Singapore company structures: An entrepreneur's guide
Often when new entrepreneurs set out to incorporate a Singapore private limited company, they are confronted with certain basic questions that revolve around the definition of a corporation. For instance, what are the connotations of the term legal personality in the context of companies? What constitutes a Singapore corporation? Who runs the company? What are their functions and liabilities? What is meant by a company’s Constitution? Where and how does limited liability come into play?
Often when new entrepreneurs set out to incorporate a Singapore private limited company, they are confronted with certain basic questions that revolve around the definition of a corporation. For instance, what are the connotations of the term 'legal personality' in the context of companies? What constitutes a Singapore corporation? Who runs the company? What are their functions and liabilities? What is meant by a company’s Constitution? Where and how does limited liability come into play?
This guide provides answers to most of these questions and serves as a good starting point for individuals who are planning to incorporate a Singapore company for the first time. If you have an overall understanding of what a company is, you can skip this article and proceed directly to Singapore company registration guide that outlines the requirements, procedure, timeline, and other relevant details of company incorporation. The following topics are covered in this guide:
- Legal Nature
- Company Secretary
- Key Components
- Memorandum and Articles of Association
- Company Directors
- Share Capital
- Company Shareholders
Legal Nature of Singapore Corporation
Individuals planning to incorporate a Singapore company for the first time are often unsure of how an incorporated company differs from its owner from a legal perspective. Companies incorporated in Singapore have two legal characteristics that enable them to undertake activities in their own right. They are:
- Separate legal personality
- Legal capacity
Separate legal personality
The law treats a Singapore incorporated company as being a separate person from its members and those who manage its operations. What this essentially implies is that:
- The company can incur and receive obligations and hold property in its own name, enter into contracts with its members, directors or employees and with third parties.
- The company can be the plaintiff or defendant in civil proceedings and in certain cases may be a defendant in criminal prosecutions.
- The legal rules that separate a company from its participants are referred to by lawyers as the corporate veil.
- The company continues unchanged even if the identity of its participants changes.
- The company can enter into legal relationships with its members or directors.
Consequences of treating a corporation as a separate legal entity
- A company’s obligations and liabilities are its own and not of its participants.
- A company’s rights are its own and not those of its participants.
- A company can sue and be sued in its own name.
- A company has perpetual succession.
- A company’s property is not the property of its participants.
- A company can contract with its controlling participants.
Despite the general rule that a Singapore incorporated company and its participants must be treated as separate legal entities, courts under certain circumstances (outlined below), treat both as the same person.
- Where the corporate form is used to avoid an existing legal duty
- Where the company is being used to perpetuate fraud
- Where the company is acting as the agent or partner of the controller
- Wrongful trading provisions
Legal capacity of a corporation
Companies’ ability to carry out acts of legal effect is referred to as their capacity.
- Companies have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction.
- Companies have the legal capacity to do most of the things that a natural person can do and some additional things (such as issue shares and create floating charges over their property).
However participants of the company may be permitted to decide on the limits of the powers of their creation. These limits may be spelt out in the company’s constitutional documents – the Memorandum of Association and Articles of Association.
How Does A Corporation Operate?
Companies operate through officers or agents. The directors are often considered as the “brain and nerve centre” of the company, followed by the members or shareholders. They represent the mind and will of the company and control what it does. Acts of the directors and members are acts of the company. The scope of the powers of each of these organs is defined by the Memorandum and Articles of Association, in addition to the general principles of Singapore company incorporation laws.
The board of directors is responsible for the conduct and the management of affairs of a company. More specifically, they have fiduciary and ethical responsibility and accountability for what a company does. Shareholders being owners of the company have the power (through voting rights) to select members of the board of directors.
A private limited company incorporated in Singapore may have one or more directors. However at least one of the directors must be a local resident of Singapore. Listed public companies are required to have three directors.
Role of directors
The role of directors is to manage or supervise the management of the business of the company. Functions vary depending on the size and type of company and the role of directors in it. In the case of small businesses, the directors manage the company’s business, in the sense that they work in the business and make day to day decisions involved in running it. In larger companies, directors take on a supervisory function, leaving day to day decision making to the executive management. As most of the company’s powers are vested in the board of directors, they actually control its affairs and are thus answerable to the company’s shareholders collectively.
