6 Mistakes to Avoid While Incorporating a Company in Singapore

6 Mistakes to Avoid While Incorporating a Company in Singapore

Backed by supportive government policies and private funding, Singapore has emerged as Asia’s favorite business hub. The country has so much to offer for entrepreneurs worldwide to set up their businesses there. However, not all entrepreneurs managed to incorporate their companies without making a single fatal mistake.

While some mistakes may help you improve, some can be lethal for your career. But if you plan properly and do your due diligence, you can easily avoid some of these most common mistakes while starting a business in Singapore.

1. Choosing the wrong business entity

Choosing the wrong business entity can have multiple negative impacts on your business, e.g., difficulties in finding funding opportunities, inflexibility of succession, and higher tax rates. There are three most common types of business entities in Singapore:

  • Limited Liability Company (consisting of Private Limited Company and Public Limited Company)
  • Partnership (consisting of General Partnership, Limited Partnership, and Limited Liability Partnership)
  • Sole Proprietorship

Of all business entities in Singapore, only Private Limited Company and Limited Liability Partnership are considered separate legal entities. For banks and financial institutions, the legal status of a business entity is vital when providing banking or credit facilities. Sole proprietorships and partnerships are usually excluded, except for some term loans, which require guarantors and detailed documentation to prove that the sole proprietorship or partnership has the ability to repay the loan within the specified timeframe.

More importantly, only private limited liability companies can benefit from government-funded micro-loans offered by local banks such as DBS, OCBC, and UOB. These loans are supported by Enterprise Singapore, which aims to provide affordable funding schemes for small and medium enterprises.

In addition, there is little succession flexibility for sole proprietorships, partnerships, and limited partnerships. Especially for sole proprietorships, there is no option for another person to continue the business on behalf of the sole proprietor. Therefore, for those who have already built their reputation and brand awareness, this may be a costly opportunity loss for the next generation who has the potential to continue the business.

When it comes to paying taxes, sole proprietorships, partnerships, limited partnerships, and limited liability companies are taxed on an individual basis, i.e., sole proprietors or partners are taxed based on their income tax rate. Hence, beyond a certain income level, these business entities may end up paying higher tax rates.

Depending on your business needs and plans, it is wise to consider a business entity that has more convenience, especially if you plan to maintain the business long term. Alternatively, if your current business is a sole proprietorship or partnership, rest assured that there is an option to convert your business into a private limited company. A change like this can help you grow your business, protect assets, limit liabilities, allow you to enjoy corporate tax incentives, attract investors, and recruit high-quality talent.

2. Not making deals with co-founders

The flip side of having multiple co-founders is that it can be conflict-prone. Personality collisions between co-founders, having different visions for business growth, or simply being on another wave when making daily business decisions can lead to clashes and premature company closures.

That is why it is crucial to have an agreement with your co-founders, especially concerning equity allocation. The equity allocation among business partners should not be taken lightly, although there is no one-size-fits-all formula when deciding how to split.

Often, startups split equity evenly to avoid uncomfortable situations among co-founders. However, this approach may no longer be appropriate as your business grows. The same split may seem fair at first. But if roles change and the time and effort devoted to the business by each founder differs, it is better to ensure that each founder has an interest in the company that matches this contribution. 

For example, your partner’s role may decrease over time, while yours may increase. Thus, the 50/50 split doesn’t make sense if one partner devotes more energy to the company than the other. Instead, consider the long term when dividing equity, as each percentage point of equity can incur high costs for partners who receive less than their fair share.

To avoid conflicts that may arise in the future, you should communicate with your partner(s) to define what each of you brings to the table. Also, it is important to protect your interests by using enforceable legal instruments, where you have the opportunity to clearly state responsibilities and equity stakes commensurate with the roles and inputs of each partner.

3. Doing everything on your own

Starting a new business can bring a lot of uncertainty, so don’t try to do it all yourself. Things sometimes don’t go well for a reason, and when you do it alone, you get tied up with multiple tasks, which is never a good thing. The best way to proceed is to consult or hire an authorized corporate service agent to help you through this challenging early stage.

Foreigners are advised to contact agents who can incorporate their business in Singapore for them. This is a wise move as the paperwork can be a bit complicated, and the whole process takes time to complete.

4. Spending too much in the initial stages

Every start-up requires cash. But caution must be exercised when collecting money. Giving up too much equity in the early stages is not a good idea. One of the most common mistakes many startups make is spending too much on unnecessary advertising in the first stages.

Advertising is essential, and there is no confusion there. But spending too much on it without knowing what is required can derail your business from the right track. So when you invest in advertising, be sure to do it properly by doing the math. Control your budget, know your audience, and choose what works for your business. 

5. Scaling up too early

Another common mistake is trying to scale up too early. Some examples of premature scaling are rapid market expansion, over-hiring, and expanding marketing and advertising budgets. 

Remember that rapid growth does not necessarily mean profitability. Initially, most startups sell their products or services at a loss to gain market share and recognition. However, if you do the math wrong, your sales will only go against you. 

Moreover, you should not think about scaling up before you’ve achieved a product-market fit. Instead, validate your product or service strategy with a small group of trusted clients who are ready to be beta testers and give you honest feedback. You can scale up after doing so.

6. Failing to comply with regulations

To run your business worry-free, your company must comply with Singapore’s regulatory authorities, such as IRAS and ACRA. Otherwise, you could face hefty penalties or even risk your business registration being canceled. 

The first thing many foreign entrepreneurs have trouble understanding is the incorporation process in Singapore. That is why it is important to learn how this process looks like and what it takes to successfully set up a company in the country (please, refer to A Complete Guide on Company Registration in Singapore).

The second most problematic issue for foreign entrepreneurs is filing an annual return. It is a document that every Singapore company must submit annually to ACRA. Filing taxes is also a bit confusing without the help of a corporate service agent. 

Another law that is often overlooked by foreign entrepreneurs is the Employment Act. Once the company is established and you start hiring your team members, it would be wise to look at the rules and conditions you should follow. The company must comply with the applicable obligations imposed on the employer under the Act. 

Wrap up

Setting up a new business in Singapore is a great decision. However, this process can also be a bit complicated when you go through it alone. Without the proper knowledge, you might end up making some mistakes that could lead to business failure. The best way to avoid mistakes is by consulting an experienced agent to guide you through the entire process.

Biz Atom can help you with incorporation and other administrative tasks. If you want to avoid the mistakes mentioned above and ensure a smooth journey through the early stages of your company, feel free to contact us.

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