When incorporating a business in Singapore, choosing the legal entity structure is one of the most important decisions. This will affect aspects like the business' taxation, its reputation, administrative demands, its accountability, the capacity to borrow money, and the potential expansion of the business.
Much like Limited Liability Companies (LLCs), which provide asset safeguarding and growth adaptability, different business structures have their own pros and cons. While sole proprietorships offer simplicity in formation, they leave personal assets vulnerable. It's essential to carefully assess your requirements and seek professional advice to pick the most suitable structure for your Singapore-based enterprise, ensuring financial stability, efficient operations, and a path toward success.
In this article, we’ll talk about the 4 main different types of Singapore business entities and their differences. The regulations governing businesses in Singapore vary based on the chosen structure, meaning that not all business entities adhere to the same set of rules.
Sole Proprietorship and General Partnership (Full Personal Liability Vehicles)
Setting up and handling sole proprietorships and general partnerships in Singapore is simple.
The registration process is uncomplicated and involves minimal fees compared to other types of business structures.
Who typically registers a Sole Proprietorship or General Partnership?
A sole proprietorship is a business owned and managed by an individual known as its sole proprietor.
It is popular among freelancers, independent consultants, and small businesses due to their simplicity, flexibility, and low initial investment. They offer complete control over operations and allow the owner to keep all profits after expenses.
A general partnership is an arrangement whereby several persons put resources and assets in common but also share the relevant legal liabilities.
General partnerships are not widely popular among startups and small businesses, but are commonly used in the world of venture capital and private equity.
Regulations for Sole Proprietorships and General Partnerships
Although sole proprietorships and general partnerships offer simpler structures and fewer regulations (compared with companies), they may still require permits or licenses and compliance with general business regulations such as the Employment Act and the Goods and Services Tax (GST) Act.
Unlimited Personal Liability: The Drawbacks of Sole Proprietorships and General Partnerships
All partners in general partnership bear equal responsibility for managing the business and have unlimited liability for the partnership's debts. Sole proprietors also face unlimited liability for their sole partnership.
In simpler words, sole proprietorships and general partnerships do not have legal personality. They are actually a simple extension of their founders. This means that the personal assets of such founders may be used to settle any due liabilities if required.
Although appealing due to their simple setup and maintenance, sole proprietorships and general partnerships' unlimited liability is, therefore, a major drawback.
As a sole proprietor or a general partner, this means that there is no separation between your personal and business finances. If your business faces financial challenges, creditors can pursue your personal assets, such as your car or home, to cover debts. Similarly, personal creditors can seize both your business and personal assets if you owe them money.
For this reason, many businesses tend to stay away from these vehicles.
Limited Liability Partnership (LLP)
An LLP offers owners the flexibility of working as a partnership while possessing a separate legal identity similar to a private limited company.
This implies that the LLP is recognized as a separate legal entity with its own personality away from its partners. In practice, this means that the personal assets of LLP members are not exposed to potential liabilities.
Who typically registers a Limited Liability Partnership?
Limited Liability Partnerships (LLPs) are a favored option among businesses that aim to secure limited liability protection while maintaining a degree of flexibility in internal management. Like a corporate structure, LLPs extend limited liability to all partners involved.
In Singapore, professionals such as lawyers, accountants, and architects often establish LLPs, with their reputation and collective experience playing a part in client attraction. Sharing resources, such as office space and staff, is a common strategy among Singaporean LLPs to cut costs and boost profits. Delegating routine tasks to junior partners enables senior partners to concentrate on business development, a widespread practice in Singaporean LLPs.
The LLP framework permits adding or removing partners based on a predetermined agreement, facilitating growth by accommodating new clients introduced by incoming partners, a practice observed in Singapore. Through their partnership agreement, the partners enjoy maximum contractual freedom in organizing their relationship.
Regulations for Limited Liability Partnership
An LLP requires a minimum of two partners. Registration of the LLP with ACRA is mandatory. Industry-specific licenses might be needed for certain activities (such as law firms and CPA firms).
