Types of Business Entities in Singapore
This article provides a gist of different types of companies and their distinctive features and benefits.
What is a Sole Proprietorship?
A sole proprietorship is ideal for a small businesses. It is a type of business entity where an individual person owns and carries on a business. A sole proprietor is legally responsible for all the contracts relating to the business, owns its assets and is personally liable for all its debts. Hence, the sole proprietor has unlimited liability and can be sued in their name, or the business name. A sole proprietor is not considered as a separate legal entity
How do I pay taxes?
The profits of a sole proprietorship are taxed based on the personal income tax rate.
Eligibility to be a Sole Proprietor?
A sole proprietor:
- must be at least 18 years of age,
- ordinarily resident in Singapore;
- must not be an undischarged bankrupt.
Hence, a Singaporean, Permanent Resident or foreigner living in Singapore with a valid work pass or in most cases Dependent Pass holder can register such entity.
What is Partnership?
Partnership is largely similar to sole proprietorship. The structure, liability and taxes are very much same as Sole proprietorship. The significant difference is that a partnership can comprise of 2 or more persons subject to a maximum of twenty individuals. Once the partnership exceeds 20 individuals, it will be required to be incorporated as a company under the Companies Act.
How to pay taxes?
The profits of a partnership will be taxed in the following manner:
All partners individuals : personal income tax rates would apply
Partner is a corporation : corporate tax rates would apply.
Eligibility to be a Partner?
In order to register a Partnership, a local manager must be appointed who is
- at least 18 years of age,
- ordinarily resident in Singapore
- must not be an undischarged bankrupt.
Types of Partnership in Singapore:
General Partnership: In a general partnership partners are personally liable for the debts and liabilities of the business, just like a sole proprietorship and each partner can be held responsible for the actions of another partner.
Limited Partnership: This business organization comprises both “general partners” as well as “limited partners”. The liabilities of limited partners are limited to their investment in the partnership (capital or property).
Limited Liability Partnership: A Limited Liability Partnership (“LLP”) combines the features of partnerships and companies. The main similarity is that partners of an LLP are taxed at their personal income tax rate. As the name implies, in a LLP, each individual partner’s liability is limited.
A LLP is primarily meant for carrying a profession (e.g. accountants, law firms, architects, etc.) where two or more professionals would like to build a joint practice in a common field.
What is a Company?
There are two types of companies, Private company and Public company. A private company is owned by several shareholders and is not open for public to apply for its shares. There is also a restriction on the transfer of shares of a private company. However, shares of a public company are openly available for subscription.
Public Company- Meant for large business
A public limited company may offer its shares to general public. A public limited company must have at least 50 shareholders and is subject to significantly more stringent rules and regulations since they have the power to raise funds from the public. Usually a public limited company is listed on a stock exchange.
Private Limited Company – The Ideal Structure
A private limited company in Singapore is a separate legal entity and shareholders are not liable for the company’s debts beyond the amount of share capital they have contributed. According to the Singapore Companies Act, any person, whether foreign or local who is above the age of 18 can register a Singapore company. A private limited company is most ideal because can qualify for tax exemption schemes and is taxed at the effective corporate rate of 0-17%, it is a separate legal entity and is distinct from its shareholders and directors. A private limited company is the most advanced and flexible type of business incorporation in Singapore.
Why private limited company is preferred more than other businesses:
- Tax Exemptions: Singapore government encourages the spirit of entrepreneurship and innovation. For newly incorporated companies that meets the qualifying condition, there is a 100% tax exemption on the first S$100,000 of chargeable income for each of its first three consecutive years. The corporate taxes are capped at 17% for profits above SGD 300,000. Furthermore, there is no capital gains tax.
- Limited Liability: The liability of company’s members is limited to the extent they have agreed to contribute to company’s debts.
- Perpetual Succession: This means that the company’s existence continues indefinitely until it is brought to an end through winding up and de-registration, despite changes in the identity of its participants.
- Ease of Raising Capital: Capital can be raised for the expansion and growth of the company by bringing in new shareholders or issuing more shares to the existing shareholders.
- 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.
Determining the right structure to incorporate in Singapore will depend on your business plans and requirements. Each type of business entity has its own advantages and disadvantages.
If you are a local and the size of the business is a small and which also does not bring along any liabilities then, Sole proprietorship or Partnership is a good option. But it is to be carefully noted that the business liabilities as the claimants can go after your personal assets.
If the purpose of registering a business is providing professional services, for example, lawyer, accountant, etc., and you also have one or more additional partners, then setting up a Limited Liability might be a most suitable business structure.
In all the other scenarios, while a private company is the most ideal business entity. Although it may come with several more statutory obligations, it is a far better option as the members liability is limited and it is easier to obtain loans from financial institutions.
Kanak is a member of the Institute of Chartered Secretaries and Administrators, Singapore and also holds a bachelor degree in Law.
Her career spans more than 6 years, with experience in law firms, in-house company secretary and in corporate service providers. She is currently a company secretary of Inctro Pte Ltd.
For any services related to registering of a business entity, accounting and taxation she can be contacted at: +65 65287193
Email: firstname.lastname@example.org / Kanak@inctro.com