< Back to blog

Why Should I Start a Private Limited Company?

Private Limited Company

A private limited company is a business that is a legal entity that is separate and distinct from its directors and shareholders. Companies can be private which limits the number of members to 50 or public where it can have more than 50 members.

A private limited company is one that is locally incorporated where it has a minimum of 1 shareholder in the company and a maximum of 50. It can sue and be sued in its own name, and the directors and shareholders are not personally liable for debts or losses of the company. Its members also have limited liability to the company, meaning that there are no obligations to the company except for shares being paid up.

Advantages of setting up your business as a private limited company

1. Having a distinct legal identity

Being a private limited company, the business is given a separate legal identity from its owners and shareholders. This means that the company is able to purchase assets in the country, enter contracts, go into debt, sue or be sued in their own name. Since it has its own identity, the company can remain a perpetual business until the shareholders decide to dissolve it. Moreover, the distinctiveness of a private limited company prohibits the use of similar identities by other businesses.

Adding on, a company’s distinct legal identity implies that owners’ and shareholders’ liability in the company are limited based on their share capital. Since owners’ and shareholders’ personal assets are separate and protected from the business entity, they are given some form of security when doing business in the company. This can translate into having the ability to take more calculated risks that may not have been taken if the ownership was fully on any of the owners/shareholders. Also, the limited liability in the company serves as an attractive characteristic to encourage potential investors to be part of the company without being held personally liable.

2. Raising additional capital

As the company grows and expands, it will require additional capital to support its business operations. As a private limited company, it would find it easier to raise additional capital to support its expansion by simply issuing new shares to current shareholders or attracting new investors. This is much more feasible for a private limited to do as compared to a sole proprietor or partnership business which has to rely on their owner’s personal assets and funds.

3. Tax exemption benefits

A private limited company is able to take advantage of the tax exemption benefits given to companies. Newly established private limited companies incorporated in Singapore are eligible for full tax exemption in their first three years of assessment, and yearly partial tax exemption from then on. This makes after tax profits more competitive as compared to business run as sole proprietors or partnerships, which charges personal income tax on the business income which could range from 2 to 22%.

Moreover, income from companies are taxed only once at the corporate level and will not be taxed when the profits are transferred to shareholders. Hence the dividends received by shareholders of a private limited company will not be tax chargeable again, resulting in a sense tax free income to be received by shareholders.

4. Ease of transfer of ownership

In the case of the need for a transfer of ownership of the company from one shareholder to another due to various reasons such as a shareholder exiting the business or any dispute, ownership transfer can be easily done without comprising operations. The ownership of a private limited company may be transferred either wholly or partially by selling off shares or through issuing new shares to new investors. The process is not as complicated as it seems and can be done without disrupting current business operations. This ease of transferability of shares are beneficial to investors and hence can be a point that makes a company attractive to new investors.

Disadvantages to starting a private limited company

There are undoubtedly certain drawbacks of setting up a private limited company as well, mostly due to the governing and regulation of the company itself since it is made up of numerous members. A private limited company has to follow rules and regulations by the Singapore Companies Act, and any violation or misconduct in these area can lead to severe penalties on the company. There is also a larger amount of administrative work that a company has to deal with as compared to sole proprietors or partnership businesses. These administrative duties are extensive and include the submission of Annual Reports and Directors’ Reports. Operating costs of private limited companies are generally higher with these administrative requirements, hence overall is more expensive to set up.

You may also find these useful: