“On average, more than 50,000 new businesses are set up every year, of which only half survive beyond five years…without the necessary resources, their growth potential could be hampered. Yet many of them find it challenging to obtain funding during their start-up years as their level of operations or business activity may be too low – or they lack the necessary financial records or collaterals to obtain external funding,” commented Mr Eric Ong, OCBC Bank’s Head of Emerging Business.
Securing funding for your business entity can be a challenge depending on your legal designation. Of the five business entities in Singapore, only two, (the limited liability partnership and private limited company) would be considered to be separate legal entities. To banks and financial institutions, the legal status of the business entity is especially important when extending banking or credit facilities. Sole proprietorships and partnerships are typically excluded, with the exception of a few term loans that require guarantors and detailed documentation to evidence that the sole proprietorship or partnership has the ability to re-pay the loan within the stipulated period.
More importantly, it is only the private limited companies that can benefit from government funded micro loans, which are offered by local banks such as DBS, OCBC and UOB. These loans are supported by the Standards, Productivity & Innovation Board (SPRING Singapore) and International Enterprise Singapore (IE Singapore), aimed at providing affordable funding schemes for small and medium-sized businesses.
A snapshot of the business loan schemes offered by the three banks is pictured in the table below:
|Eligibility Requirements||Business is registered and operating in Singapore for less than 3 years||Business is registered in Singapore and operating for at least 6 months but less than 3 years||Business is registered and operating in Singapore|
|30% of shares owned by a Singaporean or Singapore Permanent Resident (“PR”)||30% of shares owned by a Singaporean or Singapore Permanent Resident (“PR”)||30% of shares owned by a Singaporean or Singapore Permanent Resident (“PR”)|
|Less than 10 employees or annual turnover not exceeding S$1 million||Less than 10 employees or annual turnover not exceeding S$1 million||Less than 10 employees or annual turnover not exceeding S$1 million|
|One guarantor must be a Singaporean or PR aged between 21 and 62||Company’s Group Annual Sales of not more than S$100 million or company’s Group Employment Size of not more than 200|
|Maximum Loan amount||S$100,000 for four years from 5.50% p.a.||S$100,000||S$100,000 for four years at a fixed interest rate of 5.5% p.a.|
Sources: https://www.dbs.com.sg/sme/financing/government-assisted-schemes/micro-loan; https://www.uob.com.sg/business/government_assistance_schemes/lefs_micro_loan.html; and
With features such as fixed interest rates, collateral-free terms and fewer requirements for application, private limited companies can benefit from easier access to funding, as and when their business needs require. Comparatively, sole proprietorships and partnerships may find that there are more hurdles to cross and may need to seek funding from independent financial institutions, which may impose less favourable terms.
Flexibility of Succession
|Type of Entity||Continuity in Law|
|Sole Proprietorship||Exists as long as the owner is alive|
|Partnership||Exists subject to partnership agreement|
|Limited Partnership||Exists subject to partnership agreement|
|Limited Liability Partnership||Perpetual succession until wound up or struck off|
|Private Limited Company||Perpetual succession until wound up or struck off|
As evident from the table above, there is little flexibility of succession for sole proprietorship, partnership and limited partnership. Particularly for sole proprietorship, there is no option for others to continue the business on behalf of the sole proprietor. Hence, for those who have built up their reputation and awareness of their brand, this may be a costly opportunity loss for the next generation who has the potential to carry on the business. For partnerships, it is essential that the partnership continues to be harmonious, as if it sours, it will be not be possible to carry on the business if one partner chooses to terminate the partnership; and is dependent on the clauses set out in the partnership agreement.
Dependent on your business needs and the future plans for your business, it may be wise to consider a business entity that has more flexibility, particularly if one plans to stay or maintain the business in the long-run. Alternatively, if your business is currently a sole proprietorship or partnership, rest assured that there is the option to convert your business into a private limited company. A professional services provider should be able to assist you with all the steps required.
