This article offers information on the various business entity kinds in Singapore, as well as on their unique characteristics and advantages. Each of these organizations must yearly comply with regulations. Depending on their entity structure, different tax rates apply.
Singapore was ranked No. 2 in the World Bank’s annual survey aptly titled Doing Business 2018, which compared 190 economies in terms of the fundamental conditions to establish and structure a company (such as accessing electricity, registering property, choosing a company structure, paying taxes, trading internationally, and resolving insolvency, among other indicators).
Singapore’s success and reputation as one of the friendliest countries to conduct business may be largely credited to its clear-cut, comprehensive system of company structure and governance, which is simple to grasp and understand for business owners or foreign investors. The benefits and drawbacks of any business organization and associated corporate structure, however, are not always obvious. Any entrepreneur or foreign investor interested in starting a business in Singapore will find this article to be a helpful resource as it compares various business entity types and company structures.
Ideal for Small Businesses Is the Sole Proprietorship
A sole proprietorship is a sort of business entity that is owned and operated by an individual, and in which there is no legal distinction between the individual and the business. It is often referred to as the single trader, a proprietorship, or a “one-man show” by laypeople.
The lone proprietor has unrestricted responsibility and can be sued in his or her own name or as the business name because they own and control the business entirely. A sole proprietorship isn’t taken into account as a distinct legal entity.
A sole proprietorship cannot take advantage of the effective corporate tax rate of 0–17% or the numerous tax incentives designed specifically for businesses because sole proprietorships and partnerships are not included in the Inland Revenue Authority of Singapore’s (“IRAS”) definition of “companies.” This is another significant difference. A sole proprietorship’s profits are taxed at the personal income tax rate.
A sole proprietor must typically be at least 18 years old, a Singaporean resident, and not listed as an un-discharged bankrupt. But a sole proprietor can also be a business, in which case the business must designate a natural person who satisfies these criteria to serve in the capacity of manager.
Practically speaking, a sole proprietorship cannot be applied for by investors who live abroad because the sole proprietor must generally reside in Singapore.
Alternative for Small Businesses with Multiple Owners: Partnership
The main distinction between a partnership and a sole proprietorship is that a partnership may have two or more partners, up to a maximum of twenty unique participants. A partnership is fundamentally identical to a sole proprietorship in terms of structure, liability, and taxes. A partnership must incorporate as a company under the Companies Act if it reaches this limit.
A local management must be chosen who is at least 18 years old, a natural person who ordinarily resides in Singapore, and who is not an un-discharged bankrupt. This requirement applies to all other business organizations as well. Foreign persons or businesses are welcome to join as partners in this type of corporate structure. The tax rate is imposed similarly to a sole proprietorship; if the partner is an individual, personal income tax rates will apply; if the partner is a firm, corporate tax rates would be applicable.
Because a partnership is not regarded as a separate legal entity and all members are personally liable for its debts and losses, even if they are incurred by other partners, this fact poses the biggest risk to a partnership.
Limited Partnership as a Liability Limitation Method
Due to the potential hazards of a partnership, a limited partnership offers the opportunity to provide some degree of limited liability. There must be two partners in order for there to be a partnership, but there is no maximum. At least one of the partners will be the general partner, who will be personally responsible for all debts and losses and have limitless responsibility. The other partners could be limited partners, who are only personally liable for their agreed-upon share of debts and liabilities.
Both the general partner and the limited partners must be at least 18-year-old natural persons or corporations. Additionally, if the general partner does not typically reside in the area, a local manager who does must be selected. A limited partnership, like a sole proprietorship and a partnership, will not be eligible for any tax benefits offered to businesses, and any earnings will be taxed at the personal tax rate of each partner. However, corporation tax rates would apply if the partner were a business.
Limited Liability Company
A limited liability partnership (LLP) is fundamentally different from a partnership and a limited partnership while having a similar name. It resembles a private limited corporation more. The key similarity is that LLP partners are subject to personal income tax at their individual rates. An LLP, as the name suggests, limits the liability of each individual partner.
An LLP is deemed to be an independent legal entity from its participants, which makes it feasible for it to possess property in its own name, which is not possible for other types of partnerships. These are the main differences between an LLP and other types of partnerships. Partners will be held individually liable for debts and losses, but this liability will only extend to debts and losses brought on by their own negligence, not that of the other partners.
An LLP must, however, present a yearly statement of solvency stating whether it is able to pay its debts in the ordinary course of business. Other types of partnerships are not subject to this rule.
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