Where do I begin?
When you are incorporating your company, one of the first decisions you have to make is which business structure to use. It is paramount that you understand what different business structures entail and the advantages and disadvantages associated with each kind. In this article, we will analyse the main business structures so that you can make the right decision for your business.
We will be assessing the Sole Proprietorship, Limited Liability Company, and Private Limited Company. We chose to analyse these as entrepreneurs most commonly prefer these three structures.
Without further ado, let us begin.
Sole Proprietorship is the simplest form of business structure in Singapore. It also happens to be the riskiest. We recommend this structure for businesses with a single owner (commonly known as freelancers). Unlike the other two structures, it does not provide liability protection. In other words, your personal assets are tied to the risks of your business. If your business is unable to repay its debts, the responsibility of those debts falls on the owner’s shoulders. Thus, your personal assets can be used to repay them.
Advantages of a sole proprietorship
- Easiest structure to set up (as well as the 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
Disadvantages of a sole proprietorship
- No liability protection (You are financially and legally responsible for all debts and legal actions)
- No corporate tax benefits (Sole proprietorships adhere to higher personal income tax rates)
- Capital depends on your own personal finances and business profits (It may be harder to expand your business)
- The business dissolves after you retire or die
- 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 in which 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. However, LLPs protect the innocent partners and their personal assets from the claims on the offending partner. Still, assets under the LLP contributed by all partners can be claimed by any liabilities of any partner.
We recommend this business structure for chartered professionals interested in establishing joint practices, such as accountants or lawyers. The partners must agree upon splitting of profits and business responsibilities. It is a complicated affair and typically requires a lawyer who is responsible for reaching an agreement.
Advantages of a LLP
- Limited personal liability (Partners are not held personally liable for any business debts incurred by the LLP or the wrongful acts of another partner. However, the offending partner is personally liable for any claims from losses resulting from his or her actions)
- Perpetual succession (Any changes in the LLP ownership – resignation or death of its partners – will not result in termination of the business)
- Compliance requirements are more complex than sole proprietorship (but simpler than a private limited company)
Disadvantages of a LLP
- Requires 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
- Difficult to transfer ownership and investment
Private Limited Company (PLC)
A Private Limited Company is a business entity in which less than 50 people hold private shares (unavailable to the general public). Most privately incorporated businesses in Singapore are private limited companies. Private limited companies usually have names that end with Private Limited or Pte Ltd. Shareholders of a private limited company can either be individuals, corporate entities, or both.
A private limited company is the most advanced, flexible, and scalable type of business structure in Singapore. It’s also the most preferred type for entrepreneurs.
Advantages of a PLC
- Limited liability (A PLC has its own legal identity that is separate from its shareholders and its directors. A PLC acquires assets, incurs debt, enters into contracts, and pursues legal action in its own name; thus, shareholders only risk the amount they contributed to the company)
- Perpetual succession (the company will continue to exist even in the event of death or resignation of its shareholders and directors)
- Scalability and ease of raising capital (You can simply bring in new shareholders or issue more shares amongst existing shareholders. Investors are more likely to invest if there are barriers between business and shareholders’ personal assets)
- Credibility (A PLC portrays a more credible image compared to a sole proprietorship or a partnership firm like a LLP as it can expand and take in investors easily. It shows a seriousness in growing the business on your part)
- Ease of transferring ownership (Simply sell shares to investors)
- Corporate tax benefits and incentives (In Singapore, corporate tax rates top out at 17%. For profits below $300,000, the tax rate is below 9%. For more information on the corporate tax rate, read this article. Many grants are available for a PLC (that are not available to sole proprietorship and LLPs. Additionally, the recently released Budget 2018 details a great deal of incentives for businesses. Here is a link to our article regarding the subject matter)
Disadvantages of a PLC
Only a few disadvantages exist regarding PLCs. A PLC is generally more complicated and expensive to set up. Entrepreneurs who opt for the PLC structure must follow more complex compliance requirements.
The question remains. What business structure should I select when deciding to incorporate in Singapore? Truthfully, the choice really depends on your situation and plans for your business. However, we have provided some general rules you can consider when making your decision below.
If you plan to work alone in a small business and if the nature of the products/services you are selling does not carry liability issues, it may be best for you to register as a sole proprietorship. Still, keep in mind that this structure does not protect personal assets and that business owners do not enjoy corporate tax rates or other benefits.
We recommend a LLP for chartered professionals who wish to set up a practice with other partners, as this structure protects your personal assets from any liabilities your partners may incur.
In all other cases, we recommend incorporating as a Private Limited Company. While the procedures and compliance requirements may be more complex initially, PLCs represent the best choice in the long run due to its potential for growth and its flexibility.
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