Why should I incorporate my business?
Before you register a company in Singapore, the question you might ask is, why should I incorporate my business?
There are obvious benefits when you undergo incorporation in Singapore but let’s first talk about the common business entities.
Different Types of Business Entities in Singapore
Private Limited Company
min 1 shareholder
✓ Separate legal entity with limited liability protection
✓ Eligible for tax exemptions
✓ Ease of raising capital to expand business
✓ Credibility amongst suppliers and customers
✗ Higher set up costs (legal & administrative)
✗ For professions where liability will still fall upon you if there is negligence in the services performed, having a separate legal entity may not necessarily provide protection
Types of businesses:
Suited for small/medium businesses
Limited Liability Partnership
min 2 partners
✓ Low-cost of business set up
✓ Easy to administer
✓ Limited liability protection, allowing the business to be sued in its own name. (Partners of the LLP will not be held personally liable for debts incurred by the business)
✗ Not eligible for tax exemptions
✗ Difficult to transfer ownership
✗ Difficult to raise capital to expand business
Types of businesses:
Suited for individuals engaged in professional services such as lawyers, architects and accountants
Sole Proprietorship
min 1 owner
✓ Low-cost of business set up
✓ Easy to administer and manage
✓ Less administrative duties and statutory compliance requirements
✗ Not considered a separate legal entity
✗ Risky with no protection over personal assets (Individual will be held personally liable for business debts)
✗ Poor perception amongst customers and suppliers
✗ Difficult to transfer ownership or sell business
✗ Higher effective tax rate
Types of businesses:
Small businesses that have negligible or no risks, or professionals to which liability will still fall upon you if there is negligence in the services performed.
General Partnership
between 2 and 20 partners
✓ Low-cost of business set up
✓ Easy to administer and manage
✓ Less administrative duties and statutory compliance requirements
✗ Similar to a sole proprietorship, it is risky with no protection over personal assets.
✗ Each partner in a general partnership is personally liable for all the debts and liabilities of the business.
✗ Higher effective tax rate
Types of businesses:
Generally not recommended for most business types.
Limited Partnership
between 2 and 20 partners
✓ Low-cost of business set up
✓ Easy to administer and manage
✓ Less administrative duties and statutory compliance requirements
✗ The general partner holds complete control of the management of the company but also assume personal liability for the debts and liabilities of the business
✗ While the limited partners only have personal liability for the amount they invested in the business, but cannot participate in the management of the business.
✗ Higher effective tax rate
Types of businesses:
Generally not recommended for most business types.
5 Reasons to incorporate your business in Singapore as a private limited company:
It will be considered a separate legal entity
✓ A Private Limited Company has its own legal identity separate from its shareholders and directors, allowing it to enter into contracts, acquire assets, go into debt and sue and be sued in its own name.
✓ This protects you from any legal action taken against the company that has not resulted from personal negligence on your part.
You will have limited financial liability
✓ The liability of the company’s shareholders is limited to the amount used to purchase shares in the company.
✓ This means that your private/personal assets cannot be used to pay off the private limited company’s debts or liabilities (ie. such debts stop at the company).
You will have limited financial liability
✓ Tax Break: New start-ups have 75% exemption on the first S$100,000 of normal chargeable income for the first S$100k of income and 50% on the next S$200k. This exemption is applicable for the first 3 consecutive years after incorporation.
✓ No tax on capital gains: Capital gains are profits from the sale of a capital asset owned by the company, such as a real estate property, shares of a company’s stock etc. These will not incur any tax.
✓ No personal income tax on dividends: Once income has been taxed at the corporate level, dividends are distributed to shareholders tax-free. Corporate profits are not double taxed.
✓ Low corporate tax rate: The effective corporate tax rate is below 8.7% for companies with profits up to SGD 200,000 with the corporate tax rate capped at 17% for profits above SGD 300,000. The chargeable incomes of a sole proprietorship and partnerships companies will be treated as personal incomes of the owner/partners at 19% above SGD 200,000, that could potentially result in high tax expenditure for the business.✓ Deductions on company’s taxable income: Deductions to your company’s taxable income include research & development expenses, donations, revenue from rent, tax reliefs & rebates. For the full list of deductions that provide tax relief, please visit the IRAS website.
Ease of raising capital to expand your business
✓ With a private limited company, you have the option of raising additional capital by issuing new shares and attracting new investors.
✓ The structure of a private limited company allows the owner/owners to transfer some of his or her equity in a company in exchange for investment or to issue new shares to raise capital.
✓ On the other hand, owners of sole proprietorships and partnership firms must rely on their personal assets for raising capital and often incur a higher cost of debt capital.Credibility amongst suppliers, employees and customers
✓ Whether a supplier is willing to work with you, someone is willing to work for you or customers willing to purchase from you, begins with the perception on whether you are able to pay or deliver for goods/services.
✓ As a private limited company, you will be perceived as a credible business entity, in it for the long run and more trustworthy.
✓ For this reason, we would also recommend that the startup capital of the company be more than $1.
Now that you have decided to go ahead with setting up a company, how do I go about with incorporation in Singapore?
READ: HOW TO INCORPORATE A COMPANY IN SINGPOARE
Nonetheless, if you think that starting a private limited company is not the right fit for your business, have other doubts or simply need help with deciding, speak with us and we will help you get the answers you need to make the right choice for your business.