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  2. When Should a Freelancer Register a Private Limited Company?

When Should a Freelancer Register a Private Limited Company?

The problem of being a freelancer is that you don’t have a company under your name. As the business grows, you may face certain issues such as filing tax and bidding for higher-value projects, which require a private limited company status to apply for.

You might ask: when is the right time to incorporate a private limited company as a freelancer living in Singapore? This article will address all your concerns moving into the next step of your business.

Who are freelancers?

Freelancers are self-employed people who work flexible hours. They are often given the flexibility to choose their own projects. Their work can range from selling property, photography, designing to management consultancy.

According to the Ministry of Manpower, there were 211,000 Singapore residents and permanent residents working as freelancers in 2019. This made up 8.8 per cent of the local workforce.

What is a Private Limited Company?

A Private limited company is a legal entity separated from its shareholders and directors. Shareholders are people who own the company. Directors are people who manage the company.

Unlike a public-listed company, it does not publicly trade shares. The maximum number of shareholders allowed is 50 people. Shareholders can either be an individual or other corporate entities. Registered shareholders of a private limited company are not personally liable for debts and losses of the company.

It is a popular business structure used by entrepreneurs and those who want to do business in Singapore. Typically, a private limited company has the word ‘Pte Ltd’ as part of their company name.

What are the advantages and disadvantages of a Private Limited Company?

As a freelancer, incorporating a company is a big decision to make. Before you embark on this new journey, let’s take a look at the advantages and disadvantages of incorporating a private limited company:

5 Advantages of a private limited company

1. Your personal assets are protected

One of the biggest advantages of a private limited company is limiting your liabilities. This means as a shareholder, your liability is limited to the amount contributed to the capital of the company.

Should your company runs into any financial difficulties, you just need to ensure that your shares have been paid up. Once it has been done, you are not answerable to the company’s creditors. Your personal assets will also be protected from these creditors.

However, if you run into money troubles as a freelancer, you could be at risk of getting sued by other companies. It could be a case of contract liability for not fulfilling the terms listed in the contract. It could also be a case of negligence liability for causing a delay in the project due to unforeseen circumstances.

With these lawsuits at hand, your business will be at risk, and you may end up losing your personal assets. By incorporating a company, it helps to separate your business and personal assets.

These reasons are what makes the private limited company more attractive than the other company structures.

2. Your business gets better credibility

By incorporating a private limited company, your business gets a better image. Potential clients and investors are more willing to be part of your company, as it shows your vision in growing and expanding your business. Your suppliers and banks will also take your business more seriously.

3. Your company can outlive you

Fortunately, this business structure does not depend on the continued membership of any members. This means if a person who runs the company has passed away, the company will still be able to continue with another successor. Similarly, if there is a change in the shareholders, the transferring of the shares will be easy, and you can continue your business smoothly.

4. You don’t have to pay personal income tax

Tax benefit is one of the biggest advantages of incorporating a private limited company. The income earned by you will be received in the name of the Company.

As a result of that, the profits earned by the company will be taxed at corporate tax rates, instead of personal income tax rates (unless you take a monthly salary from the Company).

5. You pay less corporate tax for the first 3 years.

Even better, as a new company, you can pay less corporate tax for the first three years, because you qualify for the Start-Up Tax Exemption. Start a company already.

The Start-Up Tax Exemption (SUTE) scheme reduces the amount of corporate tax that new companies have to pay on their normal chargeable income for their first few years of incorporation. The scheme was introduced to encourage entrepreneurship and support local enterprises.

Tip

Chargeable income refers to taxable income that is deducted after tax-allowed expenses. Not sure what counts as taxable income and tax-allowed expenses? Read more here: How Entrepreneurs in Singapore can Pay Less Tax Legally

What is the Amount of Tax Exemption Under the SUTE?
From Year of Assessment (YA) 2020, newly established Singapore registered companies are entitled to the following exemption:

  • 75% exemption on the first $100,000 of chargeable income; and
  • A further 50% exemption on the next $100,000 of chargeable income

To qualify for the start-up tax exemptions for the first three years, your company must meet these conditions:

  • Be incorporated in Singapore
  • Be a tax resident in Singapore for that YA
  • Total share capital cannot be directly owned by more than 20 shareholders who will benefit in any way by owning these shares, for example, through a dividend payment.

Furthermore, either all of the shareholders must be individuals OR at least one shareholder is an individual holding at least 10% of the issued ordinary shares of your company.

