If you are intending to start a business, you may be wondering whether you should start a company or a sole proprietorship / partnership. You may also be wondering what exactly is the difference between the 2 and what consequences may follow once you start your business.
We’d like to guide you on your entrepreneurial journey with this quick primer.
Do take note that in this article, when we speak of partnerships, we are referring to general partnerships, and do not refer to limited liability partnerships (LLPs), which are the subject of another set of laws, mainly encapsulated in the Limited Liability Partnership Act.
The Limited Liability of Companies
One of the most important reasons for choosing a company instead of a sole proprietorship / partnership is that it grants the owners of the company (investors, members of the company, also known as shareholders) the benefits of limited liability in case something goes wrong. The law does this by creating a separate legal identity for the company as if it was a person in and of itself (upon incorporation).
On a practical level, what this means is that the liability of the shareholders of the company is limited to the amount of paid-up capital. For example, if an investor or shareholder invests $1,000 into the company and the company issues 1,000 shares to the investor at a price of $1 each, the investor does not bear any further liability beyond $1,000 if the company is in debt or wound up. Further, If the company has debts, creditors may avail themselves (or go after) only of the assets of the company, and not of the individual shareholders.
Compare the above to sole proprietorships or partnerships. Sole proprietors or partners (in a general partnership) bear unlimited liability for the debts and other liabilities of their businesses. Other than the capital each partner or sole proprietor had invested, the business owner/s is/are personally liable for all other liabilities incurred when the business is in operation. Unlike shareholders in companies, they cannot ‘hide’ behind the ‘corporate veil’ created at the inception of incorporation. So, if the business cannot pay for its debts or liabilities, each partner or sole proprietor must be prepared for creditors to go after their own personal assets. This is the main reason most businesses choose to incorporate a company.
People and Businesses Prefer to Deal with Companies
Whether we like it or not, businesses run on reputations.
In the corporate world, businesses are taken more seriously when they are incorporated companies. If they are sole proprietorships or partnerships, they are taken less seriously as a whole.
Vendors, suppliers, joint venture partners, banks, investors, and even clients prefer dealing with companies because:
- Individuals and sole proprietors can run away in times of crisis (or debt), companies generally can’t; and
- Individuals and sole proprietors are not subject to the same strict reporting, accounting and regulatory regimes which companies are subject to.
The Separate Legal Personalities of Companies
A mentioned earlier, incorporation creates a separate legal entity – the company becomes a ‘person’ of sorts. The company’s personality is considered different from its directors’ and shareholders’ personalities. In fact, you may change all of the directors and shareholders of a company – as long as the company name and UEN is unchanged, the company still exists in and of itself.
In practical terms what this means is that the company can:
- bear liabilities in its own name,
- confer benefits in its own name,
- acquire, hold and sell property and assets in its own name,
- sue and be sued in the courts of law in its own name,
- hold a common seal in its own name,
- do almost all things and acts that an individual person is lawfully able to do, and
- suffer loss and damage just as an individual person can suffer loss, damage, or injury.
Compare this to sole proprietorships and partnerships, where the business is considered an extension of the owners and there is no separate legal personality.
A Common Misconception
Many people suffer under a misconception that because a business is registered and has a separate name compared to its owners, it is a company, and consequently has a separate legal personality. It is thus important to understand registration with more clarity.
Registration of a business is very different from incorporation of a company.
Registration of a sole proprietorship or a partnership under the Business Names Registration Act does not confer a separate legal personality to the business. The individuals behind the business bear unlimited liability despite the separate name of the business.
As a rule of thumb, it is only when the business has an official name which includes the phrase ‘private limited’ or ‘Pte Ltd’ that you know for sure that you are dealing with an incorporated entity.
Advantages of Private Limited Companies
So far we have discussed 3 distinct advantages of operating your business as a private limited company instead of a sole proprietorship or partnership, as follows:
- Limited liability
- Separate legal personality
- People and businesses prefer to deal with companies
Let us now briefly discuss the other benefits, which also distinguish companies from sole proprietorships and partnerships:
- Almost ‘Perpetual’ Succession: Unlike sole proprietorships and partnerships, which depend on the continued existence (and health, and financial stability) of the owners, companies continue to exist and function despite the deaths, resignations and insolvency of its shareholders and directors. This is easily done with official procedures relating to transfer of shares and change of shareholder rules, which are strictly enforced by the Accounting and Corporate Regulatory Authority (ACRA).
- Relative Ease of Raising Capital: If you would like to expand your business or raise working capital, a company could easily do it by issuing new shares or types of shares to new or existing shareholders. Investors and banks are generally much more careful when ‘giving’ money to sole proprietorships and partnerships – after all, there is no clear separation between the business’s personality and the sole proprietor’s / partners’ identities. Neither is there a clear separation between the business’s assets and the sole proprietor’s / partners’ assets.
- Tax Incentives and Benefits: Sole Proprietors and partners in a general partnership pay taxes according to personal income tax rates. Private limited companies, however, pay only 9% corporate tax on profits of up to $300,000. Such taxes are also capped at 17% if the profits exceed $300,000. Further, there is no capital gains tax in Singapore. Lastly, under Singapore’s single-tier tax policy, shareholders’ dividends are not taxed at all once a company has been subject to tax.
If your future business is a small one with few risks, sole proprietorships or partnerships may be suitable. However, if you plan to grow your business, or if you have many shareholders, a private limited company is more advisable.
Private limited companies offer clear advantages to all budding entrepeneurs – mainly because of tax savings and more rigorous protection of assets. Do keep in mind however, that a private limited company has to comply with more regulatory requirements in the long run. This is a small price to pay, in our opinion, for the separate legal personality and limited liability that a private limited company offers.
Do approach us with your enquiries on the types of corporate structures available to you, and for advice on which structure would best suit your entrepreneurial needs.