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Every year the World Bank conducts a survey that analyses the world's leading economies in terms of setting up a business, different structures available, annual compliance requirements, international trading, resolving insolvency, and similar other factors. Singapore had maintained the top spot for seven consecutive years in this survey. It is currently placed as the second easiest place to do business.
Singapore is ideal for both local and foreign entrepreneurs to incorporate a new company. The quick and straightforward registration procedure, ease of transferring shares, single-tier corporate tax system, low tax rates, and scalability are some of the factors that attract thousands of foreign companies to Singapore every year.
The business structure and governance system in Singapore is comprehensive and straightforward. However, choosing the right business structure, which appeals to your business's present and future needs, is challenging even for the most knowledgeable and most experienced entrepreneurs. The business entity type you pick may play a vital role in your business's future expansion and viability by affecting your business's perception among your clients, personal liability, ability to acquire funds, and the amount you pay in taxes.
This article will provide you with a comparative analysis of different business entities you can register in Singapore with their main differences. Bear in mind though, if you are a foreigner you do not have many of these options.
In Singapore, there are four primary business structures that one can opt from, namely:
You must consider several factors to determine the best entity type for you.
This article will help you understand each of the four business structures in detail so you can develop a clear perception of all of them. It will help you choose the most proper business structure, depending on your needs.
Sole Proprietorship is a business model that contains a single owner. It could be a single individual or any other registered entity.
Most first time and individual entrepreneurs opt for this entity type as it is the easiest to set up with almost negligible compliance norms. The setup cost is also the cheapest as compared to other entity types.
A natural person who is above 18 years of age can set up a sole proprietorship in Singapore. A Singapore-registered business entity can also own a sole proprietorship in Singapore.
A Singapore address is also required for registration. A Singapore resident can choose one's home address for registration purposes after seeking the relevant authority's approval (HDB for a public flat and URA for a private residence).
HDB is short for the Housing Development Board.
URA is short for the Urban Redevelopment Authority.
Before incorporating a business type, it is essential to understand its advantages and drawbacks. If you want to choose a sole proprietorship as your business entity type, you must consider the following pointers:
A sole proprietorship does not exist as a separate legal identity from its owner. Hence, all its liabilities automatically extend to the owner. In this business entity type, the owner's liabilities remain unlimited. One's personal assets can be seized to fulfill the claims made in the event of debt, liability, or loss incurred by the business.
A sole proprietorship is not entitled to the corporate tax rates and cannot enjoy the various tax incentives available in Singapore. As the business is not a separate legal identity from the owner, individual tax rates apply to the business's chargeable income, i.e., 0% to 22%.
A sole proprietorship is not publicly considered a very lucrative or promising business entity type and does not attract creditors or investors. Hence, raising capital is quite challenging. Banks may need your personal assets as collaterals for loan approvals. The individual owner is solely responsible for fulfilling capital and resource needs. Simply put, the growth and expansion of a sole proprietorship entirely depend on its owner's strength.
The business must renew its registration annually or every three years. Also, the business assets cannot be wholly transferred, and the company ceases to exist with the owner's death or disqualification.
Foreigners must seek MOM's approval before registering their businesses. A sole proprietorship owner cannot secure an EntrePass. The chances to obtain an Employment Pass under a sole proprietorship are also quite slim. If foreigners fail to secure a work permit, they must appoint an authorized representative at their Singapore office. The authorized representative must be ordinarily resident in Singapore and must be at least 21 years old.
A sole proprietorship cannot own property in its own name as it lacks its own legal identity. It cannot sue someone or be sued by someone in its name.
The ownership cannot be wholly transferred.
MOM is short for the Ministry of Manpower.
A sole proprietorship has the following advantages that are ideal for small businesses with a significantly low-risk profile.
A partnership is a business entity type in which two or more individuals come together and form a working relationship. These individuals (refer to as partners) agree to share profits, losses, debts, liabilities, investments, and assets.
A general partnership is constituted with a minimum of two and a maximum of twenty partners. If the number of partners exceeds, it must be registered as a company under the Singapore Companies Act.
A general partnership is not much different from a sole proprietorship in terms of structure, taxes, and liability, except that it contains more than one owner. A partnership agreement determines the obligations and relationships among partners.
Following are the requirements for a general partnership in Singapore:
A Partnership Agreement is the most important legal document in a partnership business. It must set out rules and regulations to ensure transparency and understanding between the business partners. A Partnership Agreement must also set out laws regarding a partner wanting to quit, a new partner willing to join, or closing the Partnership.
As such all the advantages and disadvantages of Sole Proprietorship also apply here, as a general partnership is just an extension of sole proprietorship.
A limited partnership is formed between at least one general partner and one limited partner. The qualification criteria are similar to a general partnership except for a few exceptions.
SMEs do not choose this entity type for two primary reasons.
An individual who wishes to incorporate a general or limited partnership must take the following key points into consideration.
