When you plan to set up a business in Singapore, you have to make the right decisions about the business entity you are incorporating. The business entity you will choose can affect the amount you pay in taxes, the documents you must complete, the personal obligations you face, and the capacity to grow your business.
Since this is a decision that will determine the future of your business, you should be familiar with the different types of business entities that exist in Singapore. This article provides an overview of the various types of business entities you can set up in Singapore.
Business Entities Suitable for Individual Entrepreneurs
Local or foreign individuals who are over 18 years of age can choose to form a Singapore company. The process of setting up a company in Singapore is fast and hassle-free with the help of an official corporate service provider. It would be best if you chose a specific business entity for your Singapore company establishment based on the size of the business idea (whether it be a product or a platform), the scope of the business plan, and the scale of business activity you desire. You will also need to determine your liabilities, tax obligations, costs, and the value of your business assets before making a final decision on the structure to incorporate.
Limited Liability Company (LLC)
The Limited Liability Company in Singapore is a legal construct that limits the liability of the company’s shareholders for the capital invested in their shares. Private limited companies, public limited companies, public limited companies with guarantees and subsidiaries are examples of LLCs in Singapore.
The Accounting and Corporate Regulatory Authority (ACRA) acts as Company Registrar for Singapore. You will need to register with ACRA to register your new business under the Singapore Companies Act, Chapter 50.
1. Private Limited Company (Pte. Ltd.)
A private limited company is the most preferred business structure for a Singapore business formation. It is an LLC where the shares are held by less than 50 persons and are not available to the general public. At least one of the directors must be a resident of Singapore.
A private limited company is also the most advanced, flexible, and scalable type of business in Singapore. It is also the most preferred type of Singapore business entity for serious entrepreneurs (instead of a sole proprietorship or limited partnership).
Here are a few reasons why entrepreneurs prefer a private limited company:
- Separate legal entity: A private limited company has its own legal identity, separate from its shareholders and directors.
- Limited liability: The responsibility of members to contribute to the company’s debt is limited to the amount they have agreed to donate as capital to the company.
- Lasting succession: The existence of a company does not depend on its members’ ongoing membership. Ease of transfer of shares or change of shareholders ensures that the company continues to exist despite the death, resignation, or bankruptcy of shareholders or directors.
- Ease of raising capital: You can raise capital for expansion or other purposes by bringing in new shareholders or issuing more shares to existing shareholders. t Investors are more likely to buy shares in companies where there is usually a separation between personal and business assets. Besides, most banks prefer to lend money to limited companies.
- A credible image: As a legally incorporated business entity, it has a better image than a sole proprietorship or partnership company. Investors will be more willing to be part of the company because it shows a vision to grow and develop. As a private limited company, your business will be taken more seriously by the potential clients, suppliers, bankers, and other professionals you will encounter.
- Ease of transfer of ownership: Company ownership can be transferred, either in whole or in part, without interrupting operations or the need for complicated legal documentation. This can be done by selling all or part of its total shares or issuing new shares to additional investors.
- Tax benefits and incentives: Singapore private limited companies are highly efficient tax entities Effective corporate tax rates for Singapore newly incorporated companies for profits of up to SGD 300,000 under 9% and capped at 17% for profits above SGD 300,000 for the first three years, and a flat tax rate of 17% afterward. Also, there is no capital gains tax. Singapore follows a single-rate tax policy which means once income is taxed at the corporate level, dividends can be distributed to shareholders tax-free.
2. Public Limited Company
A public limited company is a type of LLC listed on the stock exchanges. It must have at least 50 shareholders and be subject to much stricter rules and regulations because they have the power to raise funds from the public.
3. Public Company Limited by Guarantee
A public company limited by guarantee is a form of LLC. Most often, it is started to promote non-profit purposes. Nonprofits, trade associations, clubs, charities & religious organizations, and professional societies are the best examples.
According to laymen, a sole proprietorship, also known as a sole trader, sole proprietor, or “one-man show,” is a type of business entity owned and operated by an individual and no legal distinction between the individual and the business.
A sole proprietorship is considered the simplest yet most risky form of business in Singapore. The owner personally owns all the assets and liabilities of the business. There is no protection of personal assets from business risks and liabilities.
