“I want to set up a company. What type of company should I set up?”
Well, if you want to expand your business, raise funds, or take on a big project, always set up a Private Limited company. The reasons are as follows:
1. Ability to raise funds
Unlike private limited, you cannot raise funds with a sole proprietor company because it doesn’t have a shareholding structure. Since the nature of the company can only consist of one owner, the owner cannot split up his/her shares to raise capital. This is due to the non-existent paid-up capital for dilution.
2. Extent of liability
If your company is accountable for a project/trade liability, a private limited company would be better as it is a separate legal entity that is distinct from its shareholders and directors. In this case, shareholders in a private limited company are not personally liable for company debts. The liability of a shareholder will only be limited to his investment in the company (which is normally paid-up capital). Whereas a sole proprietor company is owned by the sole proprietor himself without any separate legal identity of its own. The sole proprietor (owner) is personally liable for all debts and losses of the business.
3. Higher tax savings
If you are making money, especially if you earn high revenue, there are more tax savings you can obtain as a private limited company than as a sole proprietor. In Singapore, there are many tax benefits to starting a business and getting a tax discount for the first 3 years. In addition, your personal expenses can be combined with your company expenses to be expensed out from your earnings to receive higher tax savings.
4. Transferability of ownership
In a private limited company, it is easy to transfer your ownership. You can always transfer or sell your shares to another owner (succession planning or selling of business), only if you are in a private limited company. In corporate law, a private limited company last perpetually. Unlike a private limited company, a sole proprietorship cannot last in perpetuity, the registration of a sole proprietorship has to be renewed either at the end of one or three years. Even if the registration is dutifully renewed, the business will still come to an end once the business owner either retires or dies.
With that said, I personally feel that one should always set up a private limited company if you wish to expand and grow your business. Certainly, there are also advantages to operating as a sole proprietorship, such as the ease of establishing the company due to the fewer requirements. However, I suggest that you should only start a sole proprietorship if your business is a part-time hustle, and you are not serious about it. Otherwise, I advise you to always start a private limited company because the benefits far outweigh the cons of it. If you wish to succeed in growing a big and profitable business, then we should think and act like one.
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