Singapore Business Setup Entities Types

Of all the choices you make when setting up a business 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 you can setup 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:

• Companies. The most common form of a company is Private Limited Company. A private limited company is the most flexible and advanced type of business form in Singapore. A Singapore Pte Ltd enjoys special tax benefits from tax authorities.
• Sole Proprietorships. Meant for an individual owner with a small business that does not have any business risks. A sole proprietorship does not enjoy any special tax benefits similar to that are available for private limited companies.
• Partnerships. The most common form of a partnership is Limited Liability Partnership (LLP). A LLP may be suitable for accountants, lawyers, architects, etc. It does not enjoy any special tax benefits similar to that are available for private limited companies.
  

Related Topic: Benefits of Doing Business in Singapore

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

Business Setup Entity: Company

A company is a business entity registered under the Singapore Companies Act and a separate legal entity from its members.  Although it's 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 members is 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. If you are a business person who wants to register a company in Singapore, you need to incorporate a Private Company Limited by Shares commonly referred as Private Limited Company. A private company is generally held by a small number of people, often its founders. Most of the small to mid-size Singapore companies are private limited liabilities companies. A private company's name in Singapore ends with Private Limited (or Pte Ltd). Since most of us will be interested in setting up this type of Singapore business entity, it's discussed in more detail after this section.
  A private limited company must meet the following requirements:
  • Number of shareholders must be less than 50
  • Memorandum and Articles of Association has certain necessary conditions on the transfer of shares  
• Public Limited Company. A company that does not meet the definition of a private company as above is treated as a public company. A public company's name end with Limited (or Ltd). Public companies are normally well established medium-to-large entreprises that have a large number of shareholders. 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. Public companies are subject to significantly more stringent rules and regulations since they have the power to raise funds from the public. For more info on public companies, refer to Are you ready to take your company public?
  
• Company Limited by Guarantee. If you are interested in setting up a non-profit company, you need to incorporate a Company Limited by Guarantee. For more details, refer to Setting Up a Non-Profit Organization in Singapore.  
• Foreign Company. If you are a foreign company that wants to incorporate a business entity in Singapore, refer to Foreign Company Registration Options in Singapore. 

As far as a company is concerned, most of us would be interested in setting up a Private Limited Singapore Company which brings us to the following discussion.

Private Limited Company 

A private limited company is the most advanced, flexible, and scalable type of business registration 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). To setup a private limited company, refer to Incorporating a Private Limited Company in Singapore. 

Pte Ltd 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 corporate tax rate 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. 

Pte Ltd Disadvantages

1. More complex to setup and maintain than sole proprietorship or LLP.
2. Private limited companies must follow more formal rules and procedures set out in the Companies Act and adhere to ongoing compliance requirements and annual filing requirements.
3. Directors can have personal liability in some circumstances, for example if they breach their duties to the company, or in the event of wrongful or fraudulent trading.
4. Closing a company is more complex that other forms of business   

Business Setup Entity: Sole Proprietorship

Sole proprietorship is the simplest type of business form in Singapore. A sole proprietorship can only be owned by one person, usually the individual who has day-to-day responsibility for running the business. From a legal perspective, the owner and his business are the same in the structure and sole proprietorship is not a separate incorporated entity. You own all the assets of the business and enjoy all the profits generated by it. But you also have to shoulder complete personal responsibility for any debts or liabilities and there is no protection of your personal assets. 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 business 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.  

Business Setup Entity: 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 due to the fact that 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 structure. It combines the features of partnerships and companies. LLP is discussed in more detail below.

Limited Liability Partnership (LLP)

LLP was introduced in Singapore in 2005 through enactment of Limited Liability Partnership Act. Registering a 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.  LLP is not suited for a business that carries a trade. For more details on LLP including how to setup, refer to Singapore LLP Registration Guide.

LLP Advantages

1. Separate Legal Identity: A 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 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. 

Which Business Form to Choose?

Deciding on the right business structure to setup in Singapore among the three type of entities (private limited company, sole proprietorship, and limited liability partnership) as discussed in this guide 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 registering 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.
• 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, opening a private limited Singapore company would be the best choice. Although a Pte Ltd setup and compliance requirements are more complex, it's by far the best structure in the long run.

Still not sure? Read Singapore Pte Ltd vs Sole Proprietorship vs LLP.