Types of Business Structures
It is relatively simple for an entrepreneur to set up a business in Singapore. The first consideration is to decide on the right entity that will meet the business needs.
Different types of business necessitate different company setups. Before starting a business or incorporating a company, learn which type of company will work most efficiently for your business. The most common three business entities available in Singapore are sole proprietorship, limited liability partnership and private limited company.
The followings are the different business structures that are available in Singapore to an entrepreneur:
• Foreign Entities
• Limited Liability Partnership
• Limited Partnership
• Sole Proprietorship
A. Private Limited Company limited by shares
Of the various legal structures available in Singapore, a private limited company is the most popular business entity in Singapore; approximately 60% of entities formed in Singapore operate as private limited companies. Unlike business entities such as a sole proprietorship and limited liability partnership, a private limited company has a separate legal status from its shareholders and directors, who have limited liabilities for the debts and losses of the company. It usually has the words “Pte Ltd” as part of its name.
A private limited company has between 1 and 50 shareholders, who can be private individuals or corporations.
- At least one shareholder
- At least one director ordinarily resident in Singapore
- If a foreigner wishes to act as a local director of the company, he can apply for an EntrePass from the Ministry of Manpower
Formalities and Expenses
- Higher cost to set up and maintain
- More formalities and procedures to comply with
- Must appoint a company secretary within 6 months of incorporation
- Must appoint an auditor within 3 months after incorporation unless the company is exempt from audit requirements
- Annual Returns must be filed
- Statutory requirements for general meetings, duties of director/company secretary, share allotments, etc.
Why are most businesses structured as private limited companies?
1. Separate Legal Entity with Limited Liability
A private limited company has its own legal identity separate from its shareholders and directors, allowing it to enter into contracts, acquire assets, go into debt and sue and be sued in its own name. As a result, the liability of the company’s shareholders is limited to the amount used to purchase shares in the company. Their private assets cannot be used to pay off the private limited company’s debts or liabilities; such debts stop at the company.
2. Tax Benefits
New Singapore start-up companies pay zero tax on the first S$100,000 of chargeable income (profits) for the first three consecutive years. A further 50 percent exemption is given on the next S$200,000 of chargeable income (profits).
In addition, there is no capital gains tax. Moreover, companies do not pay any dividend tax due to Singapore’s single-tier tax system. Once income has been taxed at the corporate level, dividends are distributed to shareholders tax-free. All of these tax benefits are available to a private limited company.
3. Ease of Raising Capital to Expand Your Business
You can raise capital by issuing additional shares to current shareholders or by bringing in new shareholders without having to change the structure of your business. This is not readily possible with some of the other corporate structures.
4. Ease of Transfer of Ownership and Perpetual Succession
Ownership in the company can be transferred easily through the sale of shares. That means the business existence does not rely on the continued membership of any member. If a shareholder dies or resigns, the business can continue to thrive. This is not possible in the case of some of the other structures.
Investing the time and effort in setting up a company tells potential employees, customers, suppliers, partners and investors that you are running a serious and scalable business.
B. Public Company
Public Company limited by shares
A public company limited by shares can have more than 50 shareholders. The company may raise capital by offering shares and debentures to the public. A public company must register a prospectus with the Monetary Authority of Singapore before making any public offer of shares and debentures and faces heavy regulation. They also have extensive compliance and reporting requirements and as such are significantly more expensive to set up and maintain.
Public Company limited by guarantee
A public company limited by guarantee is one which carries out non-profit making activities that have some basis of national or public interest, such as for promoting art, or charity etc. The Minister may approve the registration of the company without the addition of the word “Limited” or “Berhad” to its name.
A foreign company that wishes to establish an office in Singapore can establish one of the following entities:
1. A limited liability company known as a subsidiary company
2. A branch office
3. A representative office
Foreign companies can establish a local limited liability company in Singapore, known as a subsidiary company. They can also set up a branch office or a representative office. However, a subsidiary company is the most common business structure for establishing an entity by foreign companies.
The subsidiary acts as a separate legal entity from the parent entity thereby allowing the following benefits
- Since the subsidiary is a separate legal entity, therefore, the parent company is protected from the liabilities of the subsidiary.
- A Foreign company can be the 100% shareholder in the subsidiary.
- Subsidiaries can take advantages of the same tax incentives and exemptions available to Singapore resident companies.
- Such a structure imposes simpler compliance requirements such as the financial statements of the parent company are not required to be filed.
A branch office is an extension of the foreign parent company, not a separate legal entity, meaning its liabilities extend to the parent company. There are no practical benefits of setting up a branch office over a subsidiary company. Consequently, most foreign companies opt to establish a subsidiary company in Singapore.
A representative office is only a short-term arrangement with a limited purpose. It has no legal status and is designed only for conducting market research or engaging in promotional activities.
A representative office cannot engage in business, enter into contracts, move goods, offer services or open a line of credit. Setting up a representative office may make sense in certain situations where a foreign company is not yet ready to establish a permanent office. Note, however, that the application to set up a representative office is subject to review and approval by government authorities.
Limited Liability Partnership
A limited liability partnership (“LLP”) is a perfect blend of partnership and a private limited company. A LLP gives owner the flexibility of operating as a partnership while having a separate legal identity like a private limited company. This structure is highly suitable for individuals engaged in professional services such as lawyers, architects, accountants and management consultants.
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 at least one limited partner. An LP does not have a separate legal entity from the partners.
A partnership is a business firm formed by two to twenty partners. Once there are more than twenty partners, the partnership must be registered as a company under the Companies Act.
A sole proprietorship is the simplest but riskiest business entity allowed in Singapore. It features only one owner who is the decisive authority and responsible for all assets and liabilities belonging to the business. There are no partners and the sole proprietor has absolute say in the running of the business.