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Singapore Business Entities And How To Choose The Best Business Entity That Suits Your Plan

Singapore Business Entities And How To Choose The Best Business Entity That Suits Your Plan

Overview of Singapore Business Entities

Singapore Business Entities And How To Choose The Best Business Entity That Suits Your Plan

In 2018, the World Bank surveyed the 190 economies against each other. The survey was named Doing Business 2018, and the goal was to compare economies in terms of the basic requirements to set up and structure a company.

The factors on which the survey was based were access to electricity, registering property, company structure options, paying taxes, trading across borders, and resolving insolvency. In this survey, Singapore ranked number 2.

Singapore is successful in the business market and is one of the best places to start a business. Singapore is ideal for business setup because of its straightforward, comprehensive company structure and governance system.

Singapore’s business strategies and policies are easy for entrepreneurs and foreign investors to grasp and understand. However, every business entity has some pros and cons that are not immediately evident.

This article will help you compare and analyze the types and structures of business entities working in Singapore. It is an ultimate guide for any entrepreneur or foreign investor who wants to set up a business in Singapore.

Sole Proprietorship

A sole proprietorship is also known as the sole trader or a proprietorship. For laypeople, it is known to be a one-person show. It is a type of business entity owned and run by an individual. There is no legal distinction between the individual and the business in this business form.

Features of a Sole Proprietorship Business Structures

The sole proprietorship is wholly owned and operated by a sole proprietor and is ideal for small businesses.

The sole proprietor has unlimited liability and can be sued with their name. A sole proprietorship is not considered a separate legal entity in the marketplace.

It must have at least one Shareholder.

A sole proprietorship must also have a minimum of one Resident Director and one Company Secretary.

The owner should start with an initial paid-up share capital of at least S$1 (or equivalent value in any other currency) and have a physically registered office address in Singapore.

Another distinct feature of a sole proprietor is that the profit of a sole proprietorship is taxed based on the personal income tax rate. A sole proprietorship does not benefit from an effective corporate tax rate of 0 to 17%.

The sole proprietorship is also not included in the list of the companies that benefit from the multitude of tax incentives. The Inland Revenue Authority of Singapore (IRAS) excludes sole proprietorship from the definition of companies.

A sole proprietor must be at least 18 years of age and must be a resident of Singapore. The proprietor must not be labeled as an undischarged bankrupt.

The company can also appoint a natural person who can fulfill all of these requirements and perform a manager’s duties.

It is not possible for the investors who reside overseas to apply for a sole proprietorship because the role needs a resident of Singapore.

Singapore Business Entities And How To Choose The Best Business Entity That Suits Your Plan

Partnership

The partnership is another option for small businesses with more than one owner. This business form largely resembles sole proprietorship based on its structure, liability, and taxes. The distinctive feature of the partnership is that it can be comprised of two or more partners.

Features of a Partnership Business Structure

It may have a maximum cap of twenty individual partners. Once a partnership exceeds the cap, it must incorporate as a company under the Companies Act.

In a partnership, there is no restriction for the appointed manager to be a Singapore resident, not be an undischarged bankrupt or be more than 18 years of age. This business entity has the advantage of allowing foreign individuals and companies to be partners.

The tax policy of partnership is the same as the sole proprietorship. The personal income tax rates will be applied if the partner is an individual. However, if the partner is a company, the corporate tax would be involved.

The drawback of a partnership is that it is not considered a separate legal entity. All the partners are responsible for the partnership’s debts or losses. There are different types of partnership business structures depending on the legal status of personal liability.

Limited Partnership

In this kind of business structure, there is no limitation on the number of partners. It can consist of a general partner and a limited partner.

Features of a Limited Partnership Business structure

A limited partnership does not involve severe risks. It allows the business entity a degree of limited liability.

There are at least two partners in a limited partnership, but the company cannot have a maximum cap on the number of limited partners.

Out of these partners, at least one will be the general partner. The general partner will have unlimited liability, and he will be personally responsible for all the debts and losses. The other partners in a partnership are the limited partners. They are not personally liable for the debts and obligations. They will be only responsible for the agreed liability.

The general and individual partners should be at least 18 years old or a corporate entity. If the general partner is not a resident of Singapore, the company has to appoint a resident manager.

A limited partnership company cannot qualify for any tax incentive provided to other companies. The profits earned through the partnership will be subjected to each partner’s tax rate. If the partner is a company, corporate tax rates would be applied to profits.

Limited Liability Partnership

Although the name Limited Liability Partnership is quite similar to the partnership and limited partnership, Limited Liability Partnership (LLP) has many distinctive features. It is more similar to a private limited company. The similarity between both entities is that the partners of an LLP are taxed at their personal income tax. Every partner in LLP has limited liability.

The main difference between LLP and other forms of partnership is the legal state of these business entities.

