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Should I Setup Separate Company for Every Business?
The fast-changing business environments have prompted many entrepreneurs to diversify and adapt different strategy approaches in different circumstances. Often, many business owners generate income through different channels and ventures. For example, a café owner may open a food delivery company or a restaurateur may also double as a grocery store owner.
If you are running multiple businesses, you have probably (or you might have) wondered what is the best way to structure all these ventures? Should you structure all businesses under one roof? Should you consider to setup company separately for every different business? The main advantages of using separate companies are based on commercial factors. Let us have a look at the advantages of having separate company for different business.
Many companies, in particular, deploy separate strategies for different parts of business, and in fact, when they do so, their businesses perform better.
Setting up different companies for different business is a strategic approach to diversification. While diversification means branching out into new business opportunities, setting up different companies for different business will enable decentralized decision making involving many responsibility-center managers.
On top of that, the diversification strategy allows your business to attract different source of investment and talents. If you need investment in the new activity, you may want to keep this separate so that you are only giving away ownership of one business rather than both. Diversification in business helps to allocate investments among the different financial resources and industries. It is the important component of reaching long-term financial goals while minimizing the risk.
2. Ring Fencing as a Protection
Having separate companies for different businesses means, you can ring-fence potential risks or liabilities from existing business, just in case it does not work out as you had hoped. The ring-fencing strategy will ensure that any problems in the new business will not damage or affect your existing business. The split operations provide protection because it ring-fences riskier activities from those that are more secure by separating the riskier activities into a new company or entity.
3. The Safety Net if Your Company Goes Public
In Singapore, private companies can choose to go public under voluntarily or involuntarily conversion. While converting a private company to become public company yield a multiplicity of benefits like having better access to capital, gain prestige with enhanced status and financial standing of the company, public companies are faced with the market pressures. Public companies are at greater risk of takeover attempts due to its public trading of shares and added liability exposure. As such, having separate companies for different businesses is having a safety net when one of your businesses goes public.
In Singapore, business income is taxed at a flat rate of 17 %. However, there are tax exemption schemes available for companies, which help to lower the effective corporate tax rate at different tiers. A newly incorporated company can enjoy the tax exemption for each of the first three years of tax assessment. In other words, the more companies you have the more tax rebates you can enjoy.
- Chargeable income of first $10,000 (effective tax rate: 4.25%)
- Next chargeable income of $190,000 (effective tax rate: 8.5%)
- Thereafter (effective tax rate: 17%)