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
3) Limited Partnership
4) Limited Liability Partnership
6) Variable Capital Company
This guide will cater an overview of the numerous types of business entities in Singapore and the differences among them.
A Sole Proprietorship, also known as a Sole Trader, is a business owned by one person only. He/She has to be a Singapore Citizen / Singapore Permanent Resident / Employment Pass / Dependant Pass Holder / Foreigner, age 18 and above and is not an undischarged bankrupt. However, if a foreigner wishes to set up a business, he/she must designate a local manager. It is the easiest and simplest to manage, yet the riskiest compared to the other business entities. As the sole proprietor, all the profits will solely be his/hers and he/her will personally own all assets and liabilities. However, unlike companies, there is no protection of personal assets from business risks and liabilities. This means that, if the business is unable to pay all its liabilities, the creditors to whom the business owes money to, can come after the owner’s personal assets. He/She can be sued personally and has unlimited liability. Thus, putting its own personal assets at risk. Additionally, 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. Otherwise, one should consider this as a serious drawback and it is not recommended to inspiring entrepreneurs. A sole proprietorship business will cease when the proprietor either dies 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.
Business partnerships are formed by the agreement between 2 or more individuals (maximum 20) to carry on a business as co-owners. They have to be a Singapore Citizen / Singapore Permanent Resident / Employment Pass / Dependent Pass Holder / Foreigner, age 18 and above. A local manager has to be appointed and is at least 18 years old and is not an undischarged bankrupt. Similar to Sole Proprietorship, Partnership does not constitute a separate legal entity. 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. Partners are personally liable for the debts and liabilities of the business and each partner can be held responsible for the actions of another partner. 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. Nonetheless, the risks are similar to the Sole Proprietorship, thus it is not recommended for high-risk businesses and businesses with enthusiastic growth plans. 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.
Limited Partnership is a business partnership where at least one partner is a general partner and at least one partner is a limited partner. Similarly, a local manager must be designated if all General Partners reside outside Singapore. The general partners are the one who bears unlimited liability for the company’s debt and obligations, whereas the limited partners are limited to the amount of contributions they made and are not personally liable and also have little control over the business operations. Examples of a Limited Partnership are usually found in time-restricted projects, such as filmmaking and real estate businesses. The director, writer, and editor of a movie serves as the general partners while the companies who invest money into the movie production are the limited partners. This business will cease to exist when certain terminating events occur or through an application to court. It may also be dissolved by fraud or misrepresentation.
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. LLP have to have at least two partners, who can be individuals (at least 18 years old) or body corporate (company or LLP) and is a Singapore Citizen / Singapore Permanent Resident / Employment Pass / Dependant Pass Holder / Foreigner, age 18 and above. They must also designate a local manager that is at least 18 years old and is not an undischarged bankrupt. 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. 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.
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 public; having 50 members or less, or private; can have more than 50 members. Likewise, a company must designate a local director that is at least 18 years old and is an undischarged bankrupt. 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, as well as the fact that it is considered as a separate legal entity and is separate and distinct from its shareholders and directors. The biggest advantage of this is 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%. A company can cease to exist in one of the two ways; compulsory winding up and voluntary winding up. A compulsory winding up is when it is unable to pay its debts, whereas a voluntary winding up can be either; members’ voluntary winding up or creditors’ winding up.
Variable Capital Companies (VCC)
The Variable Capital Company (VCC) is a new corporate structure for investment funds constituted under the Variable Capital Companies Act which took effect on 14 Jan 2020. The VCC will complement the existing suite of investment fund structures available in Singapore.