While optional, a Limited Liability Partnership Agreement is highly recommended for outlining internal governance.
The Limited Liability Partnership Act governs LLP formation and operations, and general business regulations like the Employment Act and the Goods and Services Tax Act apply.
LLPs don't require designated managers, but they do require at least one partner (who must be at least 18 years old) and a Singapore permanent resident.
When it comes to taxation, LLPs are tax-transparent. It means the partnership isn't taxed, and profits are taxed on individual partners' income tax returns. Further, annual declarations must be filed with ACRA.
Drawbacks of Limited Liability Partnership
Compared to simpler structures such as limited liability companies, LLPs in Singapore remain mostly used by regulated professionals. Structuring the partnership and contractually defining the rights and obligations of the partners is not easy. Also, LLPs are tax-transparent, meaning profits are taxed based on individual income, which could result in higher taxation compared with limited liability companies.
Limited Partnership (LP)
A Limited Partnership (LP) consists of a partnership composed of a minimum of two partners, including at least one general partner and one limited partner.
Who typically registers a Limited Partnership?
LP is commonly used in the venture capital and private equity industries, as well as the funds business.
In an investment fund, an LP would typically be structured around General Partners assuming management responsibilities and Limited Partners whose role is to make investment contributions.
Regulations for Limited Partnership
An LP can be established under the Limited Partnership Act, with designated limited partners registered accordingly. This legislation regulates the formation and the LP's regulation in Singapore, specifying roles, duties, and constraints for partners.
Similar to other businesses in Singapore, LPs must adhere to standard business regulations such as the Employment Act and the GST Act. Additionally, LPs may need to obtain industry-specific licenses to comply with relevant regulations.
Drawbacks of Limited Partnership
Incorporating and managing an LP requires dealing with more complicated rules than setting up sole proprietorships or general partnerships in Singapore. Although not mandatory, it's advised to have a written Partnership Agreement, similar to a general partnership, to protect partners' interests. This agreement brings added complexity compared to simpler business structures.
Companies
Companies in Singapore provide a well-defined structure with robust protection for personal assets, albeit with stricter regulations compared to simpler alternatives.
The primary benefit of a company lies in its status as a distinct legal entity separate from its owners (shareholders).
Who Can Benefit From Companies?
The key characteristic of a company is its status as a separate legal entity, distinct from its shareholders. This means the shareholders' assets are protected from the company's debts. If the company cannot repay its debts, the owners usually only stand to lose the amount of money they initially invested in the company rather than their personal belongings.
There are different types of companies, all of which offer this limited liability protection:
1. Private Company Limited by Shares: Shareholders are only liable for the amount of money they have invested in the company if it encounters financial difficulties. Private Limited Companies is the preferred option for businesses in Singapore as it offers a balance between limited liability and regulatory requirements. They represent maybe 90% of the business entities registered by our team in Singapore.
2. Public Companies: These companies can sell shares on the stock market to the public, enabling them to raise substantial capital. However, they are subject to stricter regulations.
3. Exempt Private Companies: These are tailored for smaller businesses with a limited number of owners. They are subject to fewer regulations compared to other private and public companies.
Regulations for Companies
While Singapore is known for its business-friendly environment, it also imposes regulations to ensure transparency and stability.
Companies are mandated to register with ACRA. Different company types (Private, Public, Exempt Private) have distinct requirements concerning ownership structure, minimum capital, and filing obligations.
Maintaining proper accounting records and conducting annual audits are obligatory for companies. Depending on the company type, specific mandates for holding board meetings and submitting annual reports to ACRA may exist.
Drawbacks of Companies
To be frank, it is difficult to come up with a list of drawbacks. Companies, especially private limited liability companies, are by far the most interesting vehicle for virtually any type of business.
Choosing the Right Business Structure for Your Singapore Startup
Are you confused about choosing the right business structure for your Singapore startup or need help with company registration in Singapore? Don't waste time — get a free consultation with our experts at AirCorporate and unlock the perfect structure or a smooth registration process for your business goals!
Our team can guide you through the legalities and ensure you choose the structure that best suits your needs.
