When starting a business entity, entrepreneurs are often faced with the dilemma of whether to start a Limited Liability Company (LLC), More commonly known as Private Limited Company, a Limited Liability Partnership (LLP) or Sole Proprietorship. In this article, we will discuss the differences between the three and spell out the advantages and disadvantages of each business entity type.
Legal Identity
A sole proprietorship is not an incorporated entity and therefore has no separate legal identity. The owner and the sole proprietorship are one. This means that the owner is personally responsible for all debts and liabilities against the sole proprietorship.
An LLC or LLP have separate legal identities. There are shareholders of the company (commonly known as the owners) as well as directors (who are responsible for the day to day running of the company).
This means that an LLC or LLP can
– hold property in its own name;
– enter into contracts with shareholders, directors, employees and third parties;
– can sue and be sued in its own name.
Liability
An owner of a sole proprietorship has unlimited liability. This means that creditors may sue the owner for debts owed to them and can obtain a court order to claim against the owners personal assets.
LLCs or LLPs have limited liabilities as they are a separate legal entity. The shareholders and directors are not personally liable for the debts and liabilities of the LLC or LLP.
The ability to raise capital
Sole proprietorships cannot raise capital as there is no share structure. The capital of a sole proprietorship is limited to the personal finances and assets of the owner of the sole proprietorship. To obtain business loans from banks or other financial institutions, the owner has to pledge his own assets as collateral. Assessment of the loan will be based on the owners financial position as well.
LLPs do face issues with raising capital as well. An LLP’s capital is limited to its partners’ contributions to the LLP.
LLCs are the ideal entity to raise capital. LLCs can raise capital by adding creating and selling new shares. This allows investors to subscribe to these shares in exchange for capital or seed funding. Also, in general, LLCs are deemed more favourably by banks and financial institutions.
Taxation
Sole proprietorships and LLPs are taxed at the personal income level of the owners as all business profits are considered as personal income for the owners. This means that profits are taxed at the personal income tax rates.
An LLC is taxed at corporate tax rates and enjoys tax incentives and exemptions. The effective corporate tax rate after factoring in the various tax incentives and exemptions usually result in corporate taxes that are lower than if that income was assessed using personal income tax rates. Singapore follows a single-tier tax policy where the same dollar cannot be taxed twice. This means that dividends distributed to shareholders are tax-free.
Cost to start and maintain
Sole proprietorships cost $100 to register (excluding the $15 name application fee) and there is a renewal fee of $30 every year. There are no filing requirements.
LLP cost $100 to register (excluding the $15 name application fee) and there is a $30 filing of annual declaration fee every year. This annual compliance requires the LLP to submit a declaration of solvency or insolvency to the authorities.
LLC cost $300 to register (excluding the $15 name application fee) and there is a $60 annual return filing to be paid when the company files its annual return every year. There is a requirement to have financial statements prepared every year. Depending on the structure of the LLC, there may be a need to have the financial statements audited.
Transfer of ownership
An LLC is the only structure that ownership transfer can take place. The transfer of shares from one party to another is rather straightforward. A sole proprietorship and LLP does not have this ease of ownership transfer. Any licences and assets of an LLC will remain with the company even after a change in the shareholding. However, in the case of a sole proprietorship and LLP, the ownership of licences is tagged to the individual and it can be difficult to transfer. This is especially true for sole proprietorships and stems from the fact about having no separate legal identity.
Closing down
To end a sole proprietorship, you will need to issue a notice of termination followed by a notice of cessation to the authorities.
To end an LLP or an LLC, you will either need to apply for striking off (which is simpler) or winding up. There are requirements you must clear before you can apply for striking off or winding up. The balance sheet must be clear of assets and liabilities and all matters with the Inland Revenue Authority of Singapore (IRAS) must be cleared before a striking off application can be filed. In the case of winding up, a court order may be required.
Perception and standing
The common perception and standing in most peoples’ minds are that an LLC structure is more serious whereas a sole proprietorship is less so and an LLP comes somewhere in between. Banks and financial institutions tend to want to deal with companies. Huge brands are set up as companies. Think of major listed companies like Apple and Microsoft in the US and Singtel, DBS and CapitaLand in Singapore. If you are serious about your business in terms of getting it to grow, an LLC should be the only business structure you should be considering.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
Yours Sincerely,
The editorial team at Singapore Secretary Services
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