Incorporating a business in Singapore often involves the issuance of shares, which represent ownership in the company. The types of shares a company issues can significantly impact its operations, financial structure, and relationships with shareholders. In Singapore, two primary classes of shares exist: Ordinary shares and Preference shares. In this comprehensive guide, we will delve into the distinctions between these two share classes, their advantages and disadvantages, and how they can impact your business.
Ordinary Shares: The Backbone of Private Limited Companies
Benefits and Rights of Ordinary Shareholders
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Participation in Corporate Governance: Ordinary shareholders are entitled to attend Annual General Meetings and vote on crucial matters, including the appointment of directors. Each share they hold typically grants them one vote, as defined by the company's Constitution.
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Share in Company's Profits: When the company generates profits and decides to distribute dividends, ordinary shareholders are eligible to receive their share.
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Distribution on Winding Up: In the unfortunate event of the company's liquidation, ordinary shareholders have the right to claim any remaining assets after all debts have been settled.
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Limited Liability: Ordinary shareholders enjoy protection against the company's financial obligations and are only liable for the value of their shares.
Disadvantages of Ordinary Shares
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Priority Dividend Distribution: When it comes to distributing dividends, preference shareholders are given priority.
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No Guaranteed Right to Receive Dividends: The company may choose not to distribute dividends depending on its financial situation.
Preference Shares: Tailored Benefits for Shareholders
Rights and Benefits of Preference Shareholders
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Fixed or Preferential Dividend Rights: Preference shareholders usually have fixed or preferential rights to receive dividends, ensuring a consistent income stream.
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Priority Claims on Company Assets: In the event of the company's liquidation, preference shareholders have priority claims on the company's assets, offering greater security.
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Redeemable Shares: Some preference shares are redeemable, meaning the company can buy them back from shareholders at a predetermined price.
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Convertible Shares: Certain preference shares are convertible into other capital instruments issued by the company, such as convertible notes.
Disadvantages of Preference Shares
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No Voting Rights: Preference shareholders generally do not possess the right to vote at company meetings.
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Higher Dividends: Preference shares typically come with a higher dividend rate compared to the interest on debentures.
Tax Treatment of Preference Shares
Preference shares are treated similarly to ordinary shares in terms of tax implications. They do not affect taxes differently, making them a flexible option for structuring your company's capital.
Choosing the Right Share Class for Your Company
Selecting the appropriate share class depends on your company's specific needs and the preferences of your investors. If you prioritize consistent dividend income and security, preference shares may be the way to go. On the other hand, if voting rights and participation in corporate decision-making are essential, ordinary shares are a suitable choice.
Consider the following key factors when making your decision:
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Investor Preferences: Assess the preferences of your potential investors and what type of shares align with their expectations.
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Dividend Distribution: Evaluate whether your business model is more profit-oriented, making preference shares a more appealing option.
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Voting Rights: If your investors value participation in company decisions, ordinary shares with voting rights may be the better choice.
Expanding or starting a company in Singapore involves making critical decisions, including the type of shares to issue. The right choice can have a profound impact on your business's success. If you're looking to learn more about different types of shares or have questions about starting or expanding your company in Singapore, don't hesitate to contact us.
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In conclusion, choosing the right share class for your company is a critical decision that can impact its financial structure and relationships with shareholders. Understanding the distinctions between ordinary and preference shares is essential in making an informed choice that aligns with your company's goals and investor preferences. If you need further assistance with this or other aspects of doing business in Singapore, please don't hesitate to reach out to us.
