Singapore Incorporation: Types of Business Entities

Of all the choices you make when deciding on incorporating an entity in Singapore, one of the most important is the type of business structure (i.e. legal entity) you choose for your business. Your decision can affect how much you pay in taxes, image and perception of your business among your clients and suppliers, the amount of paperwork your business is required to do, the personal liability you face, ability to borrow money, and the ability to expand your business.

This guide provides a overview of the various types of business entities in Singapore and the differences among them. In Singapore, businesses mainly operate as companies, sole proprietorships and partnerships. Each of these is subject to different regulatory and tax regimes reflecting their organization and ownership:

• Company. The most common form of incorporation in Singapore is a Private Limited Company. Also known as "Pte Ltd" company, a private limited company is the most flexible and advanced type of business form in Singapore. A Pte Ltd company protects its owners' personal assets from business liabilities of the company as well as enjoys special tax benefits in Singapore. 
• Sole Proprietorship. Meant for an individual owner with a small business that does not have any business risks. A sole proprietorship is an unincorporated type of business form and not a separate legal entity. It does not protect the owner's personal assets from business liabilities and therefore we normally do not recommend this type of entity to entrepreneurs.
  
• Partnership. The most common form of a partnership is Limited Liability Partnership (LLP). A LLP may be suitable for accountants, lawyers, architects, etc.
  
• Foreign Company Office. Foreign companies interested in setting up an office in Singapore can register a branch office, subsidiary, or a representative office.

More details for each of the above three business forms are provided below:

Singapore Incorporation: Company

A company is a business entity registered under the Singapore Companies Act and a separate legal entity from its members.  Although it is possible to incorporate a company with unlimited liability, in realty there is no commercial reason to do so. Therefore almost all companies in Singapore are incorporated as limited liability companies. In a limited liability company, the liabilities of the owners are limited to the assets in the company and their personal assets are protected from business liabilities. Consequently, the discussion here is limited to companies with limited liability only. In many jurisdictions Limited Liability Companies are referred to as LLCs or Corporations; however these terms are not commonly used in Singapore. 

Limited liability companies in Singapore can be of the following types: 

Private Limited Company

The technical term for a private limited liability company in Singapore is Private Company Limited by Shares. Most of us just call it private limited company. Most of the small to mid-size companies in Singapore are incorporated as private limited companies. A private limited company's name in Singapore normally ends with Private Limited or Pte Ltd.

A private limited company is the most advanced, flexible, and scalable type of business incorporation in Singapore. It's also the most preferred type of Singapore business entity for serious entrepreneurs (as opposed to sole proprietorship or limited liability partnership). Detailed information about setting up a private limited company can be found in Singapore Company Registration guide.

Advantages

1. Separate Legal Entity : A private limited company has its own legal identity, separate from its shareholders and its directors. It can acquire assets, go into debt, enter into contracts, sue or be sued in its own name.
2. Limited Liability: The liability of the members to contribute to the debts of the company is limited to the amount that they each agreed to contribute as capital to the company.
3. Perpetual Succession: The company's existence does not depend on the continued membership of any of its members. Ease of transfer of shares or changes in shareholders, ensures that company continues to exist even in the event of death, resignation or insolvency of shareholders or directors.
4. Ease of raising capital: You can raise capital for expansion or other purposes, by bringing in new shareholders or issuing more shares to existing shareholders. Investors are more likely to purchase shares in a company where there usually is a separation between personal and business assets. Also, most banks prefer to lend money to limited companies.
5. Credible Image: As an incorporated business entity, it commands a better image than a sole proprietorship or a partnership firm, and investors will be more willing to become part of the company as it demonstrates a vision to grow and expand. As a Pte Ltd company, your business will be taken more seriously by your potential clients, suppliers, bankers, and other professionals you will be dealing with.
6. Easier transfer of Ownership: Ownership of a company may be transferred, either wholly or partially, without disrupting operations or the need for complex legal documentation. This can be done through the selling of all or part of its total shares, or through the issue of new shares to additional investors.
7. Tax Benefits and Incentives: The effective Singapore income tax rate for companies for profits up to SGD 300,000 is below 9% and capped at 18% for profits above SGD 300,000. Furthermore, there is no capital gains tax. Singapore follows a single-tier tax policy which means once the income has been taxed at the corporate level, dividends can be distributed to shareholders tax free. 