As the sole owner of the business, you have unlimited liabilities, meaning that if your business can’t pay all of its obligations, creditors to whom your business owes money can go after your assets. Many entrepreneurs are usually unaware of this enormous financial risk. If the business is sued or unable to pay its bills, the owner is personally responsible for the business obligations.
The most significant difference is that a partnership can consist of two or more partners, with a maximum limit of twenty individual partners, similar to sole-proprietorship in structure, liabilities, and taxes. Once the partnership exceeds this limit, it must join as a company under the Companies Act.
As with all other business entities, a local manager must be appointed who is an individual and is at least 18 years of age, usually domiciled in Singapore, and is not an unresolved bankrupt. This business structure allows foreign individuals or companies to become partners. Like a sole proprietorship, the tax rate charged will be the partner rate, i.e., if the partner is an individual, the personal income tax rate will apply. If the partner is a company, the corporate tax rate will apply.
The greatest risk associated with a partnership is that the partnership is not considered a separate legal entity. All partners are personally liable for partnership debts and losses, even if other partners bear those debts and losses.
There are 3 types of partnership:
A general partnership is formed by a minimum of 2 people and a maximum of 20 people. Partners pay their taxes like personal income tax, based on their share of income from the partnership.
A general partnership is not a very attractive way to set up a business in Singapore for the following reasons:
- Similar to a sole proprietorship, partners are personally liable for business debts and liabilities.
- Each partner can be held accountable for the actions of the other partners.
A limited partnership is an alternative to the general partnership type business form in Singapore. The liability of partners is limited to their investment in the partnership (capital or property). However, limited partners cannot participate in business management. In short, even a limited partnership in Singapore is not a very attractive means of setting up a business for most people.
Limited Liability Partnership (LLP)
Among the three types of partnership business entities, LLP is the newest and most advanced business combination structure. It combines partnership and company features. Introduced in 2005, this business structure merges a partnership with a company and is considered practically viable for business owners.
Registering an LLP gives owners the flexibility to operate as a partnership while enjoying the many benefits that come with a corporate body such as a private limited liability company. However, it is important to note that an LLP must have at least two partners at all times.
LLPs are best suited for professionals who practice accounting, law or architecture, or businesses that sell their services. The terms of assets and liabilities are usually agreed upon by law, in agreements and contracts made, based on mutual discussion.
Also, read a related article:
Business Entities Suitable for Foreign Incorporation
Foreign companies wishing to establish a presence in Singapore have the option of setting up a branch office, subsidiary, or representative office in Singapore.
A subsidiary company is a form of limited liability company. For small to medium-sized foreign businesses, the subsidiary is the most preferred registration option in Singapore. It has a separate identity from its parent foreign company. One of the advantages of a subsidiary company is that the Singapore authorities allow 100% foreign ownership. In many cases, foreign companies act as major shareholders.
Subsidiaries are considered local companies. They have access to tax benefits, exemptions, and rebates provided by local authorities. Subsidiary companies are responsible for their own debts and losses from their business activities. The liabilities of their parent companies remain limited to the capital invested in shares.
A branch office is registered in Singapore as an extension of its parent company and not as a separately incorporated entity. This means that management must follow the parent company’s Memorandum and Articles of Association (MAA) to deal with share ownership, business activities, and structure. The liability of a branch office’s debts and losses arising out of its business activities lies with its parent company.
A representative office has no legal status. It is considered only as a temporary administrative arrangement of the parent company. Under the Singapore Companies Act, it may not be involved in any business activities.
For further information about how to set up a representative office in Singapore, refer to:
What Type of Business Entity Should I Choose?
Deciding on the right business entity to incorporate in Singapore depends on your particular situation and plans. You can use the following guidelines when making decisions:
- If you are a local and want to register a small business where you will be the sole owner and the nature of your product/service does not bring liability issues, it may be easier for you to register your business as a Sole Proprietor. However, you should carefully consider that the plaintiff may be after your personal assets in the case of business liability.
- If your business involves selling your services through a profession you hold (e.g., accountant, attorney, architect, etc.) and having one or more additional partners in similar professions, and want to establish a common practice, an LLP may be the right business entity for you.
- In all other cases, incorporating a private limited company in Singapore would be the best option. Although the compliance requirements are a bit more complex, it is by far the best business entity in the long run.