What is incorporation?
A corporate entity or corporation is an organisation which is authorised by law to act as a legal person to carry on a business activity. Incorporation is the process of legally declaring a corporate entity as separate from its owners.
Incorporation options in Singapore
When you start a business in Singapore, you can choose between three types of legal entities. These are: Sole Proprietorship, Limited Liability Partnership, and Private Limited Company (Pte Ltd).
A Sole Proprietorship is a business owned by one person or one company. A partnership is a business entity formed by two to twenty partners. A private limited company is a legal entity that is a vehicle formed by 50 or less members.
The business structure that you choose will depend on your business goals and growth plans. However, the structure will shape the taxes you will pay and the compliance paperwork that you will have to undertake as part of maintenance of your business. All of these structures have their distinct advantages, but a private limited company has the most benefits.
Why you should incorporate your business
Here are the top reasons for why you should incorporate a private limited company in Singapore.
Independent legal identity
A private limited company is an organisation which is a legal entity separate and distinct from its shareholders and directors. This means that a company can own property, sue or be sued, and take on debts in its own name.
Protection of shareholders' personal assets
A private limited company has limited liability thus protecting its shareholders from personal liability. If the company is sued, the shareholders' personal assets outside of the amount of their respective investment will be protected since they are not personally liable for debts and losses of the company.
A private limited company can last for perpetuity. Any changes in membership of shareholders will not affect the continued existence of the company. The company can continue despite the death, resignation, or insolvency of shareholders.
In other business entities, specifically sole proprietorships, there is no perpetual succession. This type of business will continue to exist as long as the sole owner is alive and desires to continue the business.
By incorporating a private limited company, you will convey a professional commitment therefore increasing the company’s chances of obtaining commercial loans from banks and other financial institutions. Investors are more open to contributing their resources to private limited companies as compared to sole proprietorships and partnerships.
It is easier for companies to raise capital compared to other business entity types. They can expand by bringing in new shareholders or issuing more shares to existing shareholders. Since they have a better reputation than other business entities, it is also easier for them to raise debt.
Transfer of ownership
A private limited company can be transferred easily by selling all or part of its total shares, and additional shareholders can be appointed by issuance of new shares.
Tax incentives and exemptions
Corporate tax rates are lower than individual tax rates. Private limited companies also qualify for additional tax benefits and deductions that are not available to individuals. Dividends received by shareholders are not taxed.
In Singapore, newly incorporated companies are entitled to tax incentives and exemptions. For example, the first S$100,000 of taxable income is exempt from taxes and effective tax rates can be as low as 5.6% on taxable income of up to S$300,000.
There are some disadvantages to setting up a private limited company but these are mainly to do with the maintenance of the company and with compliance issues such as annual meeting requirements, legal expectations on directors, and periodic filings with government agencies.
However, despite these, a limited liability company is still the most attractive vehicle for operating your business.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Satish Bakhda is the Chief Operating Officer at Rikvin. He brings with him over 15 years of experience in the corporate services industry and is a regular speaker at marketing events around the world. He is also a consultant on matters relating to incorporation, relocation, accounting and taxation in Singapore.