The 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 limited by the amount of share capital and the liabilities of the owners are limited to the share capital subscribed by them. A limited company can either be 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 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 Limited Company
1. 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. Limited Liability:
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 the owners to take a 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:
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 for raising 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 dividend and capital if the company is wound up.
5. Tax Benefits:
The corporate tax rate is very competitive in Singapore. With tax exemptions available for newly setup company and partial tax exemption for all companies, which effectively results in only 9% tax on the chargeable income of up to S$300,000, it is prudent to set up a limited company. The chargeable incomes of a sole proprietorship and partnerships firms will be treated as personal incomes of the owner/partners that could potentially result in high tax expenditure for the firms.
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 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.