Choosing the right type of business structure (also known as “legal entity”) is a key decision when registering a business. The business structure will affect the taxes payable, accounting, financing, ability of business expansion and personal liability of directors.
Before registering your Singapore business with the Accounting and Corporate Regulatory Authority (ACRA) , you should first conduct research and decide which business entity best suits your business model. There are several business entities available in Singapore – namely sole-proprietorships, partnerships, limited partnerships (LP), limited liability partnerships (LLP), and companies.
ACRA also provides a summary table of the different business entities in Singapore.
Diagram of Business Structure in Singapore
This is the most basic structure and second most popular type of entity. There is only one individual or corporate owner, hence the name Sole Proprietorship. The registration with ACRA must be renewed annually. There is no legal veil separating the business from its owner. The business although registered with ACRA, does not result in a separate legal entity therefore the owner’s risk is unlimited. The owner is personally liable for the debts of the company. Sole Proprietorship is exempted from annual filing.
As it does not limit the liability of the owner it is suitable only for less risky businesses. Though it states that corporations can own Sole Proprietorship, because of the unlimited risk of liabilities corporations generally do not prefer this structure. Typically, individuals involved in small businesses and freelancing or other low profile businesses prefer this structure, as the compliance requirements and costs involved are low. The profits are treated as personal income of the owner and subjected to personal tax rates.
There are serious downsides to the owner if the business falls into huge debts or is sued for other liabilities. The personal assets of the owner will be attached in such litigations or for recovery of debts. It will be challenging to raise capital all of which may have to come from the owner only and the lending institutions generally ask for personal assets to be furnished as collaterals. It typically does not bear a prestigious perception. The lack of access to capital and poor perception will hinder its growth and expansion.
The business cannot be sold in parts and assets must be sold separately and licenses held by the owner may not be transferable. The Sole Proprietorship does not have a legal identity of its own, hence will cease to exist with the demise of the owner, thus it lacks perpetuity.
General Partnership (GP)
Two or more individuals or corporations, known as partners, come together to form Partnerships. The number of partners cannot exceed 20. If the number of partners exceeds 20 it must be registered as a company. Individuals and companies may set up a partnership. The partnership must be registered with ACRA and needs to be renewed annually.
It does not constitute a separate legal entity. It can sue or be sued in the firm’s name but it cannot own property in its own name. The partners’ liability is unlimited and their personal assets are not protected from the debts and liabilities of the business. Each partner can be held responsible for the liabilities of the other partners. The partners divide the profits and the profits are treated as personal incomes of the partners for tax purposes and are taxed at personal tax rates. In the case of corporations, it will be subjected to corporate tax rates.
The merit of Partnership structure is that owners/partners are able to pool the resources in terms of capital, skills, assets etc. The ongoing compliance is lenient therefore administrative costs are low. However, the risks involved is similar to that of a sole proprietorship, therefore not recommended for high-risk businesses and businesses with ambitious growth plans. Aside from individuals, corporations enter into such business structures only for short term projects.
Limited Partnership (LP)
This is similar to the general partnership but it consists of general partners and limited partners, at least one of each kind. There is no limit to the number of partners. The liability of a limited partner is limited to the amount of his contributions and not personally liable. Unlike the limited partners, the general partners are personally liable for the debts and liabilities of the business. The limited partner cannot take active management roles in the business.
Limited Liability Partnerships (LLP)
LLP is a relatively new type of entity and the structure integrates the features of both partnerships and companies. In this type, two or more partners (individuals corporations, or another LLP) enter into an agreement to conduct business under specific terms and conditions that are mutually agreed by all partners. The liability of each partner is limited to the extent of his or her contribution. At least two partners are required but there is no upper limit on the number of partners.
Like a company, it has a legal identity of its own. It can be sued and sue in its own name. It can own property. Though the partners are not personally liable for the debts and losses of the LLP, the partners become personally liable in case of debts and losses arising from their own actions. Unlike the GP or LP the partners are not personally liable for the debts incurred by the other partners. Profits are charged at personal tax rates for individual partners and corporate tax rates for corporate partners.
The LLP enjoys the flexibility of functioning as a partnership while enjoying the benefits of a body corporate such as limitation of liability. It also has perpetuity and does not cease with changes in the partnership resulting from death, bankruptcy, resignation etc. It is easy to set up and the cost of registration is lower than that for a company. Compliance requirements are minimal therefore the compliance cost is also low. Unlike GP its registration need not be renewed annually.
This is generally suitable for professional practices such as doctors, lawyers, engineers, architects etc.
Limited Liability Company
Limited Liability Company (LLC) is a company incorporated by registering with Accounting and Corporate Regulatory Authority (ACRA) of Singapore under the Companies Act. It is a separate legal entity, meaning there is a legal veil separating the owners from the entity. The company can enter into contracts and own assets. It can sue and be sued in its own name. The liability of the company is limited to its share capital and each member’s liability is limited to the share capital subscribed by the member (shareholder). The shareholders can be an individual or a corporation. The personal assets of the shareholders are insulated from the liabilities of the company. LLC has the following types:
Private Limited Company
The most common and most preferred type of entity among entrepreneurs in Singapore is the Private Limited Company. The shares of a Private Limited Company are not made available to the general public, all of its shares are held privately. The number of shareholders in a Private Limited Company must not be more than 50. In Singapore, the names of this type of entities have the suffix ‘Private Limited’ or ‘Pte Ltd’.
