One choice that every business owner would face is the incorporation of their company. While the process of incorporation may seem daunting, it can bring forth a multitude of benefits that far outweigh the initial complexities — especially if the business is growing.
How can a business owner distinguish whether or not it would be the right time to incorporate? Also, how does one incorporate a small business?
But, before going through these three signals, let’s first discuss what exactly is “incorporation?”
What is incorporation?
Incorporation is a legal process of setting up a business as its own legal entity, separate from its owners. Being legally registered not only shows a level of competency and trustworthiness to potential investors or clients, but it also brings several benefits, such as tax incentives.
For example, startups in Singapore receive a 75% reduction from the standard tax rate for the first S$100,000 income within a startup’s first three fillings. It also gives its owners limited liability, meaning the business can take risks funded by its cash flow and not expose its owners or investors outside their original investment.
What about sole proprietorship?
A sole proprietorship is often the first type of business that entrepreneurs start with. It’s a business that’s unincorporated, meaning the company is owned by oneself, and its business income is taxed as a personal income. While this type of business is simple to set up without any legal entanglements, it’s difficult to sustain in the long run, especially if the business is growing.
Being a sole proprietor has its drawbacks. You are solely responsible for any legal issues or lawsuits, which can put your personal assets in jeopardy.
When do I need to incorporate my small business?
1. Before signing legal contracts
As mentioned above, incorporation offers you limited liability. If your business is declared bankrupt, investors or other interested parties have no right to come after your personal wealth; the business assets are the ones that are vulnerable. The same can also be said when a legal dispute occurs; the business’ cash flow will be the one that funds the business’ legal needs, not the owners’ personal wealth.
Always remember that if you signed a legal contract as a sole proprietorship and incorporated the business later, your personal wealth is vulnerable. Creditors and other personnel are entitled to access it if necessary.
2. Before hiring employees
When you hire an employee, you are generally considered liable if that employee makes a mistake or violates the law during their tenure of employment. Your personal wealth may be at risk during legal proceedings if this happens. So, it’s good to incorporate your company in Singapore as a separate legal entity before hiring your first batch of employees to help with its growth and expansion.
3. Before adding partners
It’s no secret that running a business is not a one-man job. It takes harmonious work with multiple people to run a business like a well-oiled machine. It’s not uncommon for sole owners to invite people who share their vision to become partners or co-owners in the company. By incorporating, they have a clear sense of who owns how much and their respective roles.
Moreover, it also gives them limited liability; they stand only to lose what they’ve invested in the business, giving them a certain sense of security from having their personal wealth scrutinised and poked around by the men in grey suits.
We’ve made a case for having your business incorporated as it offers numerous benefits. We hope that we have helped you in answering the question posed above. In the end, the earlier the incorporate of your company, the better it will be down the line.
Regardless of when you incorporate, Lanturn is ready to help you every step of the way. Contact us now!