To understand more about severance payment, read our article on “What is severance payment? Who is eligible for severance? How to calculate severance?”
Discrimination
Discrimination allegations are often based on race, gender, age, and ethnicity. In order to protect your brand image and prevent the incurring of huge legal costs, you should take measures to ensure all of your employees are treated equally.
The Equal Opportunities Commission has implemented 4 anti-discrimination ordinances set out below:
- Sex Discrimination Ordinance (Cap. 480) (“SDO”),
- the Disability Discrimination Ordinance (Cap. 487) (“DDO”),
- the Family Status Discrimination Ordinance (Cap. 527) (“FSDO”) and
- the Race Discrimination Ordinance (Cap. 602) (“RDO”)
These four ordinances prohibit discrimination on the grounds of sex, marital status, disability, race, pregnancy, breastfeeding and family status. However, there is no protection against discrimination on the basis of age, religious beliefs or sexual orientation. These Ordinances prohibit:
- Direct Discrimination – Direct Discrimination occurs if the employer treats another person less favourably because of sex, marital status, pregnancy, breastfeeding etc.
- Indirect Discrimination – Indirect Discrimination occurs when a condition is applied to all the employees but adversely affects a particular group because of a protected attribute
- Victimisation – Victimisation occurs when a person is treated less favourably because he/she has made any allegations of unlawful discrimination or making a complaint under any of the above 4 ordinances.
- Harassment – Sexual harassment, disability harassment and racial harassment are prohibited by the SDO, DDO and RDO in Hong Kong.
Employers may take several steps to ensure compliance with these ordinances such as by implementing anti-discrimination policies and internal grievance procedures; providing a work environment free from discrimination harassment etc. If your employee has made a complaint of unlawful discrimination then read our article on “What should I do if my employee has made a complaint of unlawful discrimination?” To understand the steps you can take to protect yourself.
Health & Safety
As workplace injuries can lead employees to sue your business for damages, you must ensure that your business is committed to health and safety. This is the case regardless of what industry you are in.
The Occupational Safety and Health Ordinance (Cap. 509) (“OSHO”) provides for the safety and health protection to employees at the workplace. The employers must, so far as reasonably practicable, ensure the safety and health of the employees at the workplace. It applies to both industrial and non-industrial workplaces.
As per the OSHO, some of the duties of the employer are to maintain the environment at the workplace safe and without risk to health, to provide training and supervision to the staff to ensure safety and health at work.
It is important to ensure safety and health of the employees as the EO provides that an employee may terminate their employment without notice if they reasonably fear physical danger by disease which was not contemplated by their contract of employment. Also, employer’s failure to comply this statutory duty is an offence liable to fine of HK$200,000 and unto 12 months’ imprisonment.
It is recommended that employers should implement a health and safety policy or guidelines that state the company’s responsibilities in preventing injuries and illnesses.
Information Sharing
If you host meetings with prospective business partners, employee or contractors during which you share confidential business information, ensure that they sign confidentiality agreements to avoid potential issues.
This often takes the form of a Non-Disclosure Agreement/Confidentiality Agreement. You may use our templates for NDA/Confidentiality Agreement for businesses, as you see fit.
There are different forms of NDA and to understand more about NDA’s read our article on “What is an NDA and when do I need one?”
Foreign Workers
The Hong Kong government encourages employers to consider employing locals over foreign workers when there is an employment opportunity. However, when in the process of hiring foreign workers, you need to check they have the appropriate work visas before you consider employing them. In Hong Kong, there is no official quota limiting the number of employment visas a company can be issued.
The minimum age for employment is 18 years old. However, students in the age group of 13-17 years old can be employed subject to certain conditions. Read the article Can I hire students? Do I need to pay them minimum wage? to find out more.
3. Intellectual Property
Intellectual property can refer to trademarks, patents, copyrights, registered designs, or trade secrets. A typical mistake many new businesses make is not properly protecting their intellectual property through registration—this puts your business at risk of losing its own ideas and creations.
