As mentioned in the various articles in the series, the three most common forms of business structures are Sole Proprietorship, Partnership and Private Limited Company. In this article, we will focus on one of the most common and popular types of business structure – Private Limited Company.
What Is A Private Limited Company?
A Private Limited Company is a business entity that is registered under the Singapore Companies Act, Chapter 50. The most important characteristic of a Private Limited Company is that it has a separate entity. This means that the law sees the company as a separate “person” or “body” (entity) from the company’s owners, shareholders and directors. In other words, a Private Limited Company is legally and financially separated from its owner(s).
As a separate entity, the company has the rights to own properties, has perpetual succession (that means the company doesn’t cease operations just because an owner or shareholder passes away) and can sue or be sued. It also has the legal capacity to enter into agreements and contracts, assume obligations, and to be held responsible for its actions and debts incurred by the business operations. It should have its own bank account and transactions, receive and pay out its own money and possess its own assets and liabilities.
You may ask, why do you need this? Wouldn’t it be easier if you and your business be one and of the same (which, by the way, you can do so with Sole Proprietorship)? The main reason for having a business with a separate entity is to differentiate your business liability from yours.
Let me elaborate.
Suppose you set up a retail business, and you purchased a lot of inventory to resell. Business isn’t going well, and your cash flow doesn’t look too good. Soon, your suppliers are demanding that you pay up, but you haven’t sold enough of the inventory to pay them back. Your suppliers decide to sue you for the outstanding payments.
Or, your business makes and sells your own products, say pastries, and a customer got food poisoning after consuming your pastries. The customer decides to sue you for personal injury.
If you didn’t set up your business as a separate entity, you – not just your business – are personally liable for the debts and lawsuits in the two scenarios above. Now, most people can’t afford the liabilities incurred by the business as it could ring up to hundreds of thousands of dollars. This could result in you selling your personal assets like your home or your car to pay for the debts or lawsuits. Sometimes, it could even lead to personal bankruptcy.
Here’s where the concept of limited liability comes in.
A separate entity shields the owners/shareholders from liability (hence, limited liability). If the business is a separate entity, it is the business, not the owners, that is being sued. If the lawsuit is lost, it is the Private Limited Company, not you, that has to pay for it. If there is any bankruptcy that needs to be filed, it is the company – not you – that would do the filing.
Can you see why this is one of the most popular forms of business structure?
Pros And Cons Of A Private Limited Company
Like other business structures, a Private Limited Company has its pros and cons. Let’s look at some of them.
- Because a Private Limited Company has a separate entity, owners/shareholders are not liable for the company’s debts beyond the amount of capital they have invested.
- Unlike Sole Proprietorships or Partnerships, Private Limited Companies have perpetual succession. It doesn’t need to wind up in the event of deaths or changes in the shareholders or directors.
- It has higher credibility and status amongst customers, investors and partners. Thus, it is usually the go-to business structure if you wish to seek funding from business angels, venture capitalists or loans from financial institutions.
- Private Limited Companies can also benefit from the attractive tax benefits and incentive schemes offered by the government. There is also no capital gains tax.
- Selling of shares and issuing of new shares to new investors are easier for a Private Limited Company.
- Tighter laws and regulations are applied to Private Limited Companies compared to Sole Proprietorships and Partnerships.
- There is more paperwork involved to meet statutory requirements, such as detailed disclosure and annual filings compared to Sole Proprietorships and Partnerships. This means that more manpower and operating costs are incurred to fulfil these tasks.
- A higher level of transparency is also required. For example, Directors must disclose to the company certain information about their interests in the company’s shares, contracts and debentures.
What is required to form a Private Limited Company in Singapore? Let’s take a look:
- You need a company name (in English) that ends with Private Limited or its abbreviation, Pte Ltd. The name cannot be the same or similar to another business name or existing trademark. It also cannot contain any offensive or vulgar words. Approval by the Accounting and Corporate Regulatory Authority’s (ACRA) is required before you can use your desired name.
- The minimum initial paid-up capital of a Private Limited Company in Singapore is SGD1. You can always inject additional capital anytime after the business incorporation.
- When incorporating the Private Limited Company, you need to choose a fiscal year. A fiscal year is a one-year (12-month) period that companies and governments use for accounting and financial reporting purposes. You also need to define it for financial statement preparation purpose. Fiscal years don’t have to correspond with the calendar year. This means that while you can have your company’s fiscal year from 1 January to 31 December, you don’t necessarily need to choose this period. Many companies start their fiscal years on 1 April, 1 July, etc.
- A Private Limited Company can have up to 50 shareholders. The shareholders can either be an individual or another corporate entity (e.g. another Private Limited Company, Sole Proprietorship, etc.). As the name “Private” implies, the shares are not made available to the general public. Buying, selling and transferring of shares are made through private arrangements. 100% local or foreign shareholding is allowed.
- A Singapore-incorporated Private Limited Company needs at least one Director who is a resident in Singapore and is at least 18 years old. If a foreigner wishes to be the local Director, the person must have a valid work pass (Employment Pass or Entrepreneur Pass). A shareholder can also be the Director of the company.
- Upon incorporation of the Private Limited Company, a Company Secretary must be appointed within six months.
- A Private Limited Company in Singapore needs to have a registered office address. While it cannot be a PO Box, a virtual office is allowed. For certain trades, residential homes (including HDB flats) can be used as offices. Find out more about the types of business you can operate from an HDB flat here.
- An auditor must be appointed within three months from the date of the Private Limited Company’s incorporation unless it is a Small Company.
For more information about how to register a business, please read our article How To Register A Business In Singapore.
Once the company is incorporated, annual filings to ACRA and IRAS is required. Please read our articles Filing Of Annual Returns – What Do I Need To Do? and All You Need To Know About Filing Annual Corporate Income Tax Returns for more information.