So, you have an exciting business plan in your head and your next step is to sort out the legalities around incorporating a company or registering a business entity. But which legal structure do you choose?
In Singapore, you can choose to register any of the following business structure with the Accounting and Corporate Regulatory Authority (ACRA):
- Limited liability partnership (LLP)
- Limited partnership (LP)
Here are five questions to help you decide on which entity type would be most suitable for your business idea.
Qn 1: How high are the potential risks in your business?
Qn 2: Do you intend to raise capital or apply for government grants?
Qn 3: Do you expect your tax bill to be high?
Qn 4: How many owners will there be?
Qn 5: Are you willing to keep up with compliance requirements?
Question 1: How high are the potential risks in your business?
Some business structures are more suitable for high-risk businesses than others. Risk factors include:
- Services or products that may lead to claims being filed against you (e.g. F&B services, investments, health and supplements etc.)
- High transaction volume and/or high value of each transaction
- Size of your intended customer base (i.e. mass market vs. niche audience)
If you assess your business’s risk factors to be high, you may want to consider registering either a company or an LLP, because both give you limited liability such that your personal savings and assets as a shareholder are not compromised, in the event of a lawsuit.
However, note that as a director, you could still be personally liable if the court rules your actions to not be in the best interest of the business. In other words, limited liability does not pardon you fromALL responsibilities, but it does provide more protection compared to unlimited liability.
Sole-proprietors and the partners in a partnership have unlimited liability. In an LP, one partner must hold unlimited liability while the other partners can have limited liability.Takeaway: For limited liability, consider registering a company or an LLP.
Question 2: Do you intend to raise capital or apply for government grants?
Does your business plan require intensive start-up capital such that you plan to borrow loans, court investors, or apply for government grants? If yes, it is easier to obtain loans and investments if your business entity has its own “legal identity”. A legal identity means that for example, ABC Pte. Ltd. is r ecognised by law to have its own capacity to enter into agreements or contracts, incur and pay debts, sue and be sued in its name (note: not its owners), and to be held responsible for its actions.
Among the business structures available in Singapore, only companies and LLPs are deemed to have legal identities.
When it comes to government grants, such as those provided by Enterprise Singapore, some of the criteria include being a private limited company. Check the Enterprise Singapore Grant Portal to see if your business can benefit from any of the grants, before deciding which business entity to register.
Takeaway: It would be easiest to raise capital or apply for government grants if you register a company, compared to other types of business entities.
Question 3: Do you expect your tax bill to be high?
In Singapore, only companies pay corporate taxes. All other business structures – sole-proprietorships, partnerships, LLPs and LPs – will see their owners being taxed at personal income tax rates.
Personal income tax rates range from 0-22% depending on your income level, whilst corporate tax rate is a flat 17%.
Corporate tax payers are entitled to fairly generous tax exemptions and tax rebates. For instance, the Inland Revenue Authority of Singapore (IRAS) will exempt 75% of a start-up company’s first $100,000 income. They will also exempt 50% of the next $100,000 of income. From 2013 to 2019, the government has also announced corporate tax rebates ranging from 20% (capped at $10,000) to 50% (capped at $30,000) which can help to shrink your tax bills further.
Takeaway: Companies in Singapore can enjoy exclusive tax advantages which do not apply to other types of business structures.
Question 4: How many owners will there be?
If you plan to start a business on your own, you can consider registering either a sole-proprietorship or a company. However, as a sole company director, you would need to appoint someone else to be your company secretary as the law states that the sole-director and company secretary cannot be the same person.
What happens if you don’t feel comfortable appointing a family member or a friend as your company secretary?You can also hire a company secretary from a corporate service provider. O ther than lending their names, they can also provide other services such as overseeing your corporate and tax filings.
If you are planning this business with at least 1 partner, you can consider registering any of the following:
- Partnership (unlimited liability)
- Limited partnership (one person will have unlimited liability, the others can have limited liability)
- Limited liability partnership (limited liability)
- Company (limited liability)
Takeaway: The number of owners involved in your new business can help you narrow down which legal structure to choose.
Question 5: Are you willing to keep up with compliance requirements?
Given the multiple benefits of incorporating a company in Singapore, the trade-off is that owning a local company involves more statutory requirements that you have to manage every year. These include the filing of annual returns, holding of annual general meetings, separate filing of corporate taxes, updating of shares information, etc.
Compliance requirements for the other business structures are not as high. Sole-proprietorships, partnerships, and LPs only have to do yearly renewals of their business registration. LLPs have to file an annual declaration of their solvency, but need not hold annual general meetings or update information on shares, etc.
Fortunately, company directors are allowed to appoint filing agents to help them keep up with the legal requirements while they focus on growing the business without being slowed down by various administrative tasks.
Takeaway: For the lowest compliance costs, consider registering a sole-proprietorship, partnership, or limited partnership.
We hope the above questions have been helpful in deciding which legal structure is best for your business.
If you’re ready for business registration or company incorporation and/or need corporate secretarial services, get in touch with us so that our friendly experts can help you.Need further help deciding? Contact us for a non-obligatory consultation. All the best!