Likewise, if you do not carefully research existing patents, trademarks or copyrights that you are using (e.g. for the name of your business or a new product), you may be sued by another business that believes they have ownership over them. In Hong Kong, you can protect your intellectual property rights as follows:
- Copyright – Copyright is a process of protecting original works recorded in a material form such as books, songs etc. The principal legislation governing copyrights is the Copyright Ordinance (Cap. 528), It protects a total of 9 categories of work such as literary work, artistic work, sound recordings, films etc. There are no procedural requirements for registering a copyright in Hong Kong. As long as the work is original and recorded in material form it will automatically receive copyright protection. The period of copyright protection lasts until 50 years after the work’s creator passes away (except in certain cases depending on the category of work). As a business, you may want to put a copyright notice (example on your business website) to inform the public that you are the owner of the work and it should not be copied without your permission. Also, you can grant a license to use your copyrighted work to another party and earn royalty. It is recommended to grant licenses in writing by signing a copyright license agreement. A template of a copyright licence agreement can be found here.
- Trademark – A trademark consists of a mark (i.e. a sign, expression or design) that distinguishes the products and/or services of one from those of another. The principal legislation governing trademarks is the Trade Marks Ordinance (Cap. 559), In Hong Kong, only registered trademarks can enjoy the benefits and protections provided under the trademark Ordinance. For instance, a registered trademark gives you the exclusive right to use the trademark, take legal action against another party in case of infringement, you can license your trademark and earn royalty etc. For registration, you can file an application with the Trade Marks Registry. To understand the application process for registering a trademark, refer to the article on ‘What is the process for registering a trademark in Hong Kong?’ The registration of a trademark will last for 10 years from the filing date of the registration application and can be extended by renewing the registration. Like copyright, you can grant license to use your trademark to another party by entering into a trademark license agreement. A template of a trademark licence can be found here.
- Patent – A patent gives the owner an exclusive right to make, use, sell, import and exploit the patented invention. In Hong Kong, patent protection is governed by the Patents Ordinance (Cap. 514). A patent needs to be registered in Hong Kong to receive the necessary protection. There are two types of patents that one can apply for – standard patent and short-term patent. To get a patent, the invention must be new; must involve an inventive step; and is susceptible of industrial application. To understand more about the application process of registration, check out the article on “How can I apply for a patent for my invention?”
- Registered Design – Registered Design protects the appearance of a product. In Hong Kong, registered designs are regulated by the Registered Designs Ordinance (Cap. 522). In order to register a design, it must be new; the aesthetic considerations of the article to which the design relates should be of a material extent by users of the article; the design must not be contrary to public order or morality; and the design must not be a computer program or a protected lay-out design (topography). To understand the application process for registration, check out the article on ‘How can I register a design in Hong Kong? How long does registered design protection last?’. If you have a product that has an appealing design or appearance that you should consider registering a design to ensure the competitors do not sell a product with the same shape or appearance.
4. Shareholder disagreements
Shareholders’ disputes are one of the most common causes of business failure. A Shareholders’ Agreement is the best way to avoid disputes and offer legal protection for shareholders, even if the other shareholders are family members or friends. In Hong Kong, the Companies Ordinance (Cap 622 of the laws of Hong Kong) governs some aspects of shareholders’ agreements. Like all other agreements, shareholders’ agreements are also governed by common law rules of contract in Hong Kong.
A Shareholders’ Agreement is particularly useful when a business is split up or sold, as it stipulates who gets what and leaves little room for misunderstandings or disagreements.
A Shareholders’ Agreement is concluded between the shareholders of a company to:
- define their respective rights and responsibilities, and
- organise the management of the said company.
It allows shareholders to incorporate express contractual provisions addressing key management issues above and beyond those afforded by statute and corporate law. It is not intended to govern the day-to-day operations of a business.
Summary
Matters relating to business structure, employees, intellectual property, and shareholders are some of the key legal issues to look out for when starting a new business. With a little forethought and a proactive approach, you can reduce the risk of legal battles whilst setting up your business for future success.
Please note that this is a general summary of the position under the Laws of Hong Kong SAR and does not constitute legal advice.