DO I NEED A LEGAL ENTITY FOR MY BUSINESS?

Small businesses in Singapore make up 99% of all businesses in Singapore. They come in a wide variety of flavours, including sole proprietorships, partnerships, limited liability partnerships, companies, and more. With so many choices, it may be hard to figure out what to decide on.

Know the basics

The three most important structures to know when running your small business are:

  1. Sole proprietorship
  2. Partnership
  3. Company

A sole proprietorship is the most basic structure you can use to operate your business. It is typical in situations where there is a single owner. You typically see freelancers using sole proprietorships.

A partnership is similar to a sole proprietorship, except that there are two or more owners involved. An example of a partnership could be a tuition centre owned by a few people.

A company is a separate legal entity that can have one to many owners. People who own the company are known as members or shareholders. They appoint directors who run the company. Franchises and chains such as BreadTalk are good examples of companies.

If there’s one thing to remember, companies are separate legal entities while sole proprietorships and partnerships are not.

Is setting up a company the best option?

There’s numerous reasons why setting up a company may be the best option for you.

Liability

Ultimately, one of the most important reasons in setting up a company is the personal liability protection. In essence, you are not personal liability if something happens to the company. This protects your personal assets (unlike in the situation of running a sole proprietorship). This is to be one of the strongest considerations in favour of setting up a company.

Raising Capital

If you intend to raise capital in the future and have more than one shareholder, a company will give you the flexibility to do so.

Taxes

You pay corporate tax rates instead of personal income tax rates. You also become eligible for corporate tax exemptions under a company structure.

Should I bother setting up a different structure?

Given the numerous benefits of setting up a company, it seems obvious that setting up a company is the recommended route. However, there are some considerations to take into account as well.

Cost

Setting up and maintaining a company is more expensive than sole proprietorship. Registration alone is $315 for a company compared to $175 for a sole proprietorship. However, the ongoing administrative cost is more significant, not including the additional corporate secretary and legal fees you may have to incur. For some small businesses, this additional cost and hassle is unnecessary.

The appropriate business structure depends on your intentions for your business, your plans, and which stakeholders. It’s important to think this through as it may get more complicated and costly to switch entity structures down the road.

Looking for a good provider to incorporate your business? You may want to consider using Corporate Services for your needs.