Disadvantages

1. More complex to incorporate and maintain than sole proprietorship or LLP.
2. Private limited companies must follow certain ongoing compliance requirements.
3. Closing a company is more complex than other forms of business 

Public Limited Company

Once a private company reaches a certain growth level and becomes a well-known leader in its industry, the shareholders might decide to take the company public i.e. to offer shares to the public. A public company's name in Singapore ends with Limited or Ltd. Public companies are normally well established medium-to-large enterprises that have a large number of shareholders. Majority of the public companies are listed on a stock exchange.  Public companies are subject to significantly more stringent rules and regulations since they have the power to raise funds from the public. For more information on public companies, refer to taking a private company public in Singapore

Public Company Limited by Guarantee

A public company limited by guarantee type of business entity is meant for non-profit organizations that are interested in Singapore incorporation. For more details on this, refer to Setting up a Non-Profit Organization in Singapore.  

Singapore Incorporation: Sole Proprietorship

Sole proprietorship is the simplest but the riskiest type of business form in Singapore. From a legal perspective, sole proprietorship is not a separate incorporated entity and therefore the owner and the business are one and the same. The owner personally owns all assets and liabilities of the business. There is no protection of personal assets from business risks and liabilities. As the sole proprietor of a business, you have unlimited liability, meaning that if your business can't pay all its liabilities, the creditors to whom your business owes money can come after your personal assets. Many entrepreneurs are usually unaware of this enormous financial risk. If the business is sued or can't pay its bills, the owner is personally responsible for the business's liabilities. We consider this a serious drawback and hence do not recommend sole proprietorship to inspiring entrepreneurs.

A sole proprietorship can only be owned by one person, usually the individual who has day-to-day responsibility for running the business. All profits of this business structure in Singapore are taxed at the personal income level.

Registering a sole proprietorship business in Singapore takes little effort and details can be found at Sole Proprietorship Registration guide.

Sole Proprietorship Advantages

1. Ease of setting up: It is the easiest and least expensive business structure to set up.
2. Owner Control: As a sole proprietor you are in complete control of all the business affairs including decision making.
3. No profit sharing: You accrue all income generated by the business.
4. Ease of termination: Terminating a sole proprietorship is easier, less time consuming and less expensive than other business entities.
5. Least compliance requirements: You are free of the obligation of filing returns annually and only need to renew your membership every year. 

Sole Proprietorship Disadvantages

1. No separate legal entity: You are inseparable from your business. This makes you financially and legally responsible for all debts and legal actions against the business.
2. Unlimited liability: Creditors may sue you for debts incurred and can also obtain a court order to claim against your personal assets, including your property.
3. No corporate tax benefits or incentives: Taxes are determined at your personal income tax rate and you do not enjoy special tax benefits that are available to a private limited company.
4. Limited capital: Capital is limited to your personal finances and the profits generated by the business. Thus, business expansion is limited and difficult.
5. No perpetual succession: The business lives and dies with you as you and the business are one and the same thing. 
6. Low public perception: This entity is the least preferred for serious businesses as nobody would be willing to lend you large sums of money. It is also difficult to attract high-caliber employees, or senior level executives who usually look for a more advanced form of business structure such as a private limited company.
7. Sale/transfer of all or part of the business: You can transfer the business only by the sale of business assets.  

