DECIDING ON THE IDEAL BUSINESS VEHICLE

One of the key decisions you need to make when starting up a business is to consider the type of business vehicle to conduct your new business.

Your decision will influence the ease of business formation and exit, business ownership transfer, how much taxes you need to pay, the extent of personal liability you are potentially exposed to, the set of rules applicable to your business, the amount of administration and paperwork you need to perform, the general public perception of your business and the ability to obtain loans and borrowings.

We will discuss and compare the benefits and shortcomings of the 4 most common forms of business structures used to conduct business in Singapore.

Remember: Choosing the correct business entity set up is a critical decision in your business startup plan. It would be wise to carefully think through which mode of business vehicle best suit your risk appetite, type of business and future plans.

 

PRIVATE LIMITED COMPANY

Doing business under a Private Limited Company is the most popular choice for many entrepreneurs because of its protection mechanism granted to owners of the company. In fact, there are more companies incorporated in each of the last 5 years compared to the combined total of sole proprietorships and partnerships created annually.

The financial benefits associated with operating under a company relates mainly to taking advantage of the numerous tax benefit schemes designed to boost the entrepreneurial environment in Singapore. The ease and cost of set up is comparably slightly higher compared to other forms of business vehicles although actual costs are not prohibitive at all compared to set up costs required in other countries. This form of set up requires the highest form of compliance management comparatively, which most business owners will typically receive help from in-house or third party company secretaries and accountants.

A Private Limited Company requires at least one local director and one shareholder, where the director can also be the shareholder.

You may consider a Private Limited Company setup if any of the following factors are applicable to you:

• Your business plan entails a sustainable growth phase in the business cycle. The common consensus is that the bigger the business, the higher the commercial risks involved.
• The industry you are planning to do business in, contains inherent industry risks common to all the players in the market (example: import/export business).
• Your per-deal business margin is considerable high which will affect your personal income tax liability significantly when each deal is completed.
• Your customer and suppliers prefer to do business with you only if you are operating under a company name.
• Your business plan entails the sourcing of future investors to secure capital funding for future expansion phases.

Often, we make reference to a Private Limited Company in our write-ups for simplicity purpose. However, the company setup can be in 4 different forms with differing requirements and restrictions. The most common forms are the Exempt Private Limited Company and the Private Limited Company.

• Exempt Private Limited Company (Most common form of company startup)
  An exempt Private Limited Company is one that is incorporated in Singapore that has 20 or less individual shareholders. The company needs to appoint a company secretary to complete the company officer set-up. Audit of accounts is not mandatory for this form of company.
• Private Limited Company
  A company incorporated in Singapore that has less than 50 shareholders and shareholders can be either individuals or corporate entities (LLP or corporations). The company needs to appoint a company secretary and an auditor to complete the company officer set-up.
• Public Company Limited by Guarantee
  A public company limited by guarantee is one which carries out non-profit making activities that have some basis of national or public interest, such as for promoting art, or charity etc. Typically, the setup process will require an approval in principal from the relevant government agency depending on the type of non-profit making activities you intend to carry out, before the actual incorporation. The Minister may approve the registration of the company without the addition of the word “Limited” or “Berhad” to the name of this type of Company.
• Public Company Limited by Shares
  A public company limited by shares is a company incorporated in Singapore in which the number of shareholders can be more than 50. The company can raise capital by offering shares/debentures to the general public. A public company must register a prospectus with the Monetary Authority of Singapore (“MAS”) before making any public offer of shares and debentures. This form of Company is the most regulated and complex form of Company set-up and requires significant investment on corporate and compliance infrastructure to meet with the existing regulations mandated by the Authorities.

 

LIMITED LIABILITY PARTNERSHIP

The Limited Liability Partnership (“LLP”) is a hybrid form of business mode that crosses a Private Limited Company and a General Partnership. Its existence is to encourage entrepreneurs to take a step into owning a business with some benefits of a Company, but with the ease of running a partnership.

This form of business vehicle has proven to be a useful mode for many professions, including audit firms, law firms and architect firms as it caters to the need to cover liability exposure for partners and lays the responsibilities on the shoulder of the active partner, in line with established professional and compliance regulations associated with their professional fields.

However, for most of the other trades and vocations, the benefits lauded are in essence, given on a reduced basis. For instance, although a LLP can own properties, can sue or be sued in its firm’s name (similar to a company), the taxes are eventually still computed based on personal tax rates and the “offending” partner is still personally liable for debts or losses incurred by himself(similar to partnerships).

We concur that it is definitely an easier mode compared to a Company, however our take on LLP is that it is a middle of the road approach for entrepreneurs and tangible benefits and flexibility associated with a successful business over the long run cannot be achieved with a LLP compared to a traditional Private Limited Company.

 

GENERAL PARTNERSHIP AND SOLE PROPRIETORSHIP

These 2 forms of business vehicles are the simplest mode to do business in Singapore. The compliance requirements are the lowest here (where only annual renewals required to be done every year). The flip side is that these businesses are also known as Unlimited companies, which means that the liability exposure to owner(s) are uncapped.

A sole proprietorship only involves a singular owner whereas a general partnership involves 2 to 20 partners.

The simplicity of these business structure means that they are most suited to business owners if:

• The business is small-scale in nature over the long run and involves minimal risks.
• The industry you are planning to do business in, contains low industry risks common to all the players in the market.
• Your per-deal business margin is generally low which will not affect your personal income tax liability significantly when each deal is completed.
• Your business is entirely planned to be a passive business model and capital funding will be sustained entirely by the owners.

You may wish to compare the forms of business entities HERE.

Find out more in details about The Private Limited Exempt Company;
or if you are very sure that you would like to set up a Private Limited Company for your business, find out about the registration process HERE;
or go directly to our Company Registration Service to select a package that best suits your needs.