Different types of business entity

What are the advantages & disadvantages of the different business entity in Singapore?

The following are the common business structure in Singapore

      • Sole Proprietorships
      • Partnerships – LP, LLP
      • Private Limited Company
      • Public Company

 
 
When setting up and registering a business in Singapore, there are various business entities and structures that one has to consider. Such a decision should be made based on the needs of the individual(s) and the business. In the following, the article will list the different business entities in Singapore as well as discuss their respective advantages and disadvantages, which will be useful to budding entrepreneurs and even existing business owners who are looking to convert to another business entity.

 

      1. Sole Proprietorship

 
A sole proprietorship simply refers to a business that is owned by one person. Common examples are: renovation contractors, provision shops, free-lance consultants, Private hire driver etc.

 

Advantages:

          • Simple set up procedure
          • Lower registration & start-up cost
          • Easier administration and management of the business
          • Flexibility – able to make all decision concerning the business
          • Confidentiality – no disclosure of accounts
          • Reduced compliance obligations – general meetings, directors, company secretary, etc., are not required

 
 

Disadvantages:

            • No separate legal personality from owner – owner will be held personally for all debts and obligations of the business, creditors may sue directly to owners’ assets
            • Profits are taxed are based on the owner’s income level – this means that as the owner’s income level increases, taxes increase as well due to Singapore’s progressive tax system
            • Business ceases to exist when the sole proprietor dies
            • More challenging to obtain funding during the start-up years of the business
            • Limited expansion opportunity

 

             

            1. Partnership

 
A partnership is where a business is carried out by two or more associated people. Partnerships are similar to sole proprietorships, thus sharing many overlapping pros and cons.

 

Advantages:

              • Faster and easier to set up
              • Lower registration cost
              • Easier administration and management of the business
              • Reduced compliance obligations – general meetings, directors, company secretary, etc., are not required

 
 

Disadvantages:

                • Flexibility of succession is variable – a partnership exists only as long as partners remain in agreement
                • Profits are taxed are based on the owner’s income level – this means that as the owner’s income level increases, taxes increase as well due to Singapore’s progressive tax system
                • Partnerships are not considered as a separate legal entity from their owners, which means that owners are wholly liable for any debts or losses that their businesses may accumulate
                • Every partner would be liable for the wrongful acts committed by any partner(s) done in the ordinary course of business – Section 8 Partnership Act
                • More challenging to obtain funding during the start-up years of the business

 

                1. Limited Partnership

 
 
A limited partnership (LP) refers to a partnership between two or more people, wherein there is at least one general partner with liability for all debts and obligations incurred by the business and also at least one limited partner. This business structure seeks to distinguish between active and sleeping partners within the partnership. It provide limited liability for some partners who choose to forego their rights to be involved in the management of the business. The maximum number of partners are 20.
 

Advantages:

                  • Faster and easier to set up
                  • Lower registration cost
                  • Easier administration and management of the business
                  • Fewer compliance obligations – general meetings, directors, company secretary, etc., are not required
                  • Separate the liability and obligation between active and sleeping partners
                  • Limited partnership will survive the departure of all its general partners – sole remaining partners will be treated as general partner to protect the interests of the creditors.

 
 

Disadvantages:

                    • Flexibility of succession is variable – a partnership exists only as long as partners remain in agreement
                    • Profits are taxed are based on the owner’s income level – this means that as the owner’s income level increases, taxes increase as well due to Singapore’s progressive tax system
                    • Partnerships are not considered as a separate legal entity from their owners, which means that owners are wholly liable for any debts or losses that their businesses may accumulate
                    • Specifically, general partners have unlimited liability, and are personally responsible for debts and losses of the LP
                    • On the other hand, limited partners have limited liability, and are not personally responsible for debts and losses beyond their agreed contribution
                    • More challenging to obtain funding during the start-up years of the business

 

                     

                    1. Limited Liability Partnership

 
In a limited liability partnership (LLP), the individual partners generally have limited liability. The relationship between the partners is governed by limited liability partnership agreement and first schedule, LLPA. Common examples are Lawyers, Accountants etc.

 

Advantages:

                      • Lower registration cost and easy to set up
                      • Reduced compliance obligations – general meetings, directors, company secretary, etc., are not required
                        • Only an annual declaration of solvency or insolvency is required
                      • LLPs are considered as a separate legal entity from their owners, which means that owners are not responsible for any debts or losses the business incurs
                      • Easier than partnerships and sole proprietorships to secure funding for the start-up years of the business
                      • Succession of LLPs are perpetual, until they are struck off or wound up

 

Disadvantages:

                        • Profits are taxed are based on the owner’s income level – this means that as the owner’s income level increases, taxes increase as well due to Singapore’s progressive tax system
                        • Not eligible for government funded micro loans

 

                        1. Private Limited Company

 
A private limited company or commonly known as PTE LTD is a limited liability company and its shares are held by less than 50 people and are not available to the public.

 

Advantages:

                          • Separate legal entity from members and directors, which means that members and directors are not personally liable for the losses and debts incurred
                          • Easier to obtain funding during start-up years and also eligible for government funded micro loans offered by local banks
                          • Succession of Company is perpetual, until they are struck off or wound up
                          • Profits of the companies are taxed at a corporate tax rate, which is a flat rate of 17%
                          • Tax Exemption for the first 3 year of assessment capped at $100,000 chargeable income.

 
 

Disadvantages:

                            • Higher registration cost and also costly to maintain
                            • More compliance obligations (e.g., a company secretary has to be appointed within 6 months of the company’s incorporation)
                              • Annual returns and Annual General Meeting have to be filed
                              • ECI and Corporate Tax to be filed
                            • Limitation in Fund Raising compare to Public Company

 
 

                            1. Public Company

 
A public company is a limited liability company with at least 50 shareholders and its shares can be offered to the public. It can

 

Advantages:

                              • It can raise capital by offering shares or debentures to the public.
                              • Can be listed on stock exchange (SGX)

 
 

Disadvantages:

                                • There is a lack of confidentiality because public companies have to disclose financial information to the public
                                • Stringent regulation, such as Company Secretary’s qualifications and director’s age
                                • Listed Public companies also have to file reports with Singapore exchange regularly and comply with statutory requirements and exchange guidelines

 
 

As a whole, each business entity comes with their respective pros and cons, which may be suitable for different business with different needs and requirements. It is usually the case that entrepreneurs looking to set up a business usually opt for private limited companies because such business entities benefit more from government loans, and also stand a better chance of obtaining additional loans as compared to other business entities.

 

While private limited companies appeal to more potential business owners, uncertainties surrounding statutory requirements and administrative work may deter them from choosing this entity. However, with regular bookkeeping and wise management of time and resources, the requirements of private limited companies will not be difficult to meet. Companies may also look to external bookkeeping services so that they can focus on developing the business without worrying about meeting their compliance obligations.
 

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