When starting a business in Singapore, it’s important to ask yourself what type of legal structure to go for. Your decision will affect a variety of things including the tax you pay, liability, ability to borrow money and ability to expand your business in the future. Here’s a quick guide to explain the various business structures in Singapore and pros and cons of each.
(Setting up from overseas? Skip straight to the section on tips for foreign owners.)
- There are three main categories of business entities: companies, partnerships, and sole proprietors
- Private Limited companies (Pte Ltd) are often the best choice when starting up a company because of its low barriers to entry and protection for its shareholders.
A company is formally known as “Limited Liability Company”. A LLC is an entity that is limited by its shares or amount of shared capital. A LLC needs to register with ACRA, the corporate regulatory authority in Singapore. In an LLC, the owners’ liability is limited to only the assets of the company – all personal assets are safe from any business liability. There are two types of companies: public and private companies.
Private Limited Companies (Pte Ltd)
In comparison to other types of companies in Singapore, a private limited company is the most scalable, the most advanced, and the most flexible. It is the most common type of business compared to limited liability partnership or sole proprietorship.
A private limited company is characterised by (a) having less than 50 shareholders, and (b) not having its shares accessible to the public. Shareholders of a private limited company can be other companies, individuals, or a mixture of both.
Public Limited Companies
The second type of Singapore LLCs is a public limited company. Typically, a public limited company is going to be listed on the stock exchange. A public limited company is characterised by (a) shares that are offered to the public on the stock exchange, and (b) having over 50 shareholders.
These companies must follow strict rules/regulations since they can raise funding from the public. Since this type of corporation is meant for larger businesses, if you’re looking to set up a company in Singapore they’re not likely to be an option you will be considering.
This type of business is straightforward but carries more risk for its owner since the owner will be personally liable for his/her company.
Legally, a sole proprietorship is not a standalone entity, which means that the owner – whether an individual or a legal entity – and the business are considered as one. Only Singapore citizens, Singapore permanent residents or EntrePass holders are allowed to register a sole proprietorship.
The personal assets of the owner are not protected from the liabilities and business risks of the company. The owner has unlimited liability. This means when your business is not able to pay back a particular debt, the creditors can go after your assets as well as those of the company.
There are two types of partnerships: general partnerships and limited liability partnerships.
General & limited partnerships
A partnership is a business firm formed by two to twenty partners (who can be general partners or ‘limited partners’, explained below). Once there are more than twenty partners, the partnership must be registered as a company under the Companies Act.
Only Singapore citizens, Singapore permanent residents or EntrePass holders are allowed to form a partnership. The profits of the general partnership are taxed at partners’ personal income tax rates.
In Singapore, a general partnership isn’t the best choice to set up your company, as just like a sole proprietorship, the partners are held personally liable for all of the liabilities and debts of the business, and each of the partners within the company is held accountable for the actions of the other partners.
You can also have limited partners in a general partnership. A limited partner is only responsible for the amount of property or capital that he/she invests in the business and is not able to take part in the management of the business. A limited partnership does not have a separate legal entity (like a company) from the other partners.
Given the lack of separate legal entity and restrictions around management, for most people, even a limited partnership is not the most attractive option when doing business in Singapore.
Limited liability partnerships (LLPs)
This kind of entity combines features of companies and partnerships. Of the 3 types of partnerships, an LLP is the most advanced and most recent of business structures where the individual partner’s own liability is generally limited. An LLP is owned by at least two partners, individuals or body corporate, and is a legal entity separate from its partners.
An LLP is typically established to carry a profession, such as attorneys, architects etc, where two or more would like to join together and form a practice in their shared field. The profits are taxed at partners’ personal income tax rates if the partner is an individual and at corporate tax rate if the partner is a body corporate.
A registered LLP can operate more like a partnership while at the same time enjoying the benefits that come with ownership of a Pte Ltd. However, owners of the LLP need to go into detailed agreements on how the profits will be divided.
Alternatives for a foreign-owned entity
What’s best if you’re a foreigner wanting to set up an entity in Singapore? Typically, you can chose between three approaches:
- A representative office: this is intended to be a temporary program, typically used to conduct market research activities. This type of entity has no legal status and therefore, is unable to take part in any activities that create profit for the company.
- A branch office: the main characteristic of this type of structure is that it is not treated as a separate entity from its parent company. There is no difference between the branch office and its holding regarding liabilities.
- A subsidiary: the most typical business structure when considering doing business in Singapore, a subsidiary is a private limited company in which the parent company is a shareholder. If a business is moderate to small, this is typically the best option for registration in Singapore.
If you are interested in learning more, ACRA has also developed a helpful chart that shows the main differences between the main types of business structures.
If you need any more help on choosing a business structure that works for you or incorporating in Singapore – at Sleek we can help you with this process.