Setting up a new company is a big undertaking for entrepreneurs in Singapore, regardless of experience and business size. One of the biggest tasks is how to minimise liability exposure at the onset of incorporation – even up to its full business operations.
Rather than attempting to eliminate all potential liabilities, the business owner should make a judgment call on the kind of decisions that should be enacted in order to protect the company from considerable harm, damage, or loss.
This article shares three ways business owners can limit their liability exposure during and after company incorporation.
Set up the right business structure.
The right business structure for your company in Singapore can provide the following benefits:
- simplify your compliance responsibilities
- increase your company’s ability to borrow money for capital/funds
- create positive investors’ expectations as well as customer perception
- ensure your company’s viability for growth and future expansion
- protect yourself from legal liabilities so you can either prevent or mitigate business loss
The three main types of company structures are sole proprietorships, partnerships, and companies. Here is a brief summary of its key characteristics:
- This is the simplest of all the business structures but is not recommended as it puts the owner at great financial risk and unlimited legal liability.
- In the event of failure of debt payment, creditors can come after the business owner’s personal and/or business assets.
- The owner is charged at a personal income tax rate, is not entitled to corporate tax rate (from zero to 17%), and cannot benefit from tax incentives meant exclusively for companies.
- The owner has unlimited personal liability and can be sued through either its business name or his/her own name by creditors, investors, or employees.
- This is a business structure wherein partners have equal shares of the start-up costs, expenses, and responsibilities. However, they are also equally accountable for all business liabilities.
- This structure has the same risks as the Sole Proprietorship and also presents unlimited personal liability for all partners involved in the business.
Limited Partnership (LP)
- This business structure is almost completely identical to General Partnership; the only difference is the concept of having a limited partner. The limited partner is not involved in the management of the business and is only responsible for the investment he/she has made within the company.
- The general partner has complete control over the business operations but has unlimited liability in terms of legal obligations as well as debts and loss incurred during the business operations.
- Because the limited partner has forfeited the right to be involved in running the company, he/she has limited liability and has protection from financial risks.
Limited Liability Partnership (LLP)
- This business structure combines the features of a partnership and a company and is one of the most favoured types of structure among entrepreneurs who want to set up a company in Singapore.
- The personal assets of a partner who is found guilty of acts of negligence, commission, or omission of a partner are subject to creditors’ claims for payment of debt and/or damages.
- All innocent partners are insulated from unlimited liability exposure and are only held accountable for the capital contributed to the company.
Private Limited Company
- Among all business structures, it is the one that commands high confidence from investors, suppliers, and financial institutions.
- The company is charged at a corporate tax rate (from zero to 17%) and it is entitled to all tax privileges, incentives, and rebates.
- The shareholder’s liability exposure only applies to invested capital within the company.
Get business insurance
Business insurance for your company does not serve as mere regulatory compliance or for protection of your business but a wise investment for shielding against threats and dangers of all your employees, suppliers, and customers.There are three major categories of business insurance: property, WIC, and legal liability.
This insurance category protects your business properties including buildings, machinery and equipment, assets and stocks, and such. It covers damage or loss due to fire, theft, terrorism, natural disasters, or any risks that can result to business interruption.
Work Injury Compensation (WIC) Insurance
Under the Work Injury Compensation Act (WICA), employees can file for claims if they sustained work-related illnesses or injuries. This means that the business owner is exposed to potential liabilities from WICA-related claims.
To minimise your liability exposure, you need to purchase Work Injury Compensation (WIC) Insurance. This is compulsory for companies whose employee salary is below SGD 1,600 per month. Even so, it is highly recommended for those involved in these industries:
- Courier or Delivery Services
- Carpentry, Constructions and Renovations
- Maintenance, Repair and Overhaul (MRO)
- Oil and Gas
Acts of negligence or malpractice including breach of duty within your company makes you vulnerable to indefinite number of claims. Having the right legal liability insurance can provide coverage for your company in case these result to illnesses and injuries sustained during business operations as well as damage and/or loss of property and premises.
Abide by the Employment Act.
The Employment Act of Singapore is the legal basis for creating all contracts of service for employees. Terms and conditions largely depend on job nature, company type, and industry the business belongs to.Nevertheless, the employer must ensure the employment contract is in accordance with the Employment Act. Wilful ignorance or intentional non-compliance will expose the company to all types of personal and business liabilities.
Talk to Experts in Setting Up a Company in Singapore
If you’re ready to start your new business in Singapore, Corporate Services Singapore can provide professional assistance throughout your entrepreneurial journey – from company incorporation and company secretarial services up to advisory services for your business needs.