Types of Business Structures in Singapore
As you decide to incorporate your business in Singapore, you will have to select the business structure that best suits your needs. This article provides an overview of the different business entity structures allowed in Singapore and explains why a limited liability company is the best choice for most businesses.
There are 6 main types of business structures to choose from. They are:
• Sole Proprietorship
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Private Company limited by shares
• Foreign Company
Factors to consider when choosing a business structure
The type of business structure you choose depends on your business needs. You should consider the following factors to determine the best structure for you:
• How much capital are you prepared to invest?
• How many owners will there be in the business?
• What liabilities and responsibilities are you prepared to assume?
• What risks are you prepared to take?
• What are the advantages and disadvantages of the different business entities?
• Is the business entity easy to close?
A sole proprietorship, also known as the sole trader, a proprietorship, or a “one-man show” according to laymen, is a type of business entity that is owned and run by an individual, and in which there is no legal distinction between the individual and the business.
Given that it is wholly owned and controlled by the sole proprietor, the sole proprietor has unlimited liability and can be sued in his or her name, or the business name. A sole proprietorship is not considered as a separate legal entity.
Another distinct difference is that the profits of a sole proprietorship is taxed based on the personal income tax rate, hence a sole proprietorship does not benefit from the multitude of tax incentives that are specifically meant for companies.
Largely similar to a sole proprietorship in terms of structure, liability, and taxes, the most significant difference is that a partnership can comprise of two or more partners, subject to a maximum cap of twenty individual partners. Once a partnership exceeds this cap, it is required to incorporate as a company under the Companies Act.
As with all other business entities, a local manager must be appointed who is a natural person and at least 18 years of age, is ordinarily resident in Singapore and is not an un-discharged bankrupt. This business structure allows for foreign individuals or companies to be partners. Similar to a sole proprietorship, the tax rate imposed will be that of the partner, i.e. if the partner is an individual, the personal income tax rates will apply, if the partner is a company, corporate tax rates would apply.
The greatest risk associated with a partnership is the fact that it is not considered a separate legal entity and all partners are personally liable for the partnership’s debts and losses, even if the debts and losses are incurred by other partners.
A Limited Partnership (LP) is a vehicle for doing business in Singapore. It is a partnership consisting of a minimum of two partners, with at least one general partner and one limited partner. A LP does not have a separate legal entity from the partners, i.e. it cannot sue or be sued or own property in its own name.
An individual or a corporation may be a general partner or a limited partner of the LP. Appointing a local manager is not mandatory unless all the general partners are residing outside Singapore.
A general partner is responsible for the actions of the LP and is liable for all debts and obligations of the LP. A limited partner is not liable for debts and obligations of the LP beyond his agreed contribution, provided he does not take part in the management of the LP.
If there is no limited partner registered with ACRA, the LP registration will be suspended and the general partner will be deemed registered under the Business Names Registration Act. Once a new limited partner registers with ACRA, the LP registration will be restored and the registration under the Business Names Registration Act will cease.
Limited Liability Partnership
A limited liability partnership (LLP) is a hybrid of a partnership and an incorporated company. This means that the LLP is seen as a body corporate and has a legal personality separate from its partners. The LLP has perpetual succession, which means any change in the partners of an LLP will not affect its existence, rights or liabilities.
An LLP is capable of:
• Suing and being sued in its name;
• Acquiring and holding property in its name;
• Having a common seal in its name and
• Doing such other acts and things in its name, as bodies corporate may lawfully do and suffer.
The partners of the LLP will not be held personally liable for any business debts incurred by the LLP. A partner may, however, be held personally liable for claims from losses resulting from his own wrongful act or omission, but will not be held personally liable for such wrongful acts or omissions of any other partner of the LLP.
Typically, an LLP is employed by a group of two or more professionals, such as doctors, accountants, attorneys or architects, who wish to build a joint practice.
Private Limited Company
A private limited company is the most common form of the company chosen by entrepreneurs and investors, mostly because of the tax incentives that can be applied for, as well as the fact that it is considered as a separate legal entity and is separate and distinct from its shareholders and directors.
The main benefit of this is that the members of a company will not be held personally liable for the debts or losses of a company.
Unlike all the other business entities, a private limited company can qualify for tax exemption schemes and is taxed at the effective corporate tax rate of 0-17%.
Given that the Singapore government has always been actively promoting the spirit of entrepreneurship and innovation, there are two key tax exemptions that have proven to be extremely beneficial for companies. For newly incorporated companies that meet the qualifying conditions, 75% tax exemption can be claimed on its first S$100,000 of chargeable income for each of its first three consecutive years of assessment. A further 50% exemption is given on the next S$100,000 of chargeable income for each of the first three consecutive years of assessment.
Notwithstanding the attractive tax incentives, it should be noted that there are more formalities and procedures for a private limited company to comply with. For example, it is required to appoint a company secretary within six months of incorporation and an auditor within three months of incorporation, unless the company is exempt from audit requirements. In addition, there is the requirement for annual returns to be filed annually with the Accounting and Corporate Regulatory Authority (“ACRA”).
Each year a good number of foreign companies are setup in Singapore, which would take the format of either a branch office, a subsidiary, or a representative office. The key differences among the three are:
• Subsidiary Company – This is a Singapore-incorporated private limited company whose shareholders are the parent company. Singapore allows 100% foreign ownership, which means the subsidiary could be 100% held by its foreign parent.
• Branch Office – Unlike a subsidiary company, a branch office in Singapore is registered as an extension of its parent company and not as a separately incorporated entity. The name of the Singapore branch office must be the same as that of the head office and must be approved first before branch office registration. The Singapore Companies Act requires that a branch office appoint 2 agents who are ordinarily residents in Singapore to accept services of process and notices.
• Representative Office – Foreign companies that only have an interest in conducting market research activities or feasibility studies in Singapore can setup a representative office in Singapore. It is a temporary arrangement and is therefore ineligible to conduct any profit-yielding business activity.