What is the best legal structure for your startup?

singapore private limited company ltd sign document paper

If you intend to start a business in Singapore, it has to be registered with ACRA. There are a number of ways you can set up your business in Singapore. The vast majority of startups in Singapore set up as limited liability companies but other legal structures for businesses include partnerships, limited liability partnerships and sole proprietorships.

You can choose what is most appropriate for you depending on the nature of the business you intend to undertake. However, as mentioned earlier, most startups tend to veer towards forming limited liability companies and it’s almost definitely the structure you’ll have to adopt if you’re hoping to raise funding from venture capitalists. If you’re thinking of bootstrapping your operations entirely, you have more freedom to choose from different legal structures but our opinion is that you should choose to form a limited liability company anyway (most of the time at least).

That said, if you’re still keen on learning more about the other legal structures available, you can click through the following links for a rundown on how they operate.

Sole Proprietorships

Partnerships

Limited Partnerships

Limited Liability Partnerships

However, this article will only focus on how a private limited company operates as it’s usually the most suitable structure for a Singapore startup.

The Private Company Limited by Shares

There are a number of ways a limited liability company can be incorporated. It can be private or public, and it can be limited by shares or by guarantee. As the vast majority of Singapore startups start off as private companies limited by shares, this is the structure we will focus on. The gist of this structure is that the company has less than 50 shareholders and the liability of the members of the company to contribute towards the assets of the company in the unfortunate event of winding up is limited by the number of shares he owns. Companies trading for profit are usually not limited by guarantee in Singapore.

So why should I incorporate my startup as a private company limited by shares (usually referred to as “private limited companies” for simplicity)?

There are a multitude of reasons why people choose to set up private limited companies. Here are a few of them.

1). Separate legal entity

Unlike a sole proprietorship or partnership, a private limited company has a separate legal identity from its members. A simple way of thinking about this is that once you set up the company, it’s capable of making its own decisions and taking responsibility for its own actions. It can sue or be sued. It pays its own taxes (which are a completely different set of taxes from your own). It’s even capable of purchasing its own property.

Having a separate legal identity means that your company will continue to exist even if you, the other shareholders, and the directors of the company die, resign or go bankrupt. If your intention is to create a long-lasting business, this separate legal identity is a very big deal indeed.

2). Limited liability

As the private limited company is a completely different person from you, your liability is limited to the amount used to purchase shares in the company. If the company fails, the shareholders of the company lose the entire value of their shares but their personal assets remain untouched. This is one of the main reasons why most startups prefer to incorporate as a private limited company rather than as a sole proprietorship or partnership.

This limited liability promotes entrepreneurial risk-taking as the startup founder’s risk is limited only to the amount of money he puts into the company.

3). Convention and Status

Credibility counts for something in the startup world. Creditors, suppliers, investors and even your friends and family will be more likely to take your business seriously if you set up a private limited company as opposed to the other legal structures available in Singapore.

4). Tax benefits

The separate legal liability of the company has beneficial tax implications as well. Singapore has one of the lowest corporate tax rates in the world. The effective corporate tax rate is below 9% for companies with profits up to S$300,000 and 17% for profits above that amount.

The company also doesn’t have to pay taxes for capital gains and it doesn’t have to pay dividend taxes.

5). Raising capital

As I mentioned earlier, most venture capitalists (or any other reasonable investor for that matter) will insist on the private limited company as the legal structure of choice. This structure is really the most appropriate as you can bring in new investors by issuing additional shares and there’s relative ease for transfer of ownership through the sale of shares.

All this sounds great! So what’s the catch?

There’s always a catch. As all good parents like to say, if it seems too good to be true, it probably is.

While the advantages outweigh the disadvantages by a landslide, there are some drawbacks you should be aware of.

1). There’re more costs involved relative to the other legal structures.

There’s literally a price to pay for the myriad advantages you get from this legal structure. Setting up a private limited company is more expensive (though it still won’t break the bank – as at present time, the cost is S$315). However, where the costs add up is in the maintenance of the legal structure (such as filing annual audited accounts) as well as in winding up. Remember, separate legal identity means that the business belongs to the company and the difficulty in ensuring the company is correctly wound up will lead to increased costs.

2). Stricter rules and regulations.

Alongside the many benefits of this legal structure, startup founders will also have to put up with stricter rules and regulations relative to their sole proprietor and partnership friends.

Private limited companies are predominantly governed by the Companies Act which sets out a statutory procedure that all companies have to abide by.

3). Limited limited liability

Don’t start getting any big ideas that setting up a private limited company gives you carte blanche to take all the crazy risks you want. Creditors and suppliers aren’t fools and usually request for personal guarantees from startup founders.

If you’re providing personal guarantees to secure a lease, the limited liability protection offered by the legal structure doesn’t really do you much good, does it.

Click here to find out how to incorporate your startup in Singapore.