When you are incorporating your company, you have to select your business structure. It is paramount that you understand what each business structure entails and the advantages and disadvantages of each of them. In this article, we will help you examine the three main business structures and aid you in making the correct decision for your business. The reason that we are choosing these three is because they are the most common ones that first-time entrepreneurs choose.
The three business structures that we will be going through are Sole Proprietorship, Limited Liability Company, and Private Limited Company.
Without further ado, let us begin.
Sole Proprietorship is the simplest form of business structure in Singapore, yet it is also the riskiest. It is most suitable for businesses with a single owner, or commonly known as freelancers. Unlike the other two structures, it does not provide liability protection, and so your personal assets will not be protected from the risks of your business. Thus, if your business is unable to repay its debts, the responsibility of those debts will fall on your shoulders and thus your personal assets can be used to repay them.
Here are the advantages of a sole proprietorship.
- It’s the simplest to set up as well as least expensive
- You, the owner, have complete control of the business
- You do not share any profit
- Terminating your sole proprietorship is significantly easier and cheaper compared to the other business entities
- You have less compliance requirements.
Here are the disadvantages of a sole proprietorship.
- No liability protection as discussed earlier. You are financially and legally responsible for all debts and legal actions.
- No corporate tax benefits. You will be taxed at your personal income tax rate which is higher.
- Capital is only limited to your own personal finances and business profits. Therefore, it may be harder to expand your business.
- When you retire or die, the business is terminated.
- More difficult to attract bigger clients who would naturally be looking to work with more advanced business entities.
Limited Liability Partnership (LLP)
A LLP is a type of business structure where two or more partners incorporate an entity separate from themselves. A partner of the Singapore LLP cannot be held personally liable for the wrongful commission or omission of any other partners. Thus, every partner is personally responsible for any liabilities that arise due to his act of commission, omission or negligence. Any claims for liabilities can be made against that partner and his personal assets. Other innocent partners and their personal assets will be protected from the claims on the offending partner. However, all assets under the LLP contributed by all partners can be claimed by any liabilities of any partner.
This business structure is meant for chartered professionals who would like to establish joint practices, such as accountants, lawyers etc. The partners must agree upon splitting of profits and business responsibilities. It is a complicated affair and usually needs a lawyer to draw up the agreement.
Here are the advantages of a LLP.
- There is limited personal liability as discussed earlier. The partners will not be held personally liable for any business debts incurred by the LLP or the wrongful acts of another partner. However, the offending partner will need to be held personally liable for any claims from losses resulting from his actions.
- There is perpetual succession, meaning that any changes in the LLP ownership from the resignation or death of its partners will not cause it to terminate.
- Compliance requirements are more complex than sole proprietorship but simpler than a private limited company.
Here are the disadvantages of a LLP.
- There must be at least 2 partners at all times.
- No corporate tax benefits. LLPs are not taxed as whole entities. Every partner is taxed on their share of their profits on personal income tax rates.
- Individual partners can commit the partnership to formal business agreements without the consent of the other partners.
- LLPs lack the ease of ownership transfer and investment that a company structure provides.
Private Limited Company (PLC)
A Private Limited Company is a business entity in which the shares are held by less than 50 people and are not available to the general public. Most privately incorporated businesses in Singapore are private limited companies, and their names usually end with Private Limited or Pte.Ltd. Shareholders of a private limited company can either be individuals or corporate entities or both.
A private limited company is the most advanced, flexible, and scalable type of business incorporation in Singapore. It’s also the most preferred type of Singapore business entity for entrepreneurs.
Here are the many advantages of incorporating as a PLC.
- There is limited liability. A private limited company has its own legal identity, separate from its shareholders and its directors. It can acquire assets, go into debt, enter into contracts, sue or be sued in its own name. Thus, the liability of the individual shareholders is only limited to the amount they contributed to the company.
- There is perpetual succession. The company will continue to exist even in the event of death or resignation of its shareholders and directors
- It is significantly easier to raise capital and scale as a PLC. You can simply bring in new shareholders or issue more shares amongst existing shareholders. When there is a separation between business and shareholders’ personal assets, it is more likely that investors would invest.
- A PLC portrays a more credible image compared to a sole proprietorship or a partnership firm like a LLP, because it can expand and take in investors easily and thus scale. It shows a seriousness in growing the business on your part.
- Ownership can be easily transferred without the complexity of legal documentation. This is done by just simply selling shares to investors.
- Corporate tax benefits and incentives. In Singapore, a PLC is capped at 17% for the corporate tax rate. For profits below $300,000, the tax rate is below 9%. For more information on the corporate tax rate, here is an article. Furthermore, there are a lot of grants available for PLC that are not available to sole proprietorship and LLPs. In fact, the recently released Budget 2018 details a great deal of incentives for businesses. Here is a link to our article regarding the subject matter.
The only few disadvantages that a PLC has is that it is more complicated and expensive to set up, and that there are more complex compliance requirements that need to be followed.
So the question begs. What business structure should I select when deciding to incorporate in Singapore. The answer is that it really depends on your situation and plans for your business. However, here are some general rules you can consider when making your decision.
If you are going to work alone in a small business and the nature of the products/service you are selling does not carry liability issues, it may be easier for you to register as a Sole Proprietorship. However, you must keep in mind that your personal assets are not protected, and that you are not entitled to corporate tax rates and other benefits.
If you are a chartered professional and wish to set up a practice with other partners, a LLP may be the most suitable business structure for you since your personal assets are protected from any liabilities your partners may incur.
In all other cases, incorporating as a Private Limited Company. Although initially, the procedures may be more complex, and the compliance requirements are more complicated, in the long run it is the best structure because its potential for growth and its flexibility.
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