When you make a profit from an unincorporated business such as a sole proprietorship, the maximum tax rate applies. Incorporation, on the other hand, offers you the advantage of paying tax at a reduced rate on the income generated during the year. This is one of the reasons why incorporation can be a key aspect of the profit strategy.
It should be noted that this reduced tax rate for Hong Kong company incorporation applies to the income of an active business, and not to passive income such as rent or capital gains.
As the owner of an unincorporated sole proprietorship, you are taxed every year on the profits you make. When you incorporate your business, only the earnings you earn from it in the form of wages or dividends are affected. This means that you will be able to spend years without withdrawing funds from the company and, therefore, you will not pay taxes until you decide to withdraw the money from the bank.
This process is known as tax deferral, which is the deferral of tax payments. While the amount of net tax paid should be the same in the end, you could benefit from a reduced tax rate later.
Compensation of losses
Regardless of the legal form of business you choose, you will not be taxed if the business suffers losses. However, each form of business manages losses differently. In an unincorporated sole proprietorship, losses incurred during the start-up phase may be allocated to employment income, for example; however, you cannot carry forward losses from one year to another. Hong Kong company incorporation fees is not much higher
In a corporation, you can do it. If you have losses at the beginning of the activities, you can accumulate them, so to speak, and allocate them to future income.