With any business structure, it will always have its specific benefits that cater to the business owner and the growth of their company. However, most business owners that are starting out tend to be in a rush to make some coin and tend to overlook which structure best suits them and their needs.
Today, we’ll be tackling the benefits of both a Limited Liability Company (LLC) and sole proprietorship that will help you determine which business structure is the right one for you.
A sole proprietorship is generally less costly than other forms of business and doesn't entail very many costs. Aside from the minimal registration fee and necessary permits or licenses, the cost of starting up are considered affordable. It is also much easier to set up compared to other forms of business that have more steps involved in the application process.
As a sole proprietor, you are your own boss. You don’t have to run anything by your shareholders or directors because you make all the business decisions completely on your own. For those who are born-leaders by nature and enjoy being the sole decision-maker, sole proprietorship is definitely for you.
If you dread filling your taxes, here’s some good news for you. Generally, sole proprietorships have minimal filing requirements compared to other private corporations. In fact, business owners only need to file their individual tax return to the Inland Revenue Authority of Singapore (IRAS) annually. Other business structures including LLCs need to file in more reports and have more requirements to comply with by law.
Being a legally-binding entity, the shareholder’s liability will only be limited to their investment in the company. This means that the owners, directors, shareholders and everyone else in the company are not responsible for any debts and liabilities that the business may incur. Your business becomes a separate legal entity, which will not affect your personal assets whatsoever.
As an LLC, your business is also entitled to more tax benefits. For sole proprietorships and partnerships, they are taxed based on their personal income tax whereas LLCs are taxed at the corporate rate. In Singapore, corporate tax rates are generally lower than personal income tax rates. Besides tax benefits, LLCs are also eligible for tax deductions and various government grants as well. This benefit encourages equity financing, ultimately leading to reduced debt financing.
One of the greatest financial advantages of forming an LCC is gaining easier access to capital. With multiple shareholders in the company, this gives the business a pool of funds that are sufficient enough to be used as capital. Besides the people directly involved in your business, external investors may also provide capital to the company as well. Since there is limited liability, it makes a business more attractive to investors as well.
When deciding which structure to take on, you have to consider your personal needs and business goals. But in the early stages of the entrepreneurial pathway, many choose to take on the role of a sole proprietor to start small. However, their business could expand and career plans may shift along the way, which may lead to change in business structure.
For sole proprietors seeking enhanced protection for their personal assets from legal liabilities and those looking to attract more investors, they can smoothly transition to an LCC or even a private corporation from a sole proprietorship.
Once you have registered your business, whether that’s a sole proprietorship or an LLC, consider setting up a business account for your company as well.
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