Regardless of whether you are a novice entrepreneur or a seasoned business owner in Singapore, you should take the time to learn about shares at least once in the course of your business journey. You also have to do it at least once, during incorporation.
In this article, we take you through the basics of everything you need to know about shares and whether this is the next step in the right direction for you and your business.
First, it is essential to know that there are many different classes of shares. But we will be focusing on the two most common ones: ordinary and preference shares.
Ordinary shares happen to be the most common type of share with no special restrictions or rights. Shareholders who own ordinary shares are entitled to certain voting rights and the right to dividends in the company, depending on how many shares they own.
While they have the potential to give the highest financial gains, it also comes at equally high risk—they are typically the last ones to get paid should anything unfortunate happen to the company.
To incorporate your business in the country, companies need to issue at least one ordinary share before proceeding to the next steps.
In the same way, preference shares are issued by companies as a way to raise capital for their business. But unlike ordinary shares, preferred shareholders have a higher priority claim to the assets of a company and are usually the first ones paid in the event of insolvency.
Most investors prefer this share type due to its stability and ease of acquiring equity financing. However, they are not entitled to voting rights in the same way that ordinary shareholders are.
While both ordinary and preference shares offer a range of benefits, it still boils down to what your priorities are as an investor or shareholder.
In line with Singapore company law, companies must first meet the criteria below to be deemed eligible for the issuing of shares:
Now that you have been deemed eligible, it’s time to find out how to do so. New shares can be given to both new and existing shareholders; this is known as the allotment of shares.
Companies can issue new shares at any given time as long as they file a ‘return of allotment’ with ACRA through BizFile within 14 days of issuing shares.
Fortunately, there isn’t a specified limit to how many shares a company can issue here in Singapore. This gives business owners the autonomy and freedom to take complete control of this department.
One thing that is still in question is whether it’s too early for small business owners and entrepreneurs to be thinking about shares this early in their business venture. When putting a bank loan and shares side by side, the latter ultimately holds more weight and is more beneficial in the long run. It is wiser to offer shares to potential investors instead of going through the trouble of paying bank loans for a long period of time.
One of the greatest advantages of issuing shares is the ability to bring in new investors and business partners. Regardless of the type of share given, they will still be investing a significant amount of money into your business, ultimately leading to increased capital.
These funds can then be used for labour and building expansion, marketing and advertising efforts, as well as the continuous production of goods and services.
Due to high-interest rates, most business owners fall into debt and are unable to pay off their bank loans in due time. But there’s nothing of that nature when it comes to shares.
Unlike bank loans, your company will not have any debt or repayment requirements as you are essentially not borrowing money from your investors.
Apart from avoiding debt liabilities, selling company shares can also turn into a highly liquid asset, which can be traded easily.
If any of your investors or founding members choose to sell their portion of the company in the future, it would be much easier to liquidate their assets in this way.
Flexibility is also a key benefit of issuing shares. Business owners have the final say on various factors including how many shares to issue, what to charge for each share, and the rights given to their shareholders.
Issuing shares can be a good way to increase your credit rating. In business, having a good credit rating is a direct reflection of your ability to fulfil certain financial obligations. Publicly-held companies can pay an independent credit rating agency to assign credit ratings for their company.
In turn, this safeguards your financial health and opens up your business to a variety of benefits including better access to company loans and credit cards.
At the end of the day, there’s still no perfect formula or guidebook that will tell you when it’s the right time to get started with shares. What matters most is that you’re equipped with the relevant information and tools to make a decision that’s ideal for your business