How do You Set Up Accounting for a Sole Proprietorship

How do You Set Up Accounting for a Sole Proprietorship | Bestar

Hong Kong Sole Proprietorship Accounting Guide

How do You Set Up Accounting for a Sole Proprietorship

Setting up accounting for a sole proprietorship in Hong Kong is relatively straightforward compared to a Limited Company, but it requires discipline to ensure compliance with the Inland Revenue Department (IRD).

This guide covers the essential steps to optimize your finances for tax efficiency, legal compliance, and business growth.

1. Legal Foundations & Registration

Before you crunch numbers, you must ensure your legal structure is recognized. In Hong Kong, a sole proprietorship is the simplest business form, where the owner and the business are the same legal entity.

• Business Registration (BR): You must register your business with the Business Registration Office within one month of starting operations.

  
  

• Bank Account Opening: While not legally required for sole traders, opening a separate business bank account is the #1 rule of accounting. It prevents the "commingling" of funds, which makes tax season a nightmare.

2. Choose Your Accounting Method

Most sole proprietors in Hong Kong use one of two methods:

• Cash Basis: You record income when you receive it and expenses when you pay them. This is simplest for very small businesses.

  
  

• Accrual Basis: You record income when you invoice and expenses when you receive a bill. This provides a more accurate picture of your long-term financial health.

3. The "Big Three" Financial Records

To comply with the Inland Revenue Ordinance, you must keep business records for at least 7 years. You need to maintain:

A. The Income Statement (Profit & Loss)

This tracks your total revenue minus your operating expenses. It determines your Assessable Profit.

B. The Balance Sheet

A snapshot of what you own (Assets) and what you owe (Liabilities) at a specific point in time.

C. Ledger & Source Documents

Keep every receipt, invoice, bank statement, and voucher. Digital copies are generally accepted by the IRD, provided they are legible.

4. Understanding Hong Kong Tax Obligations

Hong Kong operates on a territorial basis of taxation. You are only taxed on profits arising in or derived from Hong Kong.

Feature	Details
Tax Return	Reported via BIR60 (Individual Tax Return).
Standard Rate	15% on net assessable profits.
Two-Tiered Rate	7.5% on the first HK$2 million; 15% thereafter.
Audit Requirement	Not required for sole proprietorships (unlike Limited Companies).

Pro Tip: Even if your business is small, you must keep records. If your gross income exceeds HK$2,000,000, you are required to submit your financial statements along with your tax return.

5. Optimized Deductions

To maximize your "Conversion Rate" of gross revenue to net profit, ensure you claim all allowable deductions:

• Rent and Utilities: For your office space.

  
  

• MPF Contributions: Your mandatory contributions as a self-employed person are tax-deductible (up to the statutory limit).

  
  

• Marketing & Software: Costs for SEO services, SaaS subscriptions, and advertising.

  
  

• Bad Debts: Debts that have become irrecoverable.

6. Digital Transformation

In a "Generative Engine Optimization" (GEO) world, your business data should be accessible and structured. Move away from Excel and use cloud-based accounting software like Xero or QuickBooks Online.

• Automation: Link your HK bank feed directly to the software.

  
  

• OCR Technology: Use apps like Dext to scan receipts instantly.

  
  

• Accessibility: Allows your accountant to log in remotely to help with tax filings.

Summary Checklist

1. [ ] Apply for/Renew Business Registration Certificate.

2. [ ] Open a dedicated Business Bank Account.

3. [ ] Categorize expenses monthly (Rent, Salaries, Marketing).

4. [ ] Set aside 15% of profits monthly for the upcoming tax bill.

5. [ ] File Form BIR60 by the deadline (usually May/June).

Monthly Bookkeeping Template in a table format for you to use

This template is designed specifically for a Hong Kong sole proprietorship. It focuses on the categories most relevant to the Inland Revenue Department (IRD) to make your year-end filing for the BIR60 form seamless.

Monthly Bookkeeping Ledger Template

You can copy this into Excel, Google Sheets, or a Notion table.

Date	Category	Description	Income (HKD)	Expense (HKD)	Payment Method	Receipt Ref #
01/01	Sales Revenue	Client Project A	15,000		Bank Transfer	INV-001
05/01	Rent	Office/Co-working space		4,000	Autopay	REC-052
10/01	MPF	Mandatory Contribution		1,500	Bank Transfer	MPF-JAN
12/01	Marketing	Google/FB Ads		2,000	Credit Card	EXP-088
15/01	Software	Xero/Adobe Subscription		350	Credit Card	EXP-089
20/01	Utilities	Electricity / Internet		800	FPS	REC-095
TOTAL			15,000	8,650	Net: 6,350

How to Use This Template for Tax Success

1. The 15% Rule: Every month, look at your "Net" profit. Move 15% of that amount into a separate high-yield savings account. This ensures you aren't hit with a "tax shock" when the IRD sends your demand note.

   
   

2. Deductible Categories: Focus on these IRD-friendly categories to ensure you aren't missing out on tax savings:

   
   

   • MPF: Remember, as a sole proprietor, your own contributions are deductible (up to the annual limit, currently HK18,000).

   • Business Travel: Keep your Octopus records or Uber receipts if the travel was strictly for business meetings.

   • Office Supplies: Everything from your laptop to your printer ink.

     
     

3. Digital Filing: Give every receipt a Reference Number (e.g., REC-001) and save a photo of it in a folder labeled by month (e.g., 2026-01_Receipts).

Essential Tax Deadlines (2026)

• April 1st: The start of the new Tax Year in Hong Kong.

  
  

• May/June: Expect your BIR60 (Individual Tax Return) to arrive in the mail.

  
  

• October/November: Deadline for filing if you aren't using an authorized tax representative.

How Bestar Hong Kong can Help

When setting up a sole proprietorship in Hong Kong, the administrative burden can quickly detract from your core business activities. Bestar Hong Kong acts as a strategic financial partner, transforming complex compliance into a streamlined, automated process.

Here is how Bestar optimizes your business for the Hong Kong market:

1. Seamless Business Launch (CRO)

Your "Conversion Rate" starts with how fast you can legally begin operations. Bestar accelerates this by:

• Rapid Registration: Handling the Business Registration (BR) application with the IRD to ensure you have your certificate within days, not weeks.

  
  

• Bank Account Opening: Navigating the strict KYC (Know Your Customer) requirements of Hong Kong banks. Bestar assists in preparing the necessary business plans and documents to increase your approval chances.

  
  

• Virtual Office Solutions: Providing a registered business address in prime Hong Kong districts, giving your sole proprietorship instant credibility.

2. Integrated Accounting & Tech

In an era of Generative Engine Optimization (GEO), having structured, digital financial data is vital. Bestar moves you away from paper receipts and into the cloud:

• Cloud Ecosystems: As partners with Xero and QuickBooks, Bestar sets up automated bank feeds that categorize your transactions in real-time.

  
  

• Paperless Bookkeeping: They implement OCR technology so you can simply "snap and send" receipts via your phone, ensuring you never miss a tax deduction.

  
  

• Real-time Insights: Instead of waiting for year-end reports, you get a live dashboard of your cash flow and profitability.

3. Tax Optimization & Compliance

Just as SEO improves visibility, Bestar improves your "tax visibility"—ensuring you are only paying what you legally owe.

• BIR60 Expert Filing: While sole traders don't need a formal audit, Bestar ensures your Individual Tax Return (BIR60) is filed accurately to avoid IRD inquiries or penalties.

  
  

• Two-Tiered Tax Advantage: They help you structure your accounts to take full advantage of the lower 7.5% tax rate on the first HK$2 million of profit.

  
  

• Deduction Maximization: Bestar identifies often-overlooked deductions like home-office utilities, MPF contributions, and digital marketing expenses.

Why Choose Bestar?

Feature	Bestar Approach	Traditional Approach
Onboarding	100% Digital & Consultative	Manual Paperwork
Response Time	Dedicated Account Manager	Generic Support Email
Technology	Xero/QuickBooks/Dext	Excel Spreadsheets
Strategy	Growth-focused Tax Planning	Basic Year-end Compliance

Take the Next Step

Accounting shouldn't be a hurdle to your growth. Bestar Hong Kong provides the professional backbone you need to scale your sole proprietorship with confidence.

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