Features of a Limited Liability Partnership Business structure

An LLP is considered a separate legal entity from its partners.

It can also own property in the LLP name; other partnership firms cannot benefit from this feature.

The partners of a Limited Liability Partnership are personally liable for the debts and losses of their own wrong decisions and actions. Other partnership members are not responsible for paying their debts or loss.

An LLP is responsible for submitting an annual declaration of solvency to the state to show if it can satisfy its debts or not. This requirement of presenting a yearly declaration is only for a LLP.

What is the best business entity for you?

If we think about the definition of a “Company,” we come across two main categories of company structure: a “Private Company” and a “Public Company.”

Several shareholders own a Private Company, and the public members cannot apply for its shares. However, Public Companies are open and available to everyone.

The Public Companies are either listed on the stock exchange or are unlisted altogether. Its shares are easily purchased in the marketplace on the stock exchange list. The buyer can be any individual who has sufficient capital to do so.

If the company is not listed in the stock market, its business interests are in the public interest. Another difference between these company structures is that they are not restricted to transferring shares in the public company.

The following table will help you to compare the Private and Public companies in Singapore:

TYPES OF SINGAPORE COMPANIES
PRIVATE COMPANY PUBLIC COMPANY
Exempt Private Company Limited Private Company Public Company Limited By Shares Public Company Limited By Guarantee
It cannot have more than 20 individual shareholders It cannot have more than 50 corporate or individual shareholders The company can have more than 50 shareholders It is involved in non-profit making activities of national or public interest

Private Limited Company

A private limited company is an ideal limited company, and it is the most common form of the company selected by foreign investors or entrepreneurs. It is one of the quickest to be setup and also the most popular entity type here in Singapore.

You will recognize a Private limited company by its name since it ends with Pte Ltd.’s initials. The shareholders can either be entities, individuals, or a mix of both; hence you will find a specific existing business owns another private company limited.

Features of a Private Limited Company

A private limited company is eligible for bank loans and can apply for tax incentives. It can also raise more capital by issuing shares to the current shareholders.

Another advantage of a private limited company is that it is considered a separate legal entity from its directors and shareholders. It can own assets, get into contracts, enter into debts, sue, and get sued without the owners’ involvement.

The members of a privately owned company are also not personally responsible for the company’s debts or losses. Their contribution to the company’s debts is limited by the capital to the business structure.

This business entity is also eligible for the tax exemption schemes for its initial 2 years of operation. A private company’s effective corporate tax rate is 0 to 17%, and after taxation, dividends are given to the shareholders tax-free. Capital gains are also tax-free dependent on the nature of gain.

A private limited company will continue to run in case of death, insolvency, or death of a member. The shares are transferred to another person without interfering with the normal operations of a business entity. 

Drawbacks of a Private Limited Company

Besides all the attractive tax incentives, there are several formalities and procedures for a private limited company.

It is required to appoint a company secretary within six months of incorporation and an auditor for the company within three months of incorporation.

There is also a requirement for a Private Limited Company to file the annual returns with the Accounting and Corporate Regulatory Authority.

Private limited companies must follow strict rules laid out by the companies act.

The liquidity process is long compared to other business structures such as partnership and sole proprietorship. The legal procedures can also cost the shareholders a lot of money because they must hire professionals such as accountants and lawyers.

How to choose Singapore business entities that suits your plan

Availability Of Capital

When choosing a suitable business structure to start, it is essential to consider the amount of money you have and are willing to risk. For example, a sole proprietorship needs fewer finances since there are fewer legal charges that you will face. On the other hand, a private limited company will cost more due to the legal and administrative costs involved. However, the sole proprietorship can only work if you have a citizenship or permanent resident status in Singapore.

Liability risk

Some business entities, such as partnerships and sole proprietorships, have unlimited liability. As the name suggests, a private limited companies has no personal liability in most cases. In case of losses or bankruptcy, their personal assets cannot be used to offset the debts.

The flexibility of a Business

In case of unforeseeable circumstances, some business types are easily dissolvable, while others need a lot of paperwork for the same process. You can also change the kind of business when the demand is low for specific business structures, while others must visit the ACRA to change the type of business you have been engaging in.

Control of the Business

A distinctive number of people manages different business types. This can make it hard for you to have control of the business since every individual must be involved in the decision-making. For this reason, it is essential to consider if you prefer having complete control of the entity or if you love having partners/shareholders to help with decision-making.

Conclusion

Each business form has its unique features and comes with its benefits and drawbacks. If someone wants to run a small business at low profits and expect a little for the business expansion, a partnership is not the right choice for them, even if it comes with several statutory obligations.

On the other hand, a private limited company is the best option for small businesses because it is easy to obtain loans from banks and other financial institutions if you own a private limited company. In addition to this, it has lower risks of liability for its members. The points above will help you choose the suitable business entity to suit your plans.

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