Choosing the right type of business structure is a key decision when registering a business. The type of 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 structure best suits your business. There are several business entities available in Singapore. These include sole-proprietorships, partnerships, limited partnerships (LP), limited liability partnerships (LLP), and companies.
Diagram of Business Structure in Singapore
In a sole proprietorship business structure there is only one individual owner. This is the most basic structure and second most popular type of entity. 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 assumes the risk entirely. The owner is personally liable for the debts of the company. Sole proprietorship is exempted from annual filing.
This structure is suitable for less risky businesses as it does not limit the liability of the owner. Corporations can operate under a sole proprietorship, however corporations generally do not prefer this structure because of the unlimited risk of liabilities. Typically individuals involved in small businesses, freelancing or other low profile businesses prefer this structure because the compliance requirements and costs are low.
However, the profits are treated as personal income of the owner and subjected to personal tax rates of 0-22% while effective corporate tax rates are 0-17%. The Inland Revenue Authority’s definition of a company does not include sole proprietorship. This means that businesses run under a sole owner can not benefit from tax exemptions and incentives administered.
The owner of the business can face serious ramifications if the business were to fall into large debt or be sued for other liabilities. The personal assets of the owner would be at risk for being used as payment for the debts accumulated from the business. The sole proprietorship does not have a legal identity of its own and will cease to exist with the demise of the owner, thus it lacks perpetuity.
General Partnership (GP)
Two or more individuals or corporations can come together to form partnerships but the number of partners cannot exceed 20. If the number of partners exceeds 20 it must be registered as a company. General partnerships can be created at an individual level or even between companies. The registration needs to be registered with ACRA and renewed annually.
It does not constitute a separate legal entity. It can 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 also 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, similarly to a sole proprietorship. In the case of a partnership with a corporation, it will be subjected to corporate tax rates.
The advantage of the partnership structure is that owners/partners are able to pool the resources in terms of capital, skills, assets etc. The compliance requirements are lenient, therefore compliance costs are low. However, the risks involved is similar to that of a sole proprietorship, therefore not recommended for high-risk and large businesses.
Limited Partnership (LP)
Limited partnerships are similar to general partnerships but it consists of general partners and limited partners, at least one of each kind. There is no limit to the number of partners. Unlike general partners, the limited partners are not personally liable for the debts and other liabilities of the business. However, the limited partner cannot take active management roles in the business.
Similarly to general partnerships, a limited partnership does not qualify for tax incentives and will be subjected to personal income tax rates if the partners are individuals. If the partners are corporations they will qualify for corporate tax rates.
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 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. This means it can sue and be sued in its own name and it can own property. The partners are not personally liable for the debts and losses of the LLP. However, the partners become personally liable in cases 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 in a LLP. 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 corporation. 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 of companies. Compliance requirements are minimal therefore the compliance cost is low. Unlike general Partnership, the LLP does not need to 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). The company itself can enter into contracts and own assets.
It is a separate legal entity, meaning there is a legal veil separating the owners from the company meaning the shareholders are not personally liable for the debts and liabilities of the company. 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). Shareholders can be an individual or a corporation. 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. In Singapore, the names of this type of entities have the suffix ‘Private Limited’ or ‘Pte Ltd’. 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.
Members of the company are not personally liable for any losses or debts acquired by the company. Private limited companies are taxed at the effective corporate tax rate of 0-17% and can qualify for tax exemptions and incentives. Companies that meet certain criteria can experience 75% tax exemptions on the first S$100,000 dollars in the first three consecutive years.
While, these exemptions are enticing there are considerably more hoops to jump through when establishing a private limited company compared to a GP or LP. An example is that a company secretary and a company auditor must both be hired within six months of incorporation.
Exempt Private Limited Company
An Exempt Private Limited Company (EPC) is a Private Limited Company that is exempted from 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
The EPCs are only required to submit a declaration signed by the directors and company secretary confirming the solvency of the company. They do this instead of preparing and filing an audited statement annually to the ACRA. 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. Effective July 1st 2015, even if it does not qualify as a EPC, a company, will be exempted from the annual audit requirement if it meets at least 2 of the following new criteria for the immediate past 2 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 qualifies if it meets at least two of the three quantitative criteria above on a consolidated basis for the immediate past two consecutive financial years.
Advantages of Private Limited Company:
This is the most popular entity type because not only does it protect shareholders from the liabilities of the business, it also provides greater control of ownership.
The ownership is easily transferable, either as a whole or part. Assets, licenses and permits can be easily transferred in the case of change in ownership.
Though the compliance cost is higher compared to sole proprietorship, the tax liability is 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 only subjected to a rate of 17%.
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 support from banks and other financial institutions.
The death or insolvency of shareholders will not impede the progress 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. This means it may offer to sell shares of the company to the public. The name of a Public Limited Company is followed by the suffix ‘Limited’ or ‘Ltd’. It can get listed in the stock exchange and is 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 professional image. 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, the compliance cost is high because they are subjected to strict regulations and subjected to greater public scrutiny. The board and management are legally accountable to the shareholders.
Public Company Limited by Guarantee
A Public Company Limited by Guarantee is a company that is incorporated for the purpose of public good and non-profit purposes is. Societies and organizations 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 and 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. 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 attracts individual entrepreneurs as well as foreign businesses who want to expand their horizons and their global reach by incorporating in the heart of Southeast Asia. These entities have the option of choosing one of the following business structure.
A subsidiary company is a form of limited liability company. Foreign corporations setting up their company in Singapore prefer it. 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 to be like a local company and is treated as such. It has access to tax benefits, exemptions, and rebates awarded by the 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 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. 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.
Foreign corporations like to survey & research the new market before committing 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. The office cannot be involved in any business activities according to the Singapore Companies Act.
These are the main differences between entities, their pros and cons, that you should take into consideration when deciding which business entity suits your business the most.
If you need advice or more information regarding the type of business structure to choose, you can always reach out to us here at Incorporate.sg. We are always here to help! Give us a call, email or chat live with us by simply clicking on the blue dialogue box on the bottom right hand corner of this page. Cheers!