Quora Answer: What are Some Pros & Cons of a Sole Proprietorship versus a Limited Liability Company, in Singapore?

The following is my answer to a Quora question: “What are some pros and cons of a sole proprietorship versus a limited liability company, in Singapore?”

A sole proprietorship is a lot easier to run than a limited liability company.  That is the only so-called advantage.  There are several reasons to start a limited liability company.  These reasons are worth it, despite the extra paperwork required.  One reasons is to create a structure where there is more than one person, with some being shareholders, and others being directors.  The legal relationship is quantified, and therefore, easily administered.  A company allows you to incorporate capital injection and drawings in a transparent manner.  A company mitigates your tax liability, lowering your tax bill because you are taxed after expenses, not on gross income.  With a good accounting system, you are able to expense out a lot of activities.

Despite what many believe, a limited liability concern does not always protect your assets in the event of a bankruptcy petition.  That is a myth.  This may be true for a company loan from an individual or another company.  When a company takes a loan from the bank, the documentation clearly states that the not only is the company liable, but the directors are personally liable as well.  This means when you are sued by the bank for a default, and the company is broke, the bank will go after the directors.  The bank always starts with the director with the most assets, and he may not even be an executive director, or the one who signed the loan.

A company does protect you from litigation pertaining to non-performance of a contract, or non-payment of services and goods.  In such a case, the company is liable, not the directors.  This is useful, especially in litigious industries such as shipping.  NOL, before they were bought out by CMG, structured their fleet management such that every single vessel was owned by a company.  For example, we take the old NOL Sardonyx.  The vessel owner was Sardonyx Pte. Ltd.  Sardonyx Pte. Ltd. would be a wholly owned subsidiary of NOL.  The vessel would be managed by Neptune Shipmanagement Services Pte. Ltd.  This spread the potential liabilities around.

In the event that NOL Sardonyx collided with another vessel due to negligence, for example, and sank, there would be a massive bill.  First, would be the bill for the loss of cargo and crew. Then would be the loss of vessel itself.  All of this would be taken care of by insurance, but there would not impact on other vessels in the fleet since this would be a separate company legally.  So, there is no reason that the reinsurer can raise premiums on the remaining vessels of the fleet.

Second, there would be the bill for pollution, under MARPOL.  There might be fines and civil penalties under SOLAS.  If this happened in port waters, or near a tourist resort, there will be civil suits for loss of earnings.  Perhaps the estate of the officer might sue for wrongful death.  In the face of adverse judgement, Sardonyx Pte. Ltd. would declare bankruptcy, and there is no award to be claimed.

NOL, the parent company, is shielded from further legal and financial action because they are a separate company, even though they are the sole owners.  This also means that any financial impact on the subsidiary does not affect the leveraging of the parent company negatively, such as a major fall in share price.

There are a lot of uses for limited liability concerns.  As the name suggests, liability is limited to the capitalisation of the company.  A $100,000 paid up capital concern can only be sued to $100,000.