Directors have very broad powers of management. This means that most of the capital and enterprise decisions that must be made by the company in the course of its operations, will be made by the directors.
Duties of directors
Duties of directors fall under two broad categories:
- Statutory duties of care, skill and diligence, and
- General law duties or fiduciary duties of loyalty and good faith.
Statutory duties are administrative duties, enforced by the Accounting and Corporate Regulatory Authority of Singapore (ACRA) such as:
- General duties of disclosure.
- Updating and maintaining the accounting records of the company.
- Preparing the financial statement for the company’s Annual General Meeting (AGM).
- Ensuring that the first AGM is held within 18 months of the incorporation of the company and, following that, in every calendar year, at an interval not exceeding 15 months.
- Ensuring that regular directors’ and shareholders’ meetings are held in order to review the company’s financial and trading position.
- Ensuring that the company maintains a members register and other statutory books at its registered office.
- Appointing an auditor within three months of incorporating the company.
General law or fiduciary duties, enforced by the Company are as follows:
- Directors must act in good faith and in the interests of the company. In other words, the director must act honestly. The interests of the company are the interests of its members, creditors, other companies in the group, employees, customers, suppliers, and the community.
- Directors must utilize their freedom to make decisions on the behalf of the company wisely.
- Directors must not place themselves in a position of conflict, where a personal interest conflicts with their duty to act in the interests of the company.
- According to Sec 339 (3) of the Companies Act, directors must not knowingly incur debts, where there is reasonable ground to believe that the company would not be able to pay its debts. This duty comes into play only if the company is being wound up or if there are legal proceedings against the company.
- Sec 157 (2) of the Companies Act prohibits directors from using information that they acquire by virtue of their position to meet their personal gains or to cause detriment to the company.
Consequences of breach of duty
Statutory duties are enforced by the Accounting and Corporate Regulatory Authority of Singapore (ACRA). Consequences of breach of statutory duties involves a fine imposed by the Registrar. Alternatively, legal proceedings can be initiated and if the offender is found guilty, criminal penalties such as a fine and prison sentence can be imposed.
General law duties are enforced by the company of the which the person is a director. A company’s civil remedies for breach of general law duties include the following:
- A court injunction that orders the director to stop doing something or to make him/her take remedial action.
- A demand for compensation, under circumstances where the director’s breach of duty has resulted in a loss for the company.
- A demand for repayment of profits, under circumstances where the director has made a profit by breaching his fiduciary duties.
- A court order to return property owned by the company, under circumstances where the director holds the company’s property as a result of breaching his/her fiduciary duties.
Role of shareholders
Shareholders are members of a company. All Singapore incorporated companies are required to have at least one member. Members are, broadly speaking, owners. They are people who have invested money with the company in the expectation that they will receive a return of their investment, if the company is successful, either in the form of distributions paid out of the company’s profits during its trading life or in the form of a growth in the value of their investment in the company, over time. In a company limited by shares, members are shareholders – people who have subscribed for or purchased shares in a company. Shareholders play an important role in raising capital for organizations.
Shareholders are granted special privileges, including the right to vote on matters such as elections to the board of directors, the right to propose shareholder resolutions, the right to share in distributions of the company’s income, the right to purchase new shares issued by the company, and the right to a company’s assets during a liquidation of the company. Generally, shareholders have a say in limited matters, when compared to directors.
Broadly speaking shareholders have the following powers as per Singapore laws:
- power to adopt, modify or repeal provisions in the company’s Memorandum or Articles
- power to veto certain reductions of capital, and in the case of public companies
- power to remove directors from office and approve auditors
Shareholders also have reserve powers in the following matters
- where the Board is unable to act
- to commence and prosecute legal proceedings where the alleged wrongdoers control the company
- to ratify directors’ acts
Each Singapore company is required to have at least one company secretary who must be a natural person and have his/her principal or only place of residence in Singapore. The company directors appoint the company secretary and the Articles of Association provide for the terms and conditions of office to be determined by the director.
The Company Secretary occupies a pivotal role in the incorporation and administration of the company. He/she is the person who ensures compliance with the many regulations affecting companies. He is the one who keeps the necessary registers, sends out notices, organizes meetings, takes down minutes and files whatever forms are required by ACRA. The main function is to handle all the paperwork and procedural matters involved in running an incorporated company. In short, the smooth running of the company depends on his efforts.
