A Comparison of the Different Types of Business Entities in Singapore (2021 updates)
After doing extensive market research about the best location to incorporate your business, you have settled on Singapore. Now, you are faced with deciding which type of business organization is most suitable for your enterprise. Singapore offers six types of business structures. Each structure has its advantages and disadvantages, however, it is important that you select the one that optimizes your benefits and comes with comparatively fewer or less significant drawbacks.
A sole proprietorship is owned and operated by one person. It is the easiest and simplest business organization to set up. The owner makes all of the decisions, receives all the revenues and profits, and is liable for all business debts and liabilities if the business becomes insolvent. Sole proprietorships are taxed based on the sole proprietor’s taxable income, 0% to 22%, not at the corporate tax rate of 17%. Since sole proprietorships are identified with their owner/founder, it can be very difficult for them to secure investments from venture capitalists, banks, financial institutions, and private investors.
Sole proprietorships may be perceived as unstable and limited in growth potential. They often find it challenging to attract qualified employees because they are seen as family businesses with limited career opportunities for the staff. Moreover, these kinds of businesses are highly unlikely to survive the death of the owner/founder. With them, there is rarely a transfer of the business, succession when the owner/founder leaves it, or a legacy that is kept alive by others after the departure of the owner/founder.
Although there seem to be few advantages to sole proprietorships, they are a great way to start a business, test the market, or monetize a hobby or interest. Their attractiveness lies in the reduced amount of time, paperwork, and money necessary to register a sole proprietorship. The reduced investment in setting up the business structure can be put into the business itself and used to generate profits. Moreover, in Singapore, sole proprietorships are not required to do account auditing, annual reporting, file annual returns, or carry administrative burdens like other corporate structures. Finally, they are the easiest form of business to dissolve.
The considerable disadvantages of sole proprietorships include the unlimited liability borne by the owner/founder for the entirety of the business’ debts and obligations. If the assets of the business cannot resolve them, the owner/founder’s assets will be used to do so. Add to this, that such businesses are not permitted to take advantage of the pro-business incentives, tax breaks, and treaties that target corporations in general. Foreigners can form a sole proprietorship, but they must authorize a local Singaporean over the age of 18 to represent the business and accept responsibility for the business’ debts and liabilities.
The steps that must be taken to form a sole proprietorship include:
- Reserving the business name
- Selecting a business address
- Appointing an authorized Singaporean to represent the business in Singapore
- Compliance with government regulations and guidelines that govern sole proprietorships
General Partnership (GP)
General partnerships (GPs) are very similar to sole proprietorships. These kinds of partnerships can be entered into by a minimum of two people and a maximum of 20 people. Like sole proprietorships, they are not a separate entity from their owners/founders. The partners are subject to unlimited liability which includes the debts and obligations of the business and poor decision making by the other business partners.
In the GP, each partner can obligate the business to a contract, debt, or other obligation without the consent or knowledge of the other partners. This can be an area of great concern especially if the partners are not working as a collective unit to further a specific business objective and goal in a way that has been agreed to by all of the partners. Moreover, if the business’ debts and obligations exceed the assets of the business, all of the partners’ assets are at risk for being used to satisfy the business’ outstanding debts and obligations.
GPs are easy to dissolve if all partners are in agreement in regards to the details of the business’ dissolution. If not, the partners’ may be required to litigate the matter unless they have a legally binding partnership agreement that the partners agree to abide by, voluntarily or otherwise.
GPs face the same problems as sole proprietorships when trying to raise capital. This organizational structure doesn’t engender thoughts of confidence and stability in the business community. Thus, they too struggle to get funding from financial institutions, venture capitalists, and private investors. There is one advantage that they have over sole proprietorships, there are more people involved. So, theoretically, the partners can use their personal networks to get access to needed capital and anything else required by the business.
For tax purposes, the business’ profits are taxed according to the partners’ individual personal tax rates. They are not taxed using the corporate tax rate which is significantly lower than the highest individual tax rate. GPs are also not able to take advantage of the pro-business programs, tax breaks, and policies that are generally available to private companies.
Limited Partnership (LP)
A limited partnership (LP), like a general partnership, is not a separate legal entity from its owners/founders. It must have at least one general partner and one limited partner. There is no upper limit on the number of partners in an LP. Moreover, the partners in an LP can be individuals or corporations. In an LP, the general partner has unlimited liability, but the limited partners’ liability is limited to their investment in the limited partnership. A local manager is not required unless all the general partners reside outside of Singapore. The LP must have a legally binding partnership agreement in place to commence operation.
The advantages to this business structure are that it is fairly simple to register and requires fewer filings than a private company. The LP can be dissolved by the general partner via the limited partnership agreement or by cessation of business.