Singapore Incorporation: Partnership

Partnership type of business structure attempts to address the limited-expansion constraint faced by a sole proprietorship by allowing two or more people to establish and co-own a business.  Partnerships in Singapore can be of three types:

General Partnership

A general partnership is not a very attractive way to structure a business in Singapore because a) like a sole proprietorship, partners are personally liable for the debts and liabilities of the business; b) each partner can be held responsible for the actions of another partner. Consequently, a general partnership type of business form is not discussed further in this guide. 

Limited Partnership

The concept of limited partnership is an alternative to the general partnership type of business form in Singapore. It introduces the concept of a limited partner in addition to a general partner. The liabilities of limited partners are limited to their investment in the partnership (capital or property). However such partners are unable to participate in the management of the business in a limited partnership. In a nutshell, even a limited partnership in Singapore is not a very attractive vehicle for setting up a business for most people and therefore is not discussed any further in this guide.

Limited Liability Partnership (LLP)

Among the three types of partnership business entities, LLP is the most recent and most advanced business incorporation structure. It combines the features of partnerships and companies. LLP was introduced in Singapore in 2005 through enactment of Limited Liability Partnership Act. Registering an LLP gives owners the flexibility of operating as a partnership while enjoying many of the benefits that come with a corporate body like a private limited company. 

LLP is primarily meant for carrying a profession (accountants, law firms, architects, etc.) where two or more professionals would like to build a joint practice in a common field.  The owners must enter into very detailed agreements about how the profits and management responsibilities are divided. It can get very complicated and generally requires the services of a lawyer to draw up the agreement. Partners in a limited liability partnership are  usually responsible for cultivating their clients based on the partner's specific area of focus.

A LLP must have at least two partners at all times. An LLP is not suited for a business that carries a trade. For more details on LLP including how to incorporate, refer to Singapore LLP Registration Guide.

LLP Advantages

1. Separate Legal Identity: An LLP has a separate legal identity and can own property, enter into contracts, sue or be sued in its own name.
2. Limited personal liability: The partners of the LLP will not be held personally liable for any business debts incurred by the LLP or the wrongful acts of another partner. A partner may, however, be held personally liable for claims from losses resulting from his own wrongful act or omission.
3. Perpetual succession: Any changes in the LLP (e.g. resignation or death of partners) do not affect its existence, rights or liabilities.
4. Ease of compliance: Compliance requirements are more complex than sole proprietorship but simpler than a private limited company. 

LLP Disadvantages

1. Requires a minimum of 2 partners at all times. 
2. Individual partners can commit the partnership to formal business agreements without the consent of the other partners.
3. LLPs lack the ease of ownership transfer and investment that a company structure provides. 
4. No corporate tax benefits: Tax  exemptions available to private limited companies are not available to LLPs. LLP is treated as tax transparent which means an LLP is not taxed as an entity. Instead each partner is taxed on their share of the profits as per the personal income tax rates. 

Singapore Incorporation: Foreign Company Office

Foreign companies wishing to setup a presence in Singapore, have the choice of branch office, subsidiary, or a representative office in Singapore. For more details, refer to foreign company registration in Singapore.

Which incorporation type to choose?

Deciding on the right business structure to incorporate in Singapore will depend on your particular situation and plans. As a general rule, you can use the following guidelines when making your decision:

• If you are a local person and you who want to register a small business where you will be the only owner and the nature of your products/service does not have liability issues, it might be easier for you to register your Singapore business as a Sole Proprietorship. However, you must carefully consider the fact that in case of any business liabilities, the claimants can go after your personal assets. 
• If your business involves selling your services by way of the profession you hold (e.g. accountant, lawyer, architect, etc.) and you have one or more additional partners in a similar profession and would like to build a joint practice, setting up a LLP might be a suitable business structure for you.
• In all other cases, incorporating a private limited company in Singapore would be the best choice. Although compliance requirements are more complex, it is by far the best structure in the long run.
  

Still not sure about Singapore Incorporation? Read Singapore Company vs Sole Proprietorship vs LLP.