Why business must go through incorporation?
All business owners in Singapore carrying out any activity for profit on an ongoing basis must register a business with the Accounting & Corporate Regulatory Authority (ACRA) and abide by the Companies Act, Chapter 50. There are five main types of business structure to choose from, namely sole proprietorship, partnership, company, limited liability partnership and limited partnership. The most common and flexible option is to set up a Singapore company as the private company.
Become the sole proprietor can be a risky venture as is not a separate legal entity, if the business not going well the business owner is personally liable for all the debts and losses incurred. The way to limit your personal liability is incorporation your business as a private limited company as a local company is limited by shares and is a separate legal entity from its shareholders. . Therefore beyond the amount of share capital any debts and losses will not liable by the company shareholders. While incorporation need more paperwork and expense than a sole proprietorship or a partnership, but it offers important legal and tax benefits. However, there are two different types of private limited company, namely a “Private company limited by share” and an “Exempt private company (EPC)”.
Exempt Private Company (EPC) and Private Company Limited by Shares
An exempt private company is a private new company set up which has a maximum of 20 shareholders, none shareholder is a corporation. It also can be the minister has deemed to be an EPC under the companies act. A private company is a company with more than 20 shareholders but less than 50 or fewer shareholders that are corporations.
The difference for both type of private company is the filing requirement. An exempt private company have to prepare its financial statements in accordance to the Singapore Financial Reporting Standards (FRS). Private company limited by shares are to put in order its financial statement in XBRL format and it is compulsory that they upload the financial statement when filing for their Annual Returns. Due to tedious nature of preparing financial statements in XBRL format, the cost to get a professional to prepare them is higher. Normally, most business owner will tend to structure their private company as exempt private company because it reduces the cost of running the company as compared to a private company.
Protect your personal assets
Incorporating a private limited company is one of the ways you can protect your personal assets. A corporation can own property in its own name, carry on business, incur liabilities, and sue or be sued.
As setting up a local company, a corporation only responsible for its business debts. That means if the company encounter financial difficult and the creditor of a corporation generally can see payment only from the assets of the corporation not from the personal assets of shareholders, directors and officers. In short, business owners can conduct business without risking their own house property, cars, bank saving and other personal assets. In contrast, owners of a sole proprietorship or partnership face unlimited liability for both business and personal assets.
Have easier access to capital
Raising capital is much easier for a corporation as a corporation can gain share capital from new shareholders or borrow money from banks. This help the business owner to develop and expansion their business operations. If in the situation borrow a bank loan that’s another reason to incorporate your business. In most cases, bank officer would rather lend the money to corporations than to unincorporated business. Corporation has greater accessibility for more alternative sources of capital through which they can pay off their debts.
Enhance Your Business’ Credibility
Beyond finances, another benefit of a corporation is related to the business’ credibility. As a company that has been incorporated under government laws, customers, suppliers, business associates and investors will perceive it as being more stable and secure to build up the long-term business relationship.
Perpetual Existence
Corporations are the most enduring legal business structure. A corporation can continue indefinitely, regardless of what happens to its directors, officers, managers, or shareholders. Since the corporation is a separate legal entity from any of its directors or shareholders, it does not dissolve when departure or death of any officer (directors/shareholders). If an officer leaves or dies, the company may transfer its shares in the same way as any other property, and the corporation is not negatively affected. Corporation also allows a shareholder to disconnect from the corporation by selling its entire share without ending the corporation.
Liability and Taxation
A corporation has a separate and distinct legal identify from the owner or partners. Hence, shareholders will not be personally liable for any debt and creditors incurred during the course of business. Similarly, shareholders only pay taxes on any profits paid to them as salaries, bonuses or dividends and the corporation itself pays corporate rate taxes on any additional profits at the lower corporate rate.
