One of the most important decisions you need to make when starting a company in Singapore is choosing your company's legal entity. The entity you decide to register your business under will affect your business in many aspects, including but not limited to the amount you have to pay for your business tax, the perception your clients and suppliers have towards your business, the amount of paperwork required, the amount of money you can loan, and the possibility to expand your business overseas.
In this article, we have compared the differences between a sole proprietorship, limited liability partnership (LLP) and private limited company, and why private limited company is the preferred option. Let’s get started!
According to the Accounting and Corporate Regulatory Authority (ACRA) in Singapore, a sole proprietorship is a business that can be owned and controlled by an individual, a company, or a limited liability partnership. The company doesn't have any partners.
A Limited Liability Partnership (LLP) gives owners the flexibility of operating as a partnership while having a separate legal identity like a private limited company. This means that the LLP is regarded as a corporate entity with a separate legal personality from its partners. The LLP has perpetual succession, which means its existence, rights, and obligations are unaffected by changes in its partners.
A private limited company has its own separate legal entity from its shareholders and is limited by shares. It is recognized as an independent taxable entity. As a result, shareholders of a Singapore private limited company are only responsible for the amount of share capital they own.
To summarize, the following table describes the differences between the three entities:
1. Separate You and Your Company’s Legal Identity
Due to a private limited company’s own legal identity, the Singapore company is empowered to acquire assets easily, manage and negotiate contracts, avail of debt, or even sue or be sued in its company name. This distinct legal identity is perpetual unless expressly dissolved by the owners or shareholders.
For example, in the event that the owner or shareholder passes away or becomes disabled, it will not impact the existence of the private limited company, nor will it negatively affect the contracts the company entered into. Unlike a sole proprietorship, the company will be affected as it doesn’t have its own separate legal entity.
2. Reduce Your Personal Risk Exposure
Since your private limited company has its own independent legal entity, owners and shareholders' liability are only limited to their own shared capital from the company or held shares considered paid, unpaid, and partly paid by them. The personal assets of the individual owners and shareholders are separate and protected.
Unlike a sole proprietorship company, the owners are personally liable for the business, so their liability is unlimited. For example, if a sole proprietorship company goes into debt or is sued, the owners' and shareholders' personal properties and assets are affected.
3. Option to take Debt or Raise Capital from Investors
It's easier for a private limited company to apply for loans in general. This is because loans to sole proprietors are considered as personal loans and are highly regulated by ministry of law. As such, many business lenders without the right license are not able to make loans to sole proprietors. Even if they have the right license, they are restricted to lending only as a proportion to your income, therefore loan amounts are much lower.
Raising capital from investors as a sole proprietor can also be hard as only limited companies have the option to issue new shares to investors to raise funds.
4. Pay Lesser Tax from Certain Tax Exemption
Singapore has a flat corporate tax rate of 17% on up to S$200,000 of chargeable income. There are a few tax exemptions for newly registered private limited companies and partial tax exemptions for already established companies. Meanwhile, owners or shareholders of a limited liability company or a sole proprietorship company will be charged tax on their own income, which in most cases means that they will need to pay a higher amount of tax.
Singapore follows a single-tier taxation regime, so income taxed at the corporate level will not be taxed again in the hands of the shareholders. Dividends received by the shareholders and owners of a limited company are not taxed, resulting in tax-free income.
5. Easily Transfer Ownership
Ownership of private limited companies may be transferred partially or wholly. Transfer of ownership for private limited companies is done by selling all or part of an owner's total shares or issuing new shares to additional investors.
For example, if an owner or shareholder of the company chooses to exit the business, they can decide to leave the company by selling their shares to new shareholders or existing ones. As a result, this will not disrupt business operations. In fact, it may attract new investors to buy new shares from the company.
Make an appointment to speak with us and we will be happy to assist you with the right legal referral for a seamless change.
Jennifer loves helping SMEs in their business growth journey. She is also an epicurean and has perpetual wanderlust. During the weekend, she weaves poems out of thin air and buries herself in books.