Disputes can occur due to disagreement among partners over business management and operation. In some instances, a conflict may lead to the partnership dissolution and affect the partners' personal relationship. Therefore, the partnership agreement must be reviewed consistently and, if required, must be revised with the mutual agreement of partners.
The ability to acquire the necessary capital and resources for a business's growth and expansion is a partnership's advantage (But still it falls short of that for a company). Limited partners in a limited partnership are also a good source of acquiring additional capital without actively participating in the company's management.
There is no single owner with absolute control in a partnership. It is entirely based on consensus. However, you can make provisions in a Partnership Agreement to provide certain rights to specific partners allowing them to override consensus. These provisions are created based on a partner's contribution giving him/her the right to override a consensus if it does not seem to favor the company's business.
Like a sole proprietorship, foreigners must first seek MOM's approval before registering a Singapore partnership. Securing an Employment Pass is unlikely if all the partners are foreigners. Therefore, an authorized representative must be appointed to accept and respond to the notices served from Singapore authorities.
A limited liability partnership is more similar to a limited liability company despite its name. This business entity type is mostly preferred by professionals such as lawyers, doctors, accountants, attorneys, or architects to build a joint practice.
Business owners favor the LLP most as a partnership entity. It is a hybrid of a partnership and a limited liability company.
An LLP exists as a separate legal entity from its owners. Hence, it can own property in its own name.
The liability of partners in an LLP is limited, making it an ideal option for most of the business owners who want to get into a partnership risk-free. The partners are held liable for the losses or debts that are incurred due to their own misconduct, dishonest behavior, inaction, or carelessness. Uninvolved partners are spared.
An LLP is more similar to an LLC than a partnership. However, the primary similarity between an LLP and other partnerships is that individual tax rates apply to partners' income in an LLP, i.e., 0-22% on the chargeable income.
The most preferred business entity type in Singapore is an LLC (Limited Liability Company). In 2020, out of the 52,442 businesses registered in Singapore, 34,877 have registered as a company (including foreign and local companies). That's equivalent to 66.5% of the total businesses registered so far in 2020.
There are two primary categories of the company structure, namely:
A private limited company, or an LLC, is a company limited by shares. In this business structure, shareholders or members hold the company's shares depend on their contribution to the company. An LLC cannot have more than 50 shareholders. A private limited company's shares are not available to the general public.
Any legal person over 18 years of age can incorporate an LLC in Singapore. A corporate entity can also hold shares in an LLC. Foreigners can retain 100% ownership of a private limited company in Singapore. Thus, this business model is the first choice for foreigners.
Both local and foreign business owners prefer to register an LLC in Singapore. It is mainly because of the numerous benefits that come with it.
A limited liability company exists as a separate legal identity from its officers and members. The company name contains 'Pte Ltd' or Private Limited. It can sue in its name, and it can also be sued. An LLC can also buy or sell property in its name.
A major advantage of an LLC is its shareholders' limited liability. All company shareholders are only liable for the amount they have invested in purchasing the company's shares. Personal assets of shareholders cannot be seized to pay off the company's losses, debts, or liabilities.
Another great advantage of an LLC is that it is taxed at corporate tax rates. The corporate tax rate is 0-17% (lower than individual tax rates) on the normal chargeable income.
Singapore offers tax incentives to both start-ups and existing companies. Sole Proprietorship and partnerships do not enjoy these benefits. Under the Start-Up Tax Exemption scheme, the tax exemption reduces the effective tax rate to 4.25% on the first S$100,000 and 8.5% for the next S$100,000 of the company's net chargeable income. The tax exemption under the Partial Tax Exemption scheme (for existing companies) reduces the tax rate to 4.25% for the first S$10,000 and 8.5% for the next S$190,000 of the company's net chargeable income.
It is easier to raise funds for an LLC. Capital can be easily raised by adding new shareholders or by issuing additional shares to the company's current shareholders. Investors and VCs are more interested in purchasing shares in an LLC due to limited liability. Even banks easily approve a loan for an LLC rather than a partnership or a sole proprietorship.
An LLC holds a better public perception than a sole proprietorship or a partnership. This business entity type demonstrates the scalability and a vision for growth. Hence, clients, bankers, investors, private firms, suppliers, and other professionals will take your business more seriously.
A private limited company's existence does not depend on any of its shareholders or directors. Its existence does not cease if one of its members or officers passes away or gets disqualified. The business continues to exist by share transfer or releasing shares to new and existing shareholders.
Ownership can be, wholly or partially, transferred without halting any business operations or too much legal documentation. An LLC can transfer its ownership by selling all or a few of the company's total shares and also by issuing new shares and adding new stockholders.
An LLC comes with a long list of merits. However, one cannot overlook the following pointers before choosing to register this business structure.
The annual compliance cost is higher as compared to a sole proprietorship and a partnership. An LLC is required to abide by specific statutory obligations like holding an Annual General Meeting every 15 months, filing ECI, and annual audit (if not exempted).
