With its business-friendly government policies, first-class facilities and infrastructure, bilingual and educated workforce, it is no wonder that Singapore has been recognised as the world’s easiest place to do business, for the last ten consecutive years; and is one of the most dynamic and competitive financial hubs in the world. That said, while it is fairly easy for potential business owners to understand the process of setting up a business in Singapore, it should be noted that that not all business entities possess the same legal rights, privileges and enjoy the same benefits. This guide takes a look at the various business entities in Singapore and will help potential business owners identify the best business entity structure for their needs.
A Brief Overview of Business Entities in Singapore
|Limited Liability Partnership||14,057||14,336||14,628||14,692|
|Public Accounting Firm||517||517||520||518|
*Table above taken from ACRA’s Business Statistics – Live Entities in 2015
Entity versus entity, there is a distinct trend in the popularity of each type of entity, as can be seen in the table above, which breaks down the number of live entities in the first six months of 2015. This can be generally attributed to the intended purpose of each entity.
|Entity type||Intended Purpose|
|Partnership||For two or more people to establish and co-own a business|
|Sole Proprietor||For one business owner only and all assets and liability are attributed to the business owner.|
|Companies||Privately held companies that can be used for a variety of purposes. These companies have fewer than fifty shareholders.|
|Limited Liability Partnership||Typically intended for specific professions, e.g. accountants, lawyers and architects, where two or more professionals decide to enter into a partnership in a specific area of focus|
|Limited Partnership||Allows for partners to have limited liability|
|Public Accounting Firm||For public accountants, who wish to provide public accountancy services|
Notably, out of the six business entities listed above, entities such as partnership, limited liability partnerships, limited partnerships and public accounting firms are relatively specific and limited in what the business owners can do with them. Hence, they are relatively less popular than the sole proprietorship and company business structures.
The key distinction between the two most popular business entities is the number of owners that each business entity can have. The sole proprietorship however, is largely for small scale businesses, such as tuition teachers, freelancers or part-time taxi drivers, whose estimated projected annual income is relatively low. These sole proprietorships pay tax based on their personal tax rate and do not benefit from the tax incentives that private limited companies can enjoy.
Besides the fact that a private limited company can have up to 50 shareholders, one of the primary reasons that this is the most popular business entity structure is the fact that it is considered as a separate legal entity and is separate and distinct from its shareholders and directors. This is unlike the partnership structures (i.e. partnership, limited partnership and limited liability partnership), where the partners / business owners will be held personally liable for debts and losses, to a certain extent.
Partnership vs Limited Partnership vs Limited Liability Partnership
With three different types of partnership, it can get quite confusing. The overall similarity between these three various types of partnership are that the existence of this variant of business entity is dependent on the partnership agreement, which is typically drafted by a lawyer. Ensuring that this agreement is legally sound is one of the most crucial factors for potential partners to consider.
The key distinction is that in a partnership, liability is not limited. However, as indicated by the term “limited” in the name of the other two variants of partnership, liability is somewhat limited. Take for instance, the ownership structure of a limited partnership, where at least one partner is required to be the general partner and he or she will have unlimited liability. Hence, this general partner would undertake the largest proportion of the risk.
Of the three variants of partnerships, the most similar to a private limited company would be the limited liability partnership. However, while a private limited company is taxed at the corporate tax rate, all three partnerships are taxed at the partners’ personal tax rates. Compliance wise, a limited liability partnership is also required to submit an annual declaration of solvency to state whether the LLP has the ability to satisfy its debts during the normal course of its business, which is not applicable to the other forms of partnership.
It should be noted that of the six business entity structures listed above, only two, i.e. the limited liability partnership and private limited company would be considered to be separate legal entities. This is particularly essential for banks and financial institutions, which would typically only extend loans to separate legal entities. For sole proprietorships and partnerships, their options are limited to term loans or loans that require assets to be mortgaged. Financially speaking, this can be devastating when a business fails or becomes victim to a bad situation, as sole proprietors and partners would be personally liable.
Given that the ease of obtaining funding is one of the essential factors that would influence a new business owners’ decision; and the limitations of a limited liability partnership, this is one of the key reasons why many choose a private limited company structure. In line with its business friendly policies, two statutory boards, the Standards, Productivity & Innovation Board (SPRING Singapore) and International Enterprise Singapore (IE Singapore) have worked together with the three major local banks to offer business loan schemes.
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.|
*Information from the above table adapted from: DBS Micro Loan ; UOB LEFS Micro Loan Scheme; and OCBC Business First Loan
Great business ideas outlive their creators; and for many investors, ensuring that the company has flexibility in terms of succession can be a point of concern. If otherwise, the existence of a company may abruptly end, due to unforeseen circumstances.
Notably, of the six entities, only the limited liability partnership and company business entity structure have perpetual succession, up to the point where the limited liability partnership or company is struck off or wound up. Particularly for sole proprietorship, there is no option for others to continue the business on behalf of the sole proprietor. However, this would not likely be of concern for a sole proprietor, who would typically sustain the business with his or her own assets and savings.
Nevertheless, for business owners who currently have incorporated their businesses as a sole proprietorship or partnership; and wish to expand their business to achieve greater market reach or benefit from the tax incentives that private limited companies enjoy, they can rest assured that there is the option of converting their business into a private limited company.
Choosing your Business Entity
Ultimately, it depends on the unique requirements of the business, its nature and the industry that it is entering into, which will help business owners decide definitively, which business entity structure would be the most suitable. In general however, most business owners do choose the private limited company business structure, due to its greater flexibility and the fact that it can enjoy the multiple tax incentives offered in Singapore.
Ideally, potential business owners would consult an experienced professional corporate services provider, who would have the relevant experience and wealth of knowledge to analyse their business needs and would be well positioned to recommend the best business entity structure.
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