Business Entities in Singapore
One of the most important choices that needs to be made when incorporating an entity in Singapore is the type of business structure you want. The structure you ultimately decide on can affect the scope of your business, the taxes you pay, the way your enterprise is perceived amongst clients, competitors and suppliers, the amount of paperwork that needs to be completed for your enterprise to run effectively, the degree of personal liability you can face, the ability to obtain funding and expand your operations.
To help ensure entrepreneurs and foreign businesses make the right decision of what business structure to incorporate, Ottavia has developed a guide to the different entities which can be established in Singapore. Each structure is subject to its own unique regulatory and tax regimes.
The main business entities in Singapore
1. Limited Liability Company
Also known as an LLC, a Limited Liability Company is one which is limited by the amount of share capital it has. This business structure is registered under the Singapore Companies Act and a separate legal entity from its members. The assets of business owners are protected in an LLC structure and liability only applied to assets within the company.
There are several different types of LLC in Singapore including:
Private Limited Companies
This is where the shared are held by less than 50 people and they are not available to the general public. Generally speaking, privately incorporated businesses in Singapore are registered as this type of business. The suffix Private Limited or Pte Ltd which appears at the end of many company’s names is an indication that they are registered in this way. Shareholders of this type of entity can be either individuals or corporations or both.
This is the most scalable, flexible and advanced business structure and is the preferred choice for serious entrepreneurs. This is for several reasons including:
- It is recognised as a separate legal entity separate from shareholders and directors. That means it is able to acquire assets, go into debt, and sue or be sued in its own name.
- Limited liability which means that members’ capital contribution is the only amount which can be sought for company debts.
- Perpetual succession where the existence of the company is a constant regardless of membership. Changes in shareholders or transfer of shares can be done with ease meaning that the company can exist regardless of abject events like death, resignation, or insolvency of shareholders or directors.
- Capital raising can be done easily through adding new shareholders or issuing more shares to those existing shareholders. Investors are also more likely to buy shares in a company with separated business and personal assets. Banks also prefer to provide credit facilities to these types of businesses
- A credible public image when compared to other structures as it is indicative of a business that is willing to grow and expand. Pte Ltd companies are taken more seriously by existing and potential clients, suppliers, bankers and other professional entities encountered in a commercial context.
- Transfer of ownership is possible without complex legal processes or causing disruption to company operations. This transfer is possible by either selling the majority of shares of issuing new shares.
- Incentives and tax benefits as this structure is highly efficient from a tax perspective. The effective corporate tax rate in Singapore starts from approximately 8.5% for companies with profits of up to SGD 300,000 and is capped at 17% for profit amount above that number. There is also no capital gains tax in Singapore and as the country follows a single tier tax policy meaning that dividends can be passed to shareholders tax free provided the income has been taxed at the corporate level.
Public Limited Company
This is a type of LLC which can offer shares to the public. This structure is required to have a minimum of 50 shareholders and is subject to more stringent regulations as they are able to raise funds from the public. Generally speaking, these companies are listed on the stock exchange and are suited to large businesses.
Public Company Limited by Guarantee
This is an entity designed for non-profit-purposes.
2. Sole Proprietorship
This is a relatively simple yet risk business type. This is not a separately incorporated entity and thus the personal assets and liabilities of the owner and business are one in the same. There is no protection of personal assets with this style of structure and the owner has unlimited liabilities. In practice this means that if the business goes into debt, creditors may seek remuneration through your personal assets. Although this seems like a straightforward option legally, it is incredibly risky and not recommended by Ottavia.
This is where two or more people establish and co-own a business, thus side stepping the limited expansion constraint faced by sole proprietorships. This type of business does not exist beyond the partners and if the partnership is broken up (by death, insolvency, incapacity, retirement etc.) then the business dissolves. Unsatisfied or discontent partners are also allowed to give notice at any point for dissolution. This style of incorporation is suited to some unique situations but is not recommended generally for those looking to establish a business.
The three types of partnership in Singapore are:
- General Partnership: this is where partners are liable for the debts and liabilities of the business and each partner can be held responsible for the actions of another partner. These two factors make it a somewhat undesirable form of partnership.
- Limited Partnership: this structure consists of a limited partner alongside a general partner. The liabilities of the limited partners are restricted to their capital or property investment. Limited partners are however unable to participate in the management of the business.
- Limited Liability Partnership: with a mixture of company and partnership features, this is the most advanced partnership option. This structure provides the flexibility of a traditional partnership with the many advantages of incorporating a corporate body like a private limited company. This style of partnership is intended to be used for professions such as accounting, law, and architecture where professionals in a common field want to build a joint practice. This structure requires owners to enter into a detailed agreement about the appointing of profits and management. A lawyer is generally required to draw up these agreements. Partners in this structure of business are responsible for cultivating their own client base in the shared area of practice.
Registration Options for Foreign Companies
There are three different options for foreign companies seeking to establish a business in Singapore. These include:
- Subsidiary company: a private limited company incorporated in Singapore with the parent company as shareholder. This is the preferred choice for small to medium sized businesses.
- Branch office: this is an extension of the parent company and as such, the liabilities of the branch office extend to the parent company.
- Representative office: This is a temporary solution for those looking to conduct market research or investigate the viability of incorporating in Singapore. This is not recognised as a legal entity and cannot carry out any business.
Choosing the right entity to suit your needs
Your situation and the plans you have for your business all have a bearing on the type of business structure that is best suited to your needs. However, some general guidelines apply:
- Local residents seeking to register a small business by themselves in a product or service area which does not generally carry liability issues are often best off registering as a Sole Proprietorship. However, it is important to recognise that almost every area of business is open to liability claims and if you do end up being faced with liability, those making the claim are able to seek remuneration from your personal assets.
- Those businesses whose services involve a profession with one or more additional partners in the same area would be suited to LLP registration.
- In almost all other cases, incorporating a private limited company is likely to be the best choice. Although this structure comes with more complex compliance requirements, it is the safest structure for many businesses.