While forming a company, the most pertinent issue that you need to decide is which legal form to choose for your company as it can have crucial implications on your personal risk in the business as well as the prospects of your business for giving back financial returns.
You would like to consider vital issues like ease of formation, asset liability, business asset appreciation, and tax obligations, before you decide on your business form. Though you will certainly seek legal advice from your lawyer, it is advisable that you get to know the basics of all the legal forms before you meet your lawyer.
In Singapore, businesses mainly operate as companies, sole proprietorships and partnerships.
A company has to be registered under the Singapore Companies Act and a separate legal entity from its members. Though you can incorporate a company with unlimited liability, almost all companies in Singapore are incorporated as limited liability companies due to its advantages over other forms of company formation.
Limited Liability Company (LLC)
The limited-liability company (LLC) is a relatively new form of business organization. The chief feature of a limited liability company is that the liabilities of the owners are limited to the assets in the company, and their personal assets are protected from business liabilities.
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. A private limited company’s name in Singapore normally ends with Private Limited, or Pte Ltd.
A private limited company has various advantages over the other two conventional types of business, which makes it the most flexible and the most favoured type of Singapore business entity. A private limited company has its own legal identity, which is separate from its shareholders and its directors. It can acquire assets, go into debt, enter into contracts, and sue, or be sued. In an LLC, members are not individually liable for debts or other obligations of the company. The ease of transfer of shares or changes in shareholders ensures that the companys continuation is not dependant on the continued membership of its members.
You can raise capital for expansion or other purposes, by bringing in new shareholders or issuing more shares to existing shareholders and your also benefit from the trustworthy image it commands compared to sole proprietorship or a partnership firm. Moreover, the ownership of a company may be transferred, either wholly or partially, without disrupting operations or the need for complex legal documentation. Most importantly, you benefit greatly from tax incentives as 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, and furthermore, there is no capital gains tax.
However, an LLC also suffers from some disadvantages. Incorporation and sustenance is more complex and you need to follow certain compliance requirements. Also, the closure of company is comparatively more complex.
Public Limited Company
After a private company reaches a certain growth level to become a well established medium-to-large enterprise, the shareholders might decide to take the company public. A public company’s name in Singapore ends with Limited or Ltd.
Public companies are subject to significantly more stringent rules and regulations since they have the power to raise funds from the public.
In a sole proprietorship, the business can only be owned by one person and the owner personally owns all assets and liabilities of the business. It is the most uncomplicated form of business entity; and it is also comparatively more economical and easier to start and terminate a sole proprietorship company. You are in complete control of all the business affairs including the decision making and you benefit from all income generated by the business without sharing the profit with others. You are also free from the obligation of filing returns annually and only need to renew your membership every year.
However, the disadvantages of a sole proprietorship business far outweigh its advantages. Sole proprietorship is not a separate incorporated entity and therefore you and your business are rendered as the same legal entity. As a sole proprietor, you and your business are considered a single entity for the payment of income tax, and the income of your business is taxed to you. Moreover, as the sole proprietor of a business, you have unlimited liability, which means that if your business cannot 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.
You also do not gain from corporate tax benefits or incentives as the taxes are determined at your personal income tax rate. Capital is limited to your personal finances and business profits. Additionally, business expansion is limited and difficult due to the low public perception of such a business. Also, the business lives and dies with you and you can transfer the business only by the sale of business assets.
A partnership is an alliance of two or more persons, who are the co-owners of a business and its profits. Partnerships in Singapore can be of three types:
A general partnership is not a very economically feasible way to structure a business in Singapore because like a sole proprietorship, it is not a separate entity, which means you have unlimited liability. Another significant risk intrinsic in a partnership arrangement is that each partner is personally responsible for the debts and liabilities of the business and also responsible for the actions of another partner.
In a limited partnership, entails the concept of having limited partners in addition to a general partner. The liabilities of limited partners are limited to their investment in the partnership (capital or property), though such partners cannot participate in the management of the business in a limited partnership. Like the general partnership, even a limited partnership in Singapore is not a very favoured popular form of business structure.
Limited Liability Partnership (LLP)
LLP was introduced in Singapore in 2005, through enactment of Limited Liability Partnership Act. It gives the 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. A LLP must have at least two partners at all times.
An LLP has a separate legal identity and can own property, enter into contracts, sue or be sued in its own name. Most importantly, the partners of the LLP will not be held personally responsible for any business debts incurred by the LLP for any laxity or mistakes made by another partner, and is only responsible for his own omissions.
Any changes in the LLP (e.g. resignation or death of partners) do not affect its existence, rights or liabilities, and compliance requirements are also simpler than a private limited company.
However, LLPs lack the ease of ownership transfer and investment that a company structure provides. It also does not gain from corporate tax benefits.
An LLP is primarily suited to the needs of service professionals (accountants, law firms, architects, etc.) who desire to set up a joint practice in a common field. The owners must get into very detailed agreements about how the profits and management responsibilities are to be shared.
Choosing the Right Legal Form
To put things in a nutshell, both sole proprietorship and an LLP are suited only to certain types of businesses.
Sole proprietorship is feasible only for Singapore nationals who want to register a small business and the nature of their products/service do not have liability issues.
On the other hand, an LLP is suitable if you are in a service-related business which involves selling your services by way of the profession you hold like an accountant, lawyer, architect, etc. and you have one or more additional partners in a similar profession with whom you would like to partner your business with.
For all other cases, incorporating a private limited company in Singapore would be the best choice.