Every Singapore-registered private limited company must have at least one director and one company secretary. Both the director and the company secretary must be ordinarily resident in Singapore. An LLC may also need to hire an auditor if applicable. A foreigner wishes to relocate to Singapore and act as the local director must secure an Employment Pass and pay himself/herself a minimum salary of S$4500.
A private limited company may get penalized for not fulfilling the statutory compliance requirements. Every LLC in Singapore must act in accordance with the Singapore Companies Act. A private limited company must also register for GST (if applicable), CPF, and SDL.
In case a foreigner fails to secure an Entrepreneur Pass or an Employment Pass, a nominee director must be hired to fulfill the role of a Singapore regional director to meet the statutory compliance.
There are two types of public companies.
This business entity type is the most expensive to set up and manage due to extensive reporting and statutory obligations.
A public company limited by guarantee is an LLC that is established for the promotion of non-profit causes. Organizations that work in national or public interest choose this business entity type. Hence, it is not within the scope of this article.
Singapore offers three different business structures for foreigners who wish to incorporate a company in Singapore. These business structures are:
It is imperative for foreigners to understand the characteristics of all the three business entity types along with their differences.
For instance, a member can enforce his right to vote at an AGM (Annual General Meeting) even if other shareholders deny it. The Company Constitution gives him this voting right as a member of the company.
On the other hand, a right given to someone for any different directorial or managerial position does not come into the domain of Section 39(1).
For example, a director, granted veto right by the constitution, may not succeed in enforcing this right. The court may not order the company to comply with this provision of the constitution because it affects the director's capacity as the company's director and not the company's member.
It is the most preferred business structure by foreigners in Singapore. It is essentially same as registering a private limited company (Or LLC).
The most prominent characteristics of a subsidiary company are:
A subsidiary company is a separate legal entity from its parent company. It can engage in business operations that are different from its parent company.
Foreign parent entity can 100% own a subsidiary in Singapore.
A subsidiary is legally regarded as a Singapore local company. Hence, it enjoys the tax benefits and incentives under SUTE and PTE schemes.
The parent company's liability is limited to the amount of capital it has invested in the subsidiary company. Liabilities of a subsidiary do not extend to its parent company, making it an ideal choice for foreign SMEs.
A subsidiary company in Singapore is exempt from annual audit requirements if it qualifies as:
Audit exemption reduces the overall compliance cost and statutory obligations for a subsidiary making its management and operation cost-effective.
Other than a subsidiary, a foreigner can also register a branch office in Singapore. The characteristics of a Singapore branch office are:
A branch office does not exist as a separate legal identity from its parent company. It is considered as its foreign parent company's extension only. Therefore, it must follow the parent company's constitution. A branch office cannot carry out commercial activities differently than that of the parent company.
There is no concept of separate ownership here, because branch is essentially an extension of foreign company in Singapore.
A branch office does not legally qualify as a local company in Singapore. Hence, it cannot enjoy the various tax benefits and incentives available to Singapore local companies.
The liability of a branch office extends to its foreign parent company.
There are no practical benefits of incorporating a branch office in Singapore. Therefore, foreign business owners prefer to set up a subsidiary rather than a branch office.
When a foreign company is not ready to establish a permanent office in Singapore, it may choos to establish a representative office. A representative office is a short-term administrative arrangement with no legal status of its own.
A representative office is set up for:
A representative office cannot engage in any commercial activities, offer services, move goods, or enter into sales contracts.
Each business entity type offers some advantages and disadvantages. Therefore, choosing the right business entity type depends on your business needs and the amount of capital you are willing to invest in. However, there are specific guidelines that one can follow while making this decision:
Sole Proprietorship is the perfect choice for Singapore locals who wish to incorporate a business with a single owner. As long as your services and products do not create any liability issues, it is an easy and budget-friendly option. You hold absolute control in all the business and management issues. However, this business entity type poses risks to your personal assets. You must always remain careful as claimants may come after your personal assets in case of debts, losses, or liabilities.
Setting up a general or limited partnership is not an ideal option for most business owners. Even though a limited partnership limits limited partners' liability and involvement, general partners will still have to face unlimited liability.
However, an LLP could be a more viable and practical business entity type for professionals such as doctors, accountants, lawyers, and architects. In these professions, professionals conduct business by selling their services. If you are acquainted with someone in the same profession and want to build a joint practice, a limited liability partnership is an ideal choice.
An LLC is the most preferred business entity type for small and medium businesses for several reasons. It is regarded as the best choice out of all the business entity types by experts.
The limited liability, tax benefits, perpetuity, public perception, and the ease to access capital make it the best structure for serious business owners in the long run. This business entity type is easy to scale and expand compared to a sole proprietorship or a partnership.
A subsidiary provides all the tax benefits and protects the liability of its foreign parent company. Hence, a subsidiary is deemed best for foreign corporations and entrepreneurs.
As a subsidiary is a private limited company, it is quite easy for foreigners to raise the required funds for their growth and expansion.