The tax rates imposed for sole proprietorships, partnerships, limited partnerships and limited liability partnership are on an individual basis, i.e. the sole proprietor or partner is taxed based on his or her income tax levels. Conversely, companies will be taxed based on the corporate tax rate. For corporate tax, Singapore has a one-tier tax system, which charges a flat corporate tax rate of 17%. For personal tax however, Singapore utilises a progressive tax system. Hence, beyond a certain income level, sole proprietorships and partnerships, limited partnerships and limited liability partnership may end up paying a higher rate of tax.
It should be noted that with effect from year of assessment 2017, the government has announced that the personal income tax rates will be adjusted upwards. This will mean higher taxes for partners and sole proprietors.
|w.e.f. Year of Assessment 2017|
|Chargeable Income||Rate (%)||Gross Tax Payable ($)|
|On the first On the next||20,000 10,000||0 2||0 200|
|On the first On the next||30,000 10,000||– 3.5||200 350|
|On the first On the next||40,000 40,000||– 7||550 2,800|
|On the first On the next||80,000 40,000||– 11.5||3,350 4,600|
|On the first On the next||120,000 40,000||– 15||7,950 6,000|
|On the first On the next||160,000 40,000||– 18||13,950 7,200|
|On the first On the next||200,000 40,000||– 19||21,150 7,600|
|On the first On the next||240,000 40,000||– 19.5||28,750 7,800|
|On the first On the next||280,000 40,000||– 20||36,550 8,000|
|On the first In excess of||320,000 320,000||– 22||44,550|
In addition, only companies can qualify for the attractive tax incentives provided by the Singapore government. For multi-national corporations who set up their regional headquarters in Singapore, they can benefit from the Regional Headquarters Award, which offers a concessionary tax rate of 15% for companies that satisfy the minimum requirements by Year 3 of the incentive period for the following two years on incremental qualifying income from abroad.
Another popular tax incentive scheme is the Productivity and Innovation Credit scheme, which encourages companies to invest in innovation and productivity improvements. Under this scheme, businesses can enjoy up to 400% in tax deductions and allowances; or a 60% cash payout. Moreover, Singapore has established many double taxation agreements (“DTAs”) with various economies throughout the world, ensuring that companies will not be taxed twice.
As mentioned earlier, sole proprietorships, partnerships and limited partnerships are not considered to be separate legal entities from their business owners. The implication of this is that the sole proprietor and partners are considered wholly responsible and personally liable for the debts and losses of their business. Financially speaking, this can be devastating when a business fails or becomes victim to a bad situation. Moreover, with an awareness of the risks associated, sole proprietors and partners may be more reluctant to take risks with their own business. This could adversely impact the growth potential of the business.
Particularly in the case for partnerships, all partners are personally liable for the partnership’s debts and losses, even if the debts and losses are incurred by other partners, even if they are not aware of the other person’s actions. A limited liability partnership lessens this risk somewhat, as only the general partner has unlimited liability.
In terms of compliance obligations, the simpler business structures would naturally have fewer compliance obligations to abide by:
|Type of Entity||Compliance Obligations|
|Limited Liability Partnership||
|Private Limited Company||
Certainly, with more compliance obligations, it may be more time consuming and costly to comply with the statutory obligations of a company. However, with careful time management and regular book keeping, these requirements will not be unmanageable.
Understandably, dependent on one’s business requirements, the decision as to which business entity to choose may be a difficult one. Given that the bulk of the government’s grants and incentives do apply specifically to companies only, this is usually the entity of choice for many entrepreneurs and foreign investors.
Established in 1998, Rikvin has provided guidance to thousands of investors, entrepreneurs and professionals who want to work or do business in Singapore. For a personalised consultation to analyse your business needs, call Rikvin at +65 6230 1888 or contact us now for a free consultation.
Let us help you understand your business entity options
Speak to our incorporation specialists who will run through Singapore business entity options with you, and explain their distinctive features and benefits to aid your decision-making.