The form of ownership is a crucial business element that doesn’t receive enough emphasis. The type of business structure may influence your business’s longevity, growth, and success. Therefore, in-depth and lengthy consideration needs to be given to the matter before making a decision.
This article seeks to break down the various types of business structures you can choose from and the significant factors you need to consider.
Types of business structures in Singapore
There are several business structures for you to choose from. In this section, we have unpacked each option.
Sole Proprietorship
In this form of business structure, the business is wholly owned by an individual, company, or limited liability partnership. The sole owner is the business’s voice and enjoys control and entire profits accruable from its operations.
A sole proprietorship doesn’t offer its owner a separate legal entity from the business. The owner has unlimited liability. They can be sued for the debts of the losses of the company.
From the factors described above, sole proprietorships are ideal for small businesses with low risk and small to medium-scaled operations.
To be eligible to set up a sole proprietorship in Singapore, one must be at least 18 years old. In addition, you must either be a Singapore Citizen, Singapore Permanent Resident, or an eligible FIN holder.
Foreigners can register and open sole proprietorships in Singapore. However, there are some requirements:
- There must be at least one resident authorized representative of the business. The representative can be a Singapore citizen, permanent resident, or the holder of an Employment Pass/ EntrePass.
- Those who wish to be physically present in Singapore must apply for approval from the Ministry of Manpower.
The requirements detailed above also apply to foreigners desiring to open a partnership in Singapore (if all the partners reside outside of Singapore).
General Partnership
A general partnership is a business structure whereby two parties or more own, manage and operate a business. The agreement between the parties will determine the profit-sharing ratio and the risk attached.
According to the Accounting and Corporate Regulatory Authority (ACRA) provisions, a partnership business must have a minimum of 2 partners and a maximum of 20. An individual, company, or a limited liability partnership qualifies as a partner.
The provision stated above, however, does not apply to professional partnerships. ACRA provides that professional associations are allowed to have 20 partners. Professionals such as engineers, lawyers, and architects can take advantage of this when setting up their skilled service trades.
Partnerships are ideal for a professional consultancy due to the level of risk associated with running the service trade.
As for the legal status, a partnership is not perceived as a separate legal entity from the owners. Therefore, the owners can be sued for the losses and other liabilities of the partnership.
The eligibility requirements stated above for a sole proprietorship also apply to those looking to open a partnership in Singapore.
Limited Partnership
It is a type of partnership that consists of at least one general partner and one limited partner. The general partner is liable for all debts and obligations of the business and the limited partner. On the other hand, the limited partner is only responsible for debts and responsibilities based on his company’s agreed contribution.
Regarding its legal status, the limited partnership has the same regulations as that of a partnership. Therefore, it is not considered a separate entity from its partners.
It is ideal for a form of partnership in a business where one of the partners cannot cover the unlimited risk to the company.
The general and limited partners in the business can either be Singapore residents, permanent residents, or foreigners. In the case whereby all General partners reside outside the country, the company must select a local manager.
Incorporation
Incorporation entails the process of creating a company or corporate entity. The idea of incorporation is to create a legal entity, interpreted separately from the owners’ assets and income.
The various incorporation options in Singapore include:
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a business structure that allows its owners to operate as a partnership but has a separate legal entity like a private limited company. This means that the partners have limited liability, can sue or be sued in the business’s name, and can own assets in the name of the LLP.
There should be two or more partners with no maximum limit to form an LLP. They can be individuals who are at least 18 years old or a company or LLP. The partners are taxed as per the personal income tax rates if individuals and corporate tax rate if a corporation. Also, if the partners are not residing in Singapore, the LLP has to appoint at least one manager who is a resident of Singapore.
Unlike a company, an LLP is not bound by any statutory requirements like holding an annual general meeting, appointing a company secretary, or filing their annual returns. Instead, they just need to make a yearly declaration of solvency or insolvency to state whether the LLP can or cannot pay its debts during the ordinary course of business.
Private Limited Company
This entity allows for a maximum of 50 shareholders and must be locally incorporated. It is the most popular form of incorporation due to its flexibility. Many businesses can quickly meet the requirements of a private limited company.
There is a form of the private limited company known as Exempt Private Limited Company that allows up to 20 shareholders.
However, the setup costs of a private company are on the higher side. The business also incurs administrative costs. In addition, within the first six months of incorporation, the business must appoint a company secretary and an auditor to maintain the books and file annual returns.
A foreign company or Singapore Branch
A company that has been incorporated outside of Singapore can have a branch within the country. It will be considered an extension of the parent company and not a separate legal entity.
The form of incorporation is ideal for foreign companies who wish to try out the business waters in Singapore before setting up the business in full.
Factors to take into account while selecting the business structure
The Nature of the Business
A sole-proprietorship is recommended if you want to start a small trading business or a professional service business. However, partnerships are more suited for companies looking to start a business on a grander scale, e.g., manufacturing, finance, and insurance.
The Scale of Operations
The scale of operations determines the needs and requirements of the business. Thus, partnerships are advantageous for large-scale operations.
The Initial Capital Outlay
Of the factors of production, capital is often the hardest to secure. Therefore, businesses that require heavy investment, like manufacturing, should be organized as partnerships to increase the financial muscle.
The Level of Risk
The nature of the business and the scale of operations determine the business’s level of risk. Hence, it is advised for multiple partners to spread the risk in large companies.
Ownership vs. Management
Liability is a considerable element for any entrepreneur. Therefore, entrepreneurs prefer setting up limited partnerships or corporations, separating ownership from the management.
Profit-sharing Ratio
The goal of every business is to provide goods or services and maximize profits for its owners. Potential business owners looking to take home all the business profits should consider sole proprietorship.
Government Regulations
There are businesses and sectors of the economy that are governed by laws and statutes. These provisions of law determine the setup of the enterprise.
Conclusion
One should select the business structure on a case-by-case basis. Each entrepreneur is unique in their needs for the business, goals, and liabilities. There is also the issue of government regulation to consider, as it may explicitly and unequivocally determine your business structure.
Do you need more information on setting up your business in Singapore? Then, get in touch with us today and chat with one of our experienced and rated experts.