Let’s take a look at the below example of tax relief:

Alex set up Fritz Consultancy Pte Ltd on 1 October 2020. On FY ending 30 September 2021, Fritz Consultancy earned a net income of SGD$250,000 (after deducting business expenses and other exemptions). Under the new tax exemption scheme, his business is given tax exemption for the first three years.

1st $100,000 X 75 % = $75,000

2nd $100,000 X 50% = $50,000

$75,000 + $50,000 = $125,000

This amount is exempted, as it is part of the tax exemption. What is taxable then?

$250,000 (total income) - $125,000 (exemption) = $125,000

This remaining amount is taxable and will be taxed at a prevailing corporate rate of 17%.

However, you need to know that the maximum amount of exemption for each YA is $125,000. Any amount above $200,000 will be fully taxable at the prevailing corporate rate.

You can own a commercial property

With a private limited company, you are able to buy and sell a commercial property in your company’s name.

3 Disadvantages of a Private Limited Company

You’d have to put in extra work to comply

Private limited companies have to comply with the stringent rules and regulations in the Singapore Companies Act. At times, companies may compromise on certain rules because there are so many things to remember when running a business. However, if the company is caught not complying with the regulations of Singapore, it will face heavy penalties.

Outsource corporate secretary work to us and you will always be reminded through our mobile app. We track deadlines and file reports, so you don’t have to worry about compliance. You can even drop us a chat at any time of the day, even at night, and we’ll answer your questions.

Administrative Costs & Hassle

An annual report must be filed every year. There is also a requirement to hold an Annual General Meeting (AGM). Your directors, shareholders and company secretary must attend this yearly meeting. As a result, this will incur some administrative costs in compiling the necessary paperwork, and it can be costly. A way to overcome this is by letting service providers like us help you with the paperwork while you focus on growing your business. Drop us a chat to find out more.

When should a freelancer incorporate?

There is no right time to incorporate a private limited company. But if your business has grown exponentially over the years, this may be a good time to incorporate with ACRA. Do note that if you are planning to carry out your business in your full name as a freelancer, you are exempted from registering with ACRA.  

Shawn provides video editing services for weddings, birthdays and other corporate events. In his invoices, he states his company name as his full name: Shawn Lee Ming. However, if he wishes to change his company name in his future invoice to Shaw Lee Video Editing Services, he will have to register his company with ACRA.

What documents do you need?

Before you incorporate, there are some documents you need to prepare:

  1. Company name
  2. Company registered address
  3. Type of business activity
  4. Financial Year End
  5. Particulars of directors
  6. Particulars of shareholders
  7. Particulars of company secretary
  8. Constitution
  9. A copy of your National Registration Identity Card (NRIC) for Singaporeans, and a copy of your Passport for foreigners.

How to register for a private limited company?

You will need to register your company with ACRA. You will also need to choose a company name. This is subject to ACRA’s approval. If you would like to do it on your own, you may log in to Bizfile+ using your SingPass to submit your online application. However, if you require some advice and assistance, we are able to help you with your application.

The processing time for the application takes about 24 hours. But if your application needs to be referred to another authority for approval or comments, the process may take between 14 to 60 days.

What are the key requirements for registering a private limited company as a freelancer?

  • You need to have at least one shareholder;
  • You need to have at least one director who resides in Singapore. He or she has to be at least 18 years old;
  • If a foreigner wishes to act as a local director of the company, he or she can apply for an EntrePass from the Ministry of Manpower.

Checklist after incorporating a company

After the successful incorporation, you will still need to follow the statutory obligations. Here is the checklist:

  1. You must appoint a company secretary within 6 months of incorporation.
  2. You must appoint an auditor within 3 months after incorporation, unless the company is exempted from audit requirements.
  3. Annual returns and reports must be filed yearly.
  4. Annual General Meeting (AGM) has to be held and compiled with.

Read more here: What’s Next After Incorporation? 12 Things To Do

Summing up

Being a freelancer has its benefits. Many do not see the need to register for a private limited company. They could be put off by the amount of administrative work, and the costly set up. But incorporating a private limited company is more than just the cost or the administrative work. It’s about running your business in the long term.

Now that you know the benefits of incorporating a private limited company, it’s time for you to make the decision. If you need to engage our corporate services, we are glad to assist you. We’ll also be here if you want to focus on honing your craft and growing your business while leaving other administrative tasks like accounting to an accountancy firm in Singapore.

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