As a first time businessman in Singapore, you would most likely be clueless on what specific structure you should use to put up your business. Two popular limited liability business structures in Singapore are the limited liability partnership and t he private limited company. Before taking your pick, you should know the advantages and disadvantages of each so you can make a wise decision.
Limited Liability Partnership
In Singapore, a limited liability partnership (LLP) is a business structure where two or more partners form a partnership entity that protects co-partners from liabilities due to the gross negligence or willful misconduct of one or more partners. In practice, an LLP is the most used structure by certain classes of chartered professionals like lawyers and accountants, among others, wherein two or more of such professionals decide to create a partnership to work together.
An LLP is different from a sole proprietorship because the partners enjoy separate legal identities from that of the LLP. However, here are some disadvantages to this kind of business structure that you may want to consider:
An LLP is treated as a partnership, thus, its profits are treated as part of each partner’s personal income subject to personal income tax. The rates of personal income tax are normally higher than those for private limited companies, and an LLP cannot enjoy corporate tax benefits and incentives.
If a partner becomes liable to another person or company due to his acts or omissions, the LLP shall also be made liable to the same extent as the partner. Hence, the claim can be made against the LLP to the full extent of its assets.
A partner is personally responsible for liabilities that arise from his wrongdoing and claims for liabilities can be made against him and his personal assets.
Generally, it is more difficult to raise external capital for an LLP and is often limited to partners’ contribution.
In terms of ownership transfer, an LLP cannot be transferred as a whole, each of the assets, licenses, or permits needs to be transferred individually.
Private Limited Company
On the other hand, a private limited company (PLC) in Singapore is a business structure registered under the Singapore Companies Act wherein the PLC has a separate legal personality from its members who enjoy limited liability. A PLC is a preferred structure by entrepreneurs because only the company pays corporate tax on the profits while the dividends received by shareholders are tax-free. The personal assets of members are protected.
A PLC enjoys high standing and credibility in the market which enables it to attract more investors and high quality talents. Despite these benefits, forming a PLC still has the following disadvantages:
- The administrative burden of operating a PLC is heavier
- It is more complicated and complex to close down a PLC
- A PLC has to comply with stricter rules and regulations outlined under the Singapore Companies Act
In sum, your choice of structure would greatly depend on the type of business you will engage in. It is apparent that it is more complex and expensive to put up a private limited company in Singapore as opposed to a limited liability partnership.
However, if you are an entrepreneur, it might be wiser to invest in incorporating a PLC because it will allow you more room for expansion. In public perception, a PLC communicates more seriousness, credibility and stature, it will also help you attract more investors. On the other hand, if you are forming a group of chartered professionals, an LLP might be a better option. It is advisable to seek professional advice before setting-up a business so you can know more about the pros and cons of each business structure.