The Private limited company is the most popular entity type in Singapore, and it is registered under the Singapore Companies Act. A limited company’s liabilities are restricted to the amount of share capital, and the owner’s liabilities are limited to the share capital subscribed by them. A limited company can either be a private or public company. The shares of a Private Limited Company are not available to the public, and the company has less than 50 shareholders.
Unlike a Private Limited company, the shares of a public company can be offered to the public to raise capital, and there are at least 50 shareholders in a public company. Most of the limited companies incorporated in Singapore are Private Limited Companies because the legal structure offers several significant benefits over others, such as a limited partnership or sole proprietorship.
Let us explore the advantages of setting up a private limited company in Singapore.
Advantages of Running Your Business as a Limited Company
1. Establishing your Limited Company’s Distinct Legal Identity:
A limited company has its own legal identity, which is separate from that of its owners/shareholders. This distinct identity empowers it to acquire assets, enter into contracts, avail debts and be sued or sued in its own name. By virtue of its distinct identity, the company is perpetual as an entity until the shareholders themselves formally dissolve it or it gets liquidated by the orders of the court or the Registrar of Companies.
The death or disability of the owner/owners does not impact its existence or impair the contracts that it has entered into. More importantly, the identity thus created is protected and the use of the same/similar identity or name by any other business is legally prohibited.
2. Reduce your Limited Company’s Financial Exposure:
The liability of the owners/shareholders is limited to the share capital subscribed by them, that is, the paid, unpaid and partly paid shares held by them. Hence, they will not be personally liable for the debts and liabilities of the company. Thus, the personal assets of the owners/shareholders are kept separate and protected. Knowing that their personal assets are not at risk gives the owners a sense of security and allows to take calculated risk.
The limitation of liability is also helpful in attracting investors who will be more forthcoming when they know that they will not be held personally liable. Unlike a limited company, the owners of a partnership or sole proprietorship are personally liable, and their liability is unlimited.
However, it must be noted that in the case of a limited company, if a shareholder is also a director, then the liability may extend to them personally if the director’s actions or inactions have caused the liability or loss.
3. Credible Image:
Besides the perpetuity implied by the legal structure, a commitment to long-term business as well as governance and responsible business management is demonstrated by a limited company. This contributes to the credibility of the company among the suppliers, customers and even among its employees and potential employees. It also improves its access to credit and opens up new opportunities.
While small businesses and ad hoc traders opt for sole proprietorship and partnership structure that convey an attempt at sustenance, they are generally perceived as lacking vision and long-term commitment, hence lack credibility.
4. Ease of Raising Capital for a Limited Company:
Limited companies have the option of raising additional capital by issuing new shares and attracting new investors, whereas the owners of sole proprietorship and partnership firms must rely on their personal assets to raise capital and often pay a higher cost in the case of debt capital.
The structure of a limited company allows the owner/owners to transfer some of his or her equity in a company in exchange for investment or issue new shares. Though the existing shareholders may fear dilution of rights, it is always possible to protect their interest by including pre-emption rights and by creating share classes that effectively control the rights to vote, as well as the rights to receive dividends and capital if the company is wound up.
5. Tax Exemptions for a Limited Company:
Newly incorporated companies meeting specific criteria in Singapore will benefit from a 75% reduction in their corporate income tax rate for the initial three tax filing years on their first S$100,000 of taxable income. To qualify for this exemption, the company must satisfy the following conditions: it must be a tax resident in Singapore, have been incorporated in Singapore, and maintain a shareholder structure with 20 or fewer shareholders, with at least one individual shareholder holding a minimum of 10% of the shares.
Newly established companies can benefit from a special tax break in Singapore. They only need to pay around 8.5% in taxes for the first S$100,000 of income they earn each year. If they earn more than S$100,000, the regular 17% corporate tax rate applies to the additional income.
Additionally, as Singapore follows a single-tier taxation regime, incomes once taxed at the corporate level will not be taxed again in the hands of the shareholders. Hence, the dividends received by the shareholders of a limited company will not be charged again, resulting in tax-free income for the shareholders.
6. Ease of Transfer of Ownership:
Ownership of a company may be transferred, either wholly or partially, by simply selling off all or part of its total shares, or through the issue of new shares to additional investors. This is helpful when there is a dispute among the owners/shareholders; if one or a few of the shareholders choose to exit the business due to irreconcilable differences, they can do so by simply selling their shares to existing or new shareholders.
Thus, no complex documentation is needed, and it also does not disrupt the course of the business. This ease of transferability of shares is also helpful in attracting investors, thus aiding access to capital.
To learn more, please visit our Tips for People Transitioning into Entrepreneurship from the Corporate World »