There are some significant disadvantages to this business structure. The partners are taxed according to their own separate tax rates. So, the individual partners are taxed according to their personal income tax rates, and the corporate partners are taxed according to the corporate tax rate. Property cannot be owned in the firm’s name, but must instead be owned by partners. The partners can sue or be sued in the company’s name. Finally, this business structure has many of the same fiscal disadvantages as the general partnership. It is not eligible for any pro-business incentives, tax breaks, or policies that are generally available to private companies.
Limited Liability Partnership (LLP)
Limited liability partnerships offer the most protection to company partners. The LLP is considered a separate legal entity. It can have general partners and limited partners. There is no maximum number of partners allowed under Singaporean law. The partners can be individuals or corporations. General partners have unlimited liability while limited partners’ liability is limited to their capital investment in the LLP.
The LLP partners’ rights and duties are governed by the LLP’s partnership agreement or The First Schedule of the Act on Default Provision if there is no partnership agreement. Partners are liable for their own wrongdoings but not the wrongdoings of other partners. However, they can be held liable for the wrongdoings of partners that are committed against non-partners.
As a separate legal entity, the LLP can acquire, own, hold, develop, and dispose of property. It can also be sued by others under its own name. Furthermore, the LLPs are subject to the same doings and sufferings as private companies.
LLPs have perpetual succession, and changes in the partners do not affect any aspect of the partnership’s existence, rights, or liabilities. It has fewer legal requirements than a private company. It is not required to have a company secretary, hold general meetings, or fulfill certain company filing requirements (e.g., tax returns).
A major disadvantage, one partner can commit the entire firm to a deal. It is also difficult to transfer ownership of the firm and its assets. Thus, an LLP’s assets, licenses, and permits must be transferred separately. A natural consequence of this restriction is that an LLP can not be sold as a singular entity. Furthermore, the partners may have difficulty raising capital because this business structure only inspires a moderate level of confidence in investors and other businesses. LLP partners are likely to be required to use their personal networks to raise capital. Lastly, there are no tax benefits associated with this business structure.
Private Limited Company (Pte. Ltd.)
Private companies in Singapore are often referred to as limited liability companies (LLCs). Private limited liability companies can have as few as one but no more than 50 shareholders. It’s a legal entity separate from its shareholders. Thus, each shareholder’s exposure to corporate debt and obligations is limited to the shareholder’s capital investment in the company. The shareholders may be natural persons or corporate entities. They may also be 100% foreign.
This business structure is very flexible and can be used to serve a wide variety of business purposes. It can be used to establish the company in the Singaporean market, hold and manage assets in the interests of its shareholders, and even be used to manage debt. They can do this because they are allowed to own real and personal property. Moreover, they can participate in legal and litigious proceedings. They also allow succession, so the private company can live forever. Given their corporate structure, shares can be easily transferred. This permits the addition and removal of shareholders. Shareholders also benefit from the tax benefits, exemptions, and special treatment accorded corporations under Singaporean law.
The disadvantages are that registering the company is time consuming, cumbersome, and requires lots of paperwork. The companies must comply with a series of statutes and regulations governing their operation. It costs more to set up, operate, and maintain a private company. To remain in statutory compliance, the private company must employ bookkeepers, accounting services, and a corporate secretary. These people are necessary if the company is to comply with the annual reports, tax filings, and general meetings that must be held according to Singaporean law.
Company founders must do the following if they want to set up a private company:
- If all the shareholders reside outside of Singapore, at least one resident director who is an ordinary resident of Singapore must be appointed.
- There must be at least one corporate shareholder when the company is set up.
- The initial paid up capital minimum is $1.00.
- The company must have at least one corporate secretary who is a resident of Singapore and who has met or can meet the minimum requirements for a corporate secretary under the Singapore Companies Act in regards to accreditation and lack of disqualifications.
- There must be an established address for the company that is not a post office box.
- The private limited liability company must have an approved name that is original and suitable for its brand identity.
Wrap Up . . .
Foreigners can establish themselves in Singapore via a sole proprietorship, general partnership, limited partnership, limited liability partnership, or private company. When deciding on which business structure to use consider whether any of the founders will be an ordinary resident of Singapore, how your enterprise intends to raise capital, and how much time, effort, and money you are willing to commit to establishing, operating, and maintaining the enterprise. Overall, the more preferred business structure is the private limited liability company because it receives the highest level of confidence from investors and financial institutions. In addition, it offers the greatest protection to its founders from corporate debt and liability and from wrongdoing by other partners. Lastly, it can take advantage of pro-business tax breaks, exemptions, treaties, and policies.
Setting up a new company in Singapore is a rather straightforward and simple process. In most cases, a Singapore resident, a foreign individual or a foreign company can create a new business entity in a matter of days, if not hours. However, it is advisable to take the assistance of a corporate services firm to guide you through the incorporation process and ensure that the company is set up according to all the requirements.