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Are you contemplating starting a business in Singapore but need help figuring out where to start? Let us guide you through this critical first step.
Selecting the right business structure is not just a formality but a crucial step that lays the foundation for your business’s future. Its choice can influence your liability, tax obligations, and potential profitability, making it a key determinant of your business’s success.
In Singapore, the main types of business entities include sole proprietorships, partnerships, limited liability partnerships (LLP), and companies. Each offers different advantages and legal implications, from the simplicity of a sole proprietorship to the protective structure of a company.
Our guide provides a clear comparison to help you choose the best structure for your business needs and goals.
1. What is a Sole Proprietorship?
A sole proprietorship is the most straightforward form of business in Singapore. It is ideal for entrepreneurs who prefer to operate alone without involving shareholders. This structure is characterised by its simplicity, which requires more reporting. Business income is taxed together with personal income according to the guidelines set by the Inland Revenue Authority of Singapore (IRAS).
Advantages of a sole proprietorship include:
- Complete Control: You have full authority over business decisions.
- Ease of Setup and Management: Registering and managing this business type is relatively simple.
- Retention of Profits: All profits generated by the business go directly to you.
- Simple Conversion: Transforming into a partnership is straightforward, requiring only the addition of a partner.
- Easy Transferability: Transferring business ownership and assets to family members or heirs is uncomplicated.
However, there are several disadvantages to consider:
- Personal Liability: You are personally responsible for all business debts and liabilities.
- Management Responsibilities: All management tasks fall on your shoulders.
- No Corporate Tax Incentives: You will miss out on the tax benefits available to corporations.
- Property Ownership Restrictions: You cannot purchase property under the business’s name.
- Lack of Continuity: The business ceases to exist upon your death.
What is a Partnership?
A partnership is a standard business structure in Singapore. It functions similarly to a sole proprietorship but with more than one owner. In a partnership, an individual, a company or a limited liability partnership can come together to start a business, aiming to make a profit that they share. The maximum number of partners in a general partnership is 20.
Disadvantages of a Partnership Include:
- Personal Liability: Like sole proprietorships, all partners in a partnership are personally liable for any debts and liabilities the business incurs.
- Conflicting Interests: There can be potential conflicts among partners, as each may prioritise their interests, which can disrupt smooth operations.
- Limited Growth Potential: Partnerships may find it challenging to expand due to their inability to raise capital through the sale of shares, limiting their flexibility.
What is a Limited Partnership?
In Singapore, a Limited Partnership (LP) consists of at least one general partner and one limited partner and is not a separate legal entity. This means it cannot own property or engage in legal action under its own name. Both individuals and corporations can serve as either type of partner.
Types of Limited Liability Company
Under the Singapore Companies Act, a limited liability company can be established in one of three forms:
- Private Company Limited by Shares
- Public Company Limited by Shares
- Public Company Limited by Guarantee
Each type serves different business purposes and scales, offering distinct features in terms of ownership, liability, and capital requirements.
What is a Private Limited Company?
A private limited company is a type of limited liability company where fewer than 50 people own the shares and are not offered to the general public. In Singapore, this is the most common form for privately incorporated businesses. Typically, the names of these companies end with “Private Limited” or “Pte Ltd.” Shareholders in a private limited company can be individuals, other corporate entities, or a combination of both.
This business structure is considered the most sophisticated, adaptable, and capable of growth among Singapore’s business entities.
Entrepreneurs often prefer setting up a private limited company due to its numerous advantages:
- Separate Legal Identity: A private limited company is recognised as a separate legal entity from its shareholders and directors. It can own assets, incur debts, enter contracts, and can sue or be sued under its own name.
- Limited Liability: Shareholders’ liability is restricted to their capital contributions, protecting personal assets from business debts.
- Perpetual Succession: The company’s existence continues irrespective of changes in ownership or membership, such as shareholder or director departures due to death, resignation, or insolvency.
- Ease of Raising Capital: It is easier to attract investment by issuing more shares to existing or new shareholders. This structure is often more appealing to banks and investors due to the clear distinction between personal and business assets.
- Enhanced Credibility: Operating as an incorporated entity tends to project a more professional image, enhancing credibility with clients, suppliers, and financiers and potentially attracting more investment.