Exempt Private Limited Company
An Exempt Private Limited Company (EPC) is a Private Limited Company that is exempted from statutory annual audit. In order to qualify as an EPC a Private Limited Company must meet the following conditions:
- It must not have more than 20 shareholders
- No corporation should have beneficial interest in its shares, meaning, it must not have any corporate shareholder
- The annual revenue must not be more than S$5 million
Instead of preparing and filing an audited statement annually to the ACRA the EPCs are merely required to submit a declaration signed by the directors and company secretary confirming the solvency of the company. EPCs must still keep records of the financial statements following Singapore’s Financial Reporting Standards (FRS) in case ACRA requests them.
An amendment made to the Companies Act has made more companies eligible for the exemption even if they do not qualify as an EPC. Such companies are categorised as ‘small’ companies. Effective 1 July 2015, a company, even if it does not qualify as a EPC, will be exempted from the annual audit requirement if it meets at least two of the following new criteria for the immediate past two consecutive financial years:
-Annual revenue is less than S$10 million
-Total assets not exceeding S$10 million
-Less than 50 employees
Parent Companies or subsidiaries that are small companies and are part of a small group will also qualify for audit exemption. A small group is one, which meets at least two of the three quantitative criteria a bove on a consolidated basis for the immediate past two consecutive financial years.
Merits of Private Limited Company:
This is the most popular entity type because besides limiting the liability of shareholders, it also provides greater control of ownership.
The ownership is easily transferable, either as a whole or part, by simply transferring the shares. Assets, licenses and permits can be easily transferred in the case of change in ownership.
Though the compliance cost is higher when compared to sole proprietorship, the tax liability is immensely lowered by the competitive corporate tax rates in Singapore. Companies that have a taxable profit of S$300,000 or less are effectively charged a rate of just 8.5%. Profits above S$300,000 are subjected to a rate of 17% only.
It is relatively easy to raise capital by issuing shares to new shareholders or by issuing additional shares to existing shareholders. This facilitates growth and expansion of the business. It also improves the access to financial assistance from banks and other financial institutions.
The death or insolvency of shareholders will not impede the existence of the company. It has legal perpetuity until it is taken off the register.
There are two types of public company:
- Public company Limited by Shares
- Public Company Limited by Guarantee
Public Company Limited by Shares
A LLC that has more than 50 shareholders is a public limited company. It may offer shares to the general public. The name of a Public Limited Companies is followed by the suffix ‘Limited’ or ‘Ltd’. They can get listed in the stock exchange and are required to submit a prospectus to the Monetary Authority of Singapore (MAS) before getting listed to raise capital from public.
Its merits are similar to that of a private limited company, in terms of limiting the liabilities of the shareholders, competitive corporate tax rate and a prestigious image in general. They have improved access to capital; they can raise capital by offering shares, debentures and bonds to public. Shareholders enjoy greater liquidity as they can buy and sell shares in the capital market. However, they are subjected to strict regulations and financial matters are subjected to greater public scrutiny. The compliance cost is very high. The board and management are accountable to the shareholders.
Public Company Limited by Guarantee
A company that is incorporated for the purpose of public good and non-profit purposes is a Public Company Limited by Guarantee. Societies and organisations that are registered for the purpose of promoting arts or for the purpose of charity fall in this category. The liability of its members is limited to the amount that the members undertake to contribute to the assets of the company in the event of its winding up. The amount of guarantee by the members will be stated in the Memorandum of Association. The amount is usually nominal. The names of such companies do not have the word ‘Limited’.
It must be noted that there is no shares involved in this type of entity. As long as it is a going concern the members are not required to pay any capital. This structure is generally used by non-trading and non-commercial entities such as trade associations, charitable bodies, professional societies, religious bodies, incorporated clubs or other not-for-profit undertakings.
Business Structures for Foreign Incorporation
Singapore, in addition to the individual entrepreneurs, also attracts foreign businesses. Especially, the SMEs, wanting to expand their horizons opt for company incorporation Singapore. These entities have the option of choosing one of the following business structure.
A subsidiary company is a form of limited liability company. It is preferred by the foreign corporations to setup their company in Singapore. It has a separate identity from its parent foreign corporate. One of its USPs is that the Singapore authorities allow 100% foreign shareholding. In most cases, the foreign corporate acts as the major shareholder.
A subsidiary company is considered as the local company. It has access to the tax benefits, exemptions, and rebates awarded by the local authorities. It is responsible for its own debts and losses arising out of its business activities. The parent company’s liability remains limited to the capital it has invested in the shares.
Registering a branch office in Singapore is yet another option that the foreign corporations can choose. A branch office is not considered as the local company. It is treated as the extension of the foreign parent company. It means its management has to follow the Memorandum and Articles of Association (MAA) of the parent company to deal with issues like shareholding, business activities, and structure.
As a branch office is not a separate legal entity from its parent company, the liability of its debts and losses arising out of its business activities lies with the parent company.
The foreign corporate likes to survey & research the new markets before committing their resources to establish their presence in it. In Singapore, they need to register a representative office to carry out such activities.
A representative office has no legal status. It is taken as just a temporary administrative arrangement of its parent company. According to the Singapore Companies Act, it cannot indulge in any business activities.
These are the main differences between entities and their pros and cons, that you should take into consideration when deciding which business entity is most appropriate to start your business.