Company Limited by Guarantee versus Limited Liability Company
5 minute read
Choosing the business structure for your company incorporation in Singapore is influenced by a number of factors including the ease of doing business, investors’ queries and expectations, compliance responsibilities, ease in transfer of shares, scalability, tax rates, and liabilities among others.
Deciding on the right business structure to suit your company’s present and future needs is deemed a challenging task even for the experienced business owners and founders.
Choosing the best structure for your business in Singapore
Singapore has earned recognition for almost always topping the charts in global surveys that evaluate business metrics. The Lion City has been consistently scoring high in terms of economic competitiveness, the efficacy of business ecosystem, transparency of regulations, political stability, and other criteria that prove critical for establishing and growing a business.
As home to businesses operating across the extensive range of modern and traditional industries, Singapore’s legal landscape enables the establishment of a wide variety of legal entities and business structures that offer relevant solutions for the diverse needs of business owners.
Deciding on the right type of business entity is a critical step that entrepreneurs have to cautiously undertake as it will ultimately determine a roster of essential issues including the liability of owners, financing the business, expansion potential of the business, tax and compliance cost of maintaining the entity, transferability of the business among others.
Understanding the difference: What is a Company Limited by Guarantee?
Community projects, charities, societies, clubs, and other similar organisations are companies that are almost always limited by guarantee. As not-for-profit companies, companies limited by guarantee do not distribute the profits to their respective members but instead retain them in the company or utilise those for some other relevant purpose.
A company limited by guarantee require their articles to be drafted for their specific organisation, which is basically the main work that needs to be undertaken.
Why set up a Company Limited by Guarantee?
The main reason community projects, charities, societies, clubs, and other similar organisations opt to be set up as a company limited by guarantee is to basically protect the people running the organisation from any personal liability for the debts or losses that may be incurred by the company.
Companies limited by guarantee are viewed as more trustworthy and legitimate as opposed an unincorporated business. As a non-profit or charitable organisation, a limited by guarantee company is recognised for their reliability and established credibility. Local authorities and funding bodies almost always insist on collaborating with an organisation registered as a company limited by guarantee.
Understanding the difference: What is a Limited Liability Company?
Now if a community project, a charity, a society, club, or any other similar organisation is not registered as a limited company, then the people behind its management or those running the company can be made personally liable for its unpaid debts.
Know that some community groups, charities, sports clubs, or societies can be substantial enterprises, which could prove to be a real risk as they normally come with liabilities that cannot easily be turned off. These companies may employ people for their operations, have equipment on finance contracts, or operate on leasehold premises.
Unforeseen and unfortunate circumstances however like an unannounced withdrawal of financial support from a funding body can lead to such shortfalls and insufficiencies. If business income or profit is not able to offset these expenditures, the company may grow insolvent, and the people behind its management can be legally made personally liable for this deficiency.
On the other hand, with the company itself being a separate legal entity in a limited liability company, the people who own or run the business are only held liable commensurate to the amount the shareholder or member has agreed to pay for his or her shares.
Why set up a Limited Liability Company?
Considered as one of the easiest and most effective ways to boost your professional status and establish your business as a credible and trustworthy entity, setting up a business as a limited company is the most ideal for new businesses and existing sole proprietors and traders.
Running a business as a limited company will also enable you to compete on a level playing field with other incorporated firms who are only willing to do business with other limited companies.
Most importantly, however a limited liability company is your best pick if you want to enjoy limited liability for your organisation’s debts instead of risking your personal finances and assets and be held personally reliable for all your business debts.
Which business structure should you choose
Deciding on the structure to use when forming your company should depend on the profit sharing model you’re looking to follow for your business. This is going to be the most straightforward and logical approach you can decide on taking when weighing your options.
Go for a company that is limited by liability if it is a profit-making business that you want to set up. Or have your company limited by guarantee if you’re looking to put up a non-profit-making organization.
It always helps to talk to a business adviser or a professional consultant and get a comprehensive perspective on this matter. Getting proper guidance from them should help make things easier for you to decide on and what you should do moving forward.