- Ease of Transfer of Ownership: Shares of the company can be easily sold or transferred, either partially or wholly, without disrupting business operations or necessitating extensive legal procedures.
- Tax Advantages: The corporate tax rate in Singapore for private limited companies is attractively low, with profits up to SGD 300,000 taxed below 9%, and capped at 17% for higher profits. There is no capital gains tax, and dividends distributed to shareholders are not taxed again at the individual level, following the single-tier tax system.
These features make private limited companies a desirable choice for entrepreneurs looking to establish a robust, scalable, and credible business
Public Company Limited by Shares
A public company limited by shares typically ends its company name with “Limited” or “Ltd,” differentiating it from private limited companies. It can have more than 50 members and is capable of raising capital by selling shares to the public. However, before it can do so, it must file an initial public offering (IPO) prospectus with the Monetary Authority of Singapore (MAS). In this type of company, the shareholders’ liability is limited to the amount they have invested in the company.
Public Company Limited by Guarantee
Distinct from other business entities, a public company limited by guarantee is generally established for non-profit purposes. Often involved in activities serving the public or national interest, such as charitable organizations, these companies do not have share capital. Instead, the liability of the members is confined to the amount they agree to contribute towards the company’s assets, a figure that is typically stipulated in the company’s constitution.
Comparison of Various Business Structures in Singapore
What Factors are to be Considered When Choosing a Business Structure?
When selecting a business structure, you must tailor your choice to your venture’s requirements and goals. Here are key factors to evaluate to ensure you choose the most suitable structure:
- Capital Investment: Assess how much money you can commit to starting and sustaining your business.
- Ownership: Determine the number of stakeholders who will own the business.
- Liability and Responsibilities: Consider the level of personal liability and managerial responsibilities you are willing to accept.
- Risk Tolerance: Identify the extent of financial and operational risks you are comfortable taking with the business.
- Pros and Cons of Each Entity: Weigh the benefits and drawbacks of each business structure type.
- Ease of Dissolution: Consider how straightforward it would be to dissolve each business structure should the need arise.
These considerations will help you choose a business structure that aligns with your business aspirations, financial capacity, and risk management preferences.
Conclusion
Choosing the right business entity is more than a legal decision; it’s a strategic move that can significantly impact your operational scope, financial structure, and overall business sustainability. We recommend consulting with professionals to carefully consider the best structure tailored to your specific needs, ensuring compliance and strategic alignment with your business objectives. We at Rikvin are here to guide you through every step of this critical decision, ensuring that you set up a solid foundation for your business aspirations in Singapore.
FAQs on Choosing the Right Business Structure in Singapore
- Yes, foreigners outside of Singapore can start a sole proprietorship or partnership. Still, they must appoint a local authorized representative (a Singapore citizen, permanent resident, or holder of an EntrePass/Employment Pass). They must also engage a registered filing agent (such as a law firm or accounting firm) to submit their application via BizFile+.
Foreigners planning to manage their business in Singapore must seek approval from the Ministry of Manpower after registering their business. If partners lack a Singpass account, the application must be submitted by a registered filing agent. Foreign Identification Number (FIN) holders should also check their eligibility with the Ministry of Manpower or the Immigration & Checkpoints Authority before proceeding.
- Foreign businesses planning to establish their presence in Singapore have three main options for registration:
- Subsidiary Company: Operates as a separate entity from the parent company, usually preferred for its limited liability features.
- Branch Office: Functions as an extension of the parent company, not as a separate legal entity, which means the foreign parent company holds full liability.
- Representative Office: Best for companies looking to explore the market before fully committing, as it allows market research and liaison activities but cannot conduct revenue-generating business.
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To set up a private limited company in Singapore, the following criteria must be met:
- Locally Resident Director: The company must appoint at least one director who is a resident of Singapore.
- Company Secretary: At least one company secretary must be appointed within six months of the company’s incorporation.
- Shareholder(s): There must be at least one shareholder, but no more than 50.
Paid-up Capital: The minimum paid-up capital required is S$1. - Registered Business Address: The company must have a local address registered as its business address.
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