When deciding to set up a business in Singapore, you generally could have several options. Understanding the various company structures would enable you to be able to better organize your set-up to achieve your desired results. Different company structures attract different tax rates and harbour different advantages and disadvantages.
The Inland Revenue Authority of Singapore does not regard businesses with less than 20 shareholders as “companies”. Businesses that are not companies could be sole proprietorship, partnerships, limited partnerships or limited liability partnerships.
A sole proprietorship is the simplest but riskiest type of business form in Singapore. The sole proprietorship is not a separately incorporated entity and therefore the owner and the business are one and the same. The owner personally owns all assets and bears all liabilities of the business. Ergo there is huge financial risk for the entrepreneur. Creditors to whom the business owes money to can come after the owners personal assets since the owner is completely responsible for the business’s liabilities. The sole proprietor can be personally sued for all of the liabilities of the business.
However, the sole proprietorship allows the individual person to set up his or her own business and not have the requirement limitation of having a certain number of shareholders before you could set up shop.
Sole proprietors have to be at least 18 years old and is ordinarily resident in Singapore and cannot be an undischarged bankrupt.
Another thing to note about being a sole proprietor would be that the taxation rate for a sole proprietorship is the personal income tax rate and not the corporate tax rate of up to 17%. The Inland Revenue Authority of Singapore does not regard sole proprietorship and partnerships as companies.
If you had more than one person to set up a business with and still wanted the flexibility of operations that a sole proprietorship could offer, you might then want to consider a partnership. A partnership is similar to a sole proprietorship in terms of structure, liability and taxes. The difference is that a partnership allows you to onboard up to 20 individual partners. If you had more than 20 business partners for instance, then you would have to incorporate as a company under the Companies Act. In contrast with the sole proprietorship which only allows ordinarily resident persons to run businesses, the partnership allows for foreign nationals or companies to be partners. Personal tax rates apply to partners who are individuals but corporate tax rates apply to partners who are companies.
Again, please note that your various partners in your partnership will be personally liable to any law suits brought against the partnership which means that each individual partner would have to bear the responsibility of any claims brought against the partnership.
If you’re looking however to be protected against personal claims brought against your business, you could consider a limited partnership which provides the option of limited liability. Limited Partnerships are generally used by fund managers to set up funds.
Limited Liability Partnerships
Another spin-off to the partnership is the limited liability partnership. A limited liability partnership (LLP) is distinctively different from a partnership or a limited partnership and is more akin to a limited liability company (LLC) where each partner will be held personally liable for debts and losses but this is only restricted to debts and losses resulting from their own wrongful actions and not those of the other partners. LLPs are generally used by professional services firms such as law firms.
Under the broad definition of a “company”, there are two main categories of company structures, “private” and “public” companies. As the term suggests, private companies are owned privately by several shareholders. Members of the public are generally unable to apply for its shares. In contrast, public companies are openly available for subscription. Such public company structures that are limited by shares can either be listed on the stock exchange, or unlisted altogether. Additionally, another notable difference between the two types of company structures is the absence of restrictions on the transfer for shares in a public company as compared to a private one.
A private limited company is a company in which the shares are held by less than 50 persons whether corporate or individuals and are not available to the general public (note that you could also be an exempt private company with not more than 20 individual shareholders and a public company limited by shares can have more than 50 shareholders).
Most privately incorporated businesses in Singapore are private limited companies. Private limited companies are the most popular, flexible and scalable type of business incorporation in Singapore due to several reasons. Other than the fact that private limited companies are easily set up with just S$1 and that you only need one resident director, the following applies:
1) Most entrepreneurs prefer an arrangement in which the company is its own separate legal entity. Since its legal identity is separate from its shareholder and directors, members of the company would not be held personally liable for the losses and debts of the company.
2) It is also a lot easier to raise capital by bringing in new shareholders or by issuing more shares simply because investors are more likely to invest shares in a company where there is.
3) There are numerous tax benefits and incentives. A private limited company can qualify for tax exemption schemes and is only taxed at the corporate tax rate of up to 17%. Also, for newly incorporated companies that meet the qualifying conditions, a full tax exemption can be claimed in its first S$100,000 of chargeable income for each of its first 3 consecutive years of assessment. A further 50% exemption is given on the next S$200,000 of chargeable income for each of the first 3 consecutive years of assessment.
Although it may be said that the private limited company has attractive tax incentives, incorporating as a private limited company also subjects your entity to more legal scrutiny. A company secretary has to be appointed within 6 months of incorporation and an auditor within 3 months of incorporation, unless the company is exempt from audit requirements. Also, there is the requirement to file annual returns with ACRA on a yearly basis.
When deciding on incorporating a business entity, choosing the appropriate type of business structure can affect the taxes, image and perception of one’s business with regards to being able to take loans and expanding one’s business. You know your business best so choose wisely!
Created on 20 July 2017