There are a lot of factors needed to be considered when it comes to choosing a business structure as there are various types of it and each has its own advantages and disadvantages. There are five different types of business entities in Singapore which are:
1) Sole Proprietorship
2) Partnership
3) Limited Partnership
4) Limited Liability Partnership
5) Company
This guide will cater an overview of the numerous types of business entities in Singapore and the differences among them.
1) Sole Proprietorship
A Sole Proprietorship, also known as a Sole Trader, is a business owned by one person.
Requirements:
He/She has to be either:
- a Singapore Citizen
- Singapore Permanent Resident
- EntrePass Holder,
- age 18 and above and
- is not an undischarged bankrupt.
-
If a foreigner wishes to set up a business, he/she must designate a local representative.
The local representative must be:
- A natural person
- At least 18 years old
- Of full legal capacity
- Ordinarily resident in Singapore (i.e. has a Singapore residential address)
Closing a sole proprietorship
A sole proprietorship business will cease when the proprietor passes away or wishes to end the business. The Business Registration Act requires any person registered under it who has ceased to carry on business to notify the Registrar of this. Failing to do so is an offence and may result in the imposition of a fine.
If the sole-proprietorship is GST registered, the business owner has to apply for cancellation of GST registration with IRAS first.
Things to note
Sole proprietorship is ideal for those who are planning to start a one-person business and don’t expect the business to grow beyond yourself. It is the easiest and simplest to manage, yet the riskiest compared to the other business entities. Otherwise, one should consider this as a serious drawback and it is not recommended to inspiring entrepreneurs.
Profits are taxed at personal income tax rates ranges from 0% to 22%.
It is not a separate legal entity from the business owner and as such, the business owner is personally liable for all the debts and losses of the sole proprietorship, and the business owner can sue or be sued in his or her own name.
2) Partnership
Business partnerships are formed by the agreement between 2 or more individuals (maximum 20) to carry on a business as co-owners.
Requirements
They has to be either:
- a Singapore Citizen
- Singapore Permanent Resident
- EntrePass Holder
- age 18 and above and
- is not an undischarged bankrupt
A local manager has to be appointed and is at least 18 years old and is not an undischarged bankrupt.
Closing a partnership
A partnership business will cease when one of the partners dies or when one of the partners wishes to terminate the business with the agreement of the other partners.
If the partnership is GST registered, the partners has to apply for cancellation of GST registration with IRAS first.
Tax Rates
Likewise, the tax rate imposed will be that of the partner, example; if the partner is an individual, the personal income tax rates will apply, if the partner is a company, corporate tax rates would apply. Personal tax rate ranges from 0% to 22%. The partnership income tax is paid by the partnership, but the profits and losses are divided among the partners, and paid by the partners, based on their agreement.
The risk of a partnership are similar to the Sole Proprietorship, thus it is not recommended for high-risk businesses and businesses with enthusiastic growth plans.
A partnership does not have its own separate legal identity from the partners. Therefore, unless otherwise agreed, the partnership will come to an end each time a partner leaves.
3) Limited Liability Partnership
Limited Liability Partnership is the most recent and most advanced business incorporation structure, as it combines the features of both partnerships and companies. It is a separate legal entity from their owners, which means that owners are not responsible for any debts or losses the business incurs.
Requirements
LLP have to have at least two partners who can be individuals (at least 18 years old) or body corporate (company or LLP) .
Every LLP must have at least one manager. He/She has to be who is an ordinary resident in Singapore and age 18 years and above.
Closing a LLP
An LLP will continue to exist until it is dissolved. Dissolution usually occurs after a process called “winding-up” has been completed.
Winding up begins after dissolution, where all partnership affairs will be settled. This includes the completion of unfinished transactions, payments to creditors, liquidation of assets and the distribution of proceeds to various partners.
Then will the partnership be terminated when all the partnership matters have been fully wrapped up.
Things to note
An LLP is capable of:
-
- Suing and being sued in its name;
- Acquiring and holding property in its name;
- Having a common seal in its name and
- Doing such other acts and things in its name, as bodies corporate may lawfully do and suffer.
The key features of a limited liability partnership are as follows:
Limitation of liabilities
The partners of the LLP will not be held personally liable for any business debts incurred by the LLP. A partner may, however, be held personally liable for claims from losses resulting from his own wrongful act or omission, but will not be held personally liable for such wrongful acts or omissions of any other partner of the LLP.
Declaration of solvency
LLP must submit to the Registrar an annual declaration of solvency or insolvency (i.e. being able or unable to pay its debts respectively) which will be made available to the public.
LLP gives owners the flexibility of operating as a partnership while having a separate legal identity like a private limited company. It is mainly 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, and is not suited for businesses that carry a trade. The owners must enter into detailed agreements about how the profits and management responsibilities are divided.
Perpetual Succession
The LLP has perpetual succession, which means that any change in the partners of a LLP will not affect its existence, rights or liabilities.
3) Company
A company is a separate legal entity and can incur debt, sue and be sued. A company’s business line depends on its structure, which can range from a partnership to a proprietorship, or even a corporation.
Companies may be either be:
- public; having 50 members or less, or
- private; can have more than 50 members.
Requirements
Likewise, a company must designate a local director that is at least 18 years old and is an undischarged bankrupt.
Things to note:
A private limited company is the most common form of the company chosen by entrepreneurs and investors, mainly due to the tax incentives that can be applied for.
A company is considered as a separate legal entity which means that the members of the company will not be held personally liable for the debts or losses of the company.
Unlike all the other business entities, a private limited company can qualify for tax exemption schemes and is taxed at the effective corporate tax rate of 17%.
Perpetual Succession
Members in a company may come and go but the company will still remain and proceed to continue its business forever or until it is closed down. This means that a company has the characteristics of perpetual succession, thus giving the company a safer and a more stable area for investors to invest their money on and enhance the chances of their investment being a success.
Closing a Company
A company can cease to exist in one of the two options, either by;
- winding up or,
- striking off
Comparison
Sole Proprietorship
Partnership
Limited Liability Partnership
Company
- It is easy to set up and the cost is minimal.
- Owner has full control of the business.
- All the profits generated by the business will belong to the sole-proprietor.
- Profits are taxed at personal income tax rates
- No separate legal entity.
- Has unlimited liability.
- It can sue or be sued in the owner’s name.
- No perpetual succession.
- No corporate tax incentives and benefits.
- It is easy to set up and the cost is minimal.
- Easier administration and management of the business.
- Reduced compliance obligations.
- No separate legal entity.
- Has unlimited liability.
- Flexibility of succession is variable.
-
- It is easy to set up and the cost is minimal.
- Easier administration and management of the business.
- Reduced compliance obligations.
- Separate legal entity.
- Perpetual succession.
- Flexibility of succession is variable.
- Difficult to transfer ownership of business.
- Higher registration cost and its costly to maintain due to more compliance obligations.
- Limited liability.
- Excellent tax benefits.
- Perpetual Succession.
- Separate legal entity.
- Annual General Meeting has to be conducted.
- Annual Return filing with the Authority.
- Estimated Chargeable Income and Corporate Tax to be filed.