If you are intending to start a business, business structure comparison is a vital step. You may be wondering whether you should start a company or a sole proprietorship/partnership. Understanding the key differences between these and the resulting implications will guide you as you launch your venture.
Our goal is to guide you on your entrepreneurial journey and help you better understand the types of business structures 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 fall under a different set of laws, mainly encapsulated in the Limited Liability Partnership Act.
The Limited Liability of Companies
One of the main reasons entrepreneurs lean towards incorporating a company instead of establishing a sole proprietorship/partnership lies in the concept of limited liability. This provision grants the owners of the company (investors or members also known as shareholders) the benefits of limited liability. The law does this by creating a separate legal identity for the company as if it were a person in and of itself (upon incorporation).
On a practical level, what limited liability means is that the shareholders’ financial responsibility is restricted to the amount of paid-up capital. For instance, if an investor or shareholder invests $1,000 into the company and the company issues 1,000 shares to the investor at the price of $1 each, their liability does not extend beyond $1,000. Consequently, creditors may only claim against the company’s assets, not those of individual shareholders.
Now, compare this advantage to sole proprietorships or partnerships. In these types of business structures, owners bear unlimited liability for their business’s debts and other liabilities. This means that other than the capital invested, business owners are personally liable for all other liabilities incurred during business operations. Shareholders in companies can ‘hide’ behind the ‘corporate veil’ created at incorporation, but a sole proprietor or partner doesn’t have this luxury. Consequently, if the business cannot pay its debts or liabilities, each partner or sole proprietor must be prepared for creditors to go after their personal assets. This risk is a strong motivator for many businesses to incorporate as a private limited company.
Thus, one can see the importance of comprehensive business structure comparison before making any decisions.
People and Businesses Prefer to Deal with Companies
The impact of reputation deeply influences the business world, making business structure comparison a significant consideration.
Overall, an incorporated company is often perceived more seriously than a sole proprietorship or partnership. This distinction influences relationships with vendors, suppliers, joint venture partners, banks, investors, and clients. The preference for dealing with companies rather than sole proprietorships or individuals stems from a couple of reasons:
- 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
As mentioned earlier, when discussing business structure comparison, one of the main differences lies in the creation of a separate legal entity through incorporation. Essentially, the company becomes a legal ‘person’. This gives the company’s personality a distinct identity, separate from its directors’ and shareholders’. Even if you change all of the directors and shareholders of a company, providing its name and UEN remain the same, the company’s existence is unaffected.
In practical terms, a company’s separate legal personality means it 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.
Contrastingly, in sole proprietorships and partnerships, the business serves as an extension of the owners without a separate legal personality. This comparison illustrates why many entrepreneurs lean towards establishing a private limited company over a sole proprietorship or partnership.
A Common Misconception
There is a common misconception where individuals assume that because a business is registered and carries a unique name, it forms a corporation, gaining a separate legal personality. However, it is crucial to understand that registration of a business does not translate into incorporation.
Businesses are registered differently from how companies are incorporated. The registration of a sole proprietorship or a partnership under the Business Names Registration Act doesn’t confer a separate legal personality to the business. Despite having a distinct business name, the business owners bear unlimited liability.
So, remember: if a business’s official name includes ‘private limited’ or ‘Pte Ltd’, it signifies an incorporated entity.
Advantages of Private Limited Companies
Thus far, we’ve discussed three key advantages of operating a business as a private limited company compared to a sole proprietorship or partnership:
- Limited liability
- Separate legal personality
- People and businesses prefer to deal with companies
Let’s now briefly explore other benefits that equally distinguish companies from sole proprietorships and partnerships:
- Almost ‘Perpetual’ Succession: Unlike sole proprietorships and partnerships where the survival of the business relies on the owners, companies continue to exist despite the deaths, resignations, or insolvency of its shareholders and directors. Official procedures relating to the transfer of shares and change of shareholder rules are strictly enforced by the Accounting and Corporate Regulatory Authority (ACRA).
- Relative Ease of Raising Capital: For businesses aiming to expand or raise working capital, a private limited company has the edge. They could easily do so by issuing new shares to new or existing shareholders. Sole proprietorships and partnerships face more scrutiny from investors and banks due to blurred lines between business and personal identity and assets.
- Tax Incentives and Benefits: Taxes for sole proprietorships and general partnerships align with personal income tax rates. However, private limited companies enjoy favorable tax rates. They pay only 9% corporate tax on profits up to $300,000 and a capped rate of 17% if profits exceed $300,000. Additionally, Singapore’s single-tier tax policy implies that after a company has been taxed, shareholders’ dividends are not taxed.
These points illustrate why many, when considering a business structure comparison, lean heavily towards incorporating a private limited company.
When starting a business, the choice between a sole proprietorship, a partnership, or a private limited company greatly depends on the nature and future goals of your business.
For a small business with minimal risks, sole proprietorships or partnerships may be appropriate. However, if you plan to grow your business, or if the business has multiple shareholders, a private limited company a private limited company is more advisable.
Private limited companies offer a range of benefits to upcoming entrepreneurs, the primary among them being tax savings and the robust protection of assets. It is important, however, to bear in mind that in the long run, a private limited company comes with more regulatory requirements to comply with. Nevertheless, these requirements could reasonably be considered a minor trade-off for the perks of a separate legal personality and limited liability that a private limited company delivers.
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.