Key duties include
- establishing and maintaining all company registers
- arranging for shareholder and director meetings
- lodging and filing documents with ACRA
- acting as a liaison with the Stock Exchange and ensuring compliance with requirements (announcements, disclosure etc.)
- arranging for allotment and issue of shares and handling transfer and transmission of shares
- providing administrative assistance in the preparation and presentation of annual returns
- acting as advisor to directors, other officers and members
- acting as intermediary between directors and officers of the company
- responsible for custody and use of common seal of the company and legal documents.
Memorandum and Articles of Association
Singapore Company Incorporation law provides a mechanism by which participants can agree upon the basis on which various things connected with the ongoing operation of the company will be carried out. This is done through the company’s constitutional documents – Memorandum and Articles of Association.
Please note that as of 3 Jan 2016, the Articles of Association and the Memorandum will be merged into one single document to be known as the ‘Constitution’. Refer to this article for more information.
Memorandum and Articles of Association (MAA) is a key document of the Singapore company incorporation process. It sets out the key characteristics of the entity that has been incorporated. The Articles of Association set out how the company is internally regulated. All companies must have a set of Articles of Association. Companies are generally free to design their own or may choose to adopt by default, the set of articles provided for in the Fourth Schedule of the Companies Act, referred to as Table A. The Memorandum and Articles of Association are meant to complement each other. Where there is a conflict, provisions in the Memorandum will prevail over those in the Articles.
Content of Memorandum of Association
The memorandum defines the company. A company’s Memorandum of Association must be dated and should at least contain the following:
- name of the company
- details about the company’s share capital
- full names, addresses and occupations of the subscribers to the memorandum and
- a statement indicating the subscribers desire to form the company and their agreement to take up shares in it
Content of Articles of Association
The Articles of Association generally contains provisions that regulate the internal management of the company. Companies are generally free to decide on the content of their articles. Articles normally deal with matters that relate to:
- the issue of share capital and the variation of rights attached to shares
- liens and calls on shares, as well as, transmission and forfeiture of shares
- procedures for general meetings of the company and notices relating to the same
Legal effect of Memorandum and Articles of Association
Memorandum and Articles of Association is considered as a statutory contract between a company and its members, and among the members themselves. It binds even new members entering the company after incorporation of the company. Non-compliance with the Articles is amount to procedural irregularity. If a provision of a company’s Memorandum or Articles of Association is not observed then:
- in case of non-compliance by a company, a member may be able to obtain a declaration or injunction requiring the company to comply
- in case of non-compliance by a member, another member of the company may be able to obtain declaratory or injunctory relief or damages.
Shares represent ownership in a company. When an individual buys shares in a company (either at the time of company incorporation or subsequently), he/she becomes one of the owners of the business. This entitles the individual to a share of the distributed profits of the company, known as dividends.
A share in a limited company, is a claim against the company to which the rights set out in the Companies Act and the company’s Memorandum and Articles of Association attach. Generally those rights will be:
- Distribution Rights (i.e. rights to receive dividends during the company’s life, and, depending on the terms of issue of the particular share, rights to repayment of the principal and to share any surplus assets of the company on a winding up) and
- Control Rights (i.e. rights to exercise some control over the management of the company’s affairs, generally taking the form of a right to vote on particular decisions affecting the company)
The company’s share capital is the amount of money or assets contributed to the company, by its members when they subscribe for shares in the company. In subscribing for a share, a person who wishes to become a member takes some of their own money or assets and contributes that amount to the company. The amount contributed becomes the property of the company, and the contributor is issued with shares in the company, which may be ordinary shares or shares with particular rights attached. Share capital is a principal source of finance for private limited companies.
The minimum share capital requirement for Singapore company incorporation is $1. The concept of authorised capital has been abolished in Singapore.
In summary, a private limited company incorporated in Singapore is a legal entity separate from that of its officers, with its own profits, losses, assets and liabilities. Ownership of a private limited company is established through the division of shares. The limited liability aspect of a Singapore company protects its directors and owners from the financial liability should the company encounter problems. Not surprisingly, most entrepreneurs who are interested in Singapore company incorporation choose to setup a private limited company.