Choosing a business structure that suits your enterprise is one of the most important decisions you will make in starting a business. The type of structures that business owners choose are varied. In Singapore, companies are the most popular form of business structure. In 2017, there were approximately 310,000 active foreign and local companies in Singapore. Companies are a popular option for serious business owners as they offer many long-term advantages and provide a more credible image. Sole proprietorships are also widely popular among Singaporeans, with approximately 137,000 active sole proprietorships in 2017. Contrasted to companies, sole proprietorships are suitable for small, home-run businesses as they provide greater flexibility and more relaxed reporting requirements.
Every business structure has different advantages to offer. That being said, different types of business structures also come with different levels of compliance and reporting requirements. This can significantly impact how you run your business, from how much control you have over your business, the amount of liability you may need to shoulder, to the cost of operations.
Before comparing the three different business structures, it is important to understand the concept of limited liability. Limited liability refers to the concept of a shareholder not being personally liable for the debts of the entity, except for the amount that he had invested into the entity. As a general rule, if the business fails, the shareholder only suffers the loss of the amount he had invested, and not his entire wealth. For example, if shareholder A invested $100,000 in Company B, and Company B goes insolvent and winds up, shareholder A only loses $100,000.
Types of business structures
1. Sole Proprietorship
A sole proprietorship is a business owned by one person of at least 18 years of age or a Singapore-registered company. The sole proprietor has absolute control over the running of the business as there are no shareholders or partners. The sole proprietorship does not have a distinct legal personality, and the owner and business are treated as the same entity. While this means that the sole proprietor is not required to maintain separate accounts for auditing purposes, there is no continuity in the business – when the owner dies, the business ends too. The sole proprietorship also has unlimited liability. This means that the owner is personally liable for the debts and losses of the business and all of the owner’s assets are potentially at risk. Sole proprietorships are suitably used by small single-owner businesses that do not carry much risks, for example convenience stores, stationery shops, or freelance tutors and writers.
2. Limited Liability Partnership
A limited liability partnership (“LLP”) is owned by two or more partners, where the individual partner’s own liability is limited. Partners can be individuals or corporations. Partners are personally liable for debts and losses resulting from their wrongful actions, but they are not personally liable for debts and losses of the entity incurred by other partners. Unlike the sole proprietorship, the limited liability partnership has a distinct legal personality. This means that the entity can sue or be sued, enter into contracts, and own property in its own name. An LLP has perpetual succession and does not cease to exist if one or more of its partners dies. LLPs are commonly used by small businesses which provide professional services, for example small law practices, accounting firms, and architecture firms. For most entrepreneurs however, the limited liability company is the preferred option.
3. Limited Liability Company
A limited liability company (“LLC”) is a business that has limited liability. The extent of a shareholder’s liability is limited to the amount that he had invested into the company. Similar to the LLP, the LLC has a distinct legal personality from its shareholders and directors. It can sue or be sued, enter into contracts, and the company can own property. The life of a company is perpetual and does not cease to exist if one or more of its shareholders dies.
There are two types of LLC – private limited company and public limited company. The shares of a private limited company may only be offered up to 50 shareholders, and they are not available to the public. Generally, private limited companies are more suitable for small businesses or family-owned businesses, for example a small engineering, construction company or a family-owned catering business. A public limited company limited by shares must have at least 50 shareholders, and may offer shares to the general public. Usually, the shares of a public limited company are listed on a stock exchange. It is subject to more regulations because of its ability to raise funds from the public. Usually, public limited companies are suited for large businesses such as airline and transport businesses such as Singapore Airlines and Comfort Delgro, or banks such as DBS and UOB.
There is a third type of LLC – public limited company limited by guarantee. However, unlike the first two, this type of company is usually set up for non-commercial purposes, and is typically used by non-profit organizations.
Choosing your business structure: Factors to consider
The three business structures have some similarities and differences. Often, there can be more than one structure that you may find suitable for your business. Here are a few factors to bear in mind when deciding amongst the three.
Profits
If you are starting a small enterprise that is wholly owned by you, a sole proprietorship is ideal as the business owner may keep all of its profits. In contrast, if you are a professional embarking on a business with other partners, starting an LLP is more preferable as the profits of an LLP are distributed amongst the partners. In an LLC, the profits are shared amongst the shareholders in the form of dividends, and this is in proportion to the number of shares each shareholder owns.
Taxation regime
If your business is small and you do not expect your profits to be sizeable in the first few years of operations, a sole proprietorship or LLP may be preferable. The profits of both sole proprietorships and LLPs are taxed at the personal income tax rate of individual business owners. In Singapore, the personal income tax rates are progressive and proportionate to the income of each individual. It starts from 0% for earnings less than SGD 20,000 up to for earnings above SGD 320,000.
If you intend to take advantage of corporate tax exemptions that Singapore offers, an LLC may be more suitable. The profits earned in an LLC are taxed at a corporate rate. In Singapore’s corporate tax regime, corporate tax is fixed at 17%. However, there are many corporate tax exemptions that new businesses can take advantage of. For example, new companies in their first three years of operations pay almost 0% tax for profits up to SGD 100,000. In addition, the government also provides corporate income tax rebate (CIT rebate), where the percentage of rebate is determined from year to year. In 2018, it was announced that the CIT rebate would be 40% of the corporate tax payable, subject to a maximum cap of SGD 15,000. These exemptions and rebates are especially useful for new businesses which may have limited capital and tight budgets.
The table below shows a rough estimation of how much tax you will pay through the different business structures. The figure below includes corporate tax exemptions and partial exemptions, but does not include corporate tax rebates, which changes from year to year.
| Taxable income (SGD) | Approximate tax you will pay as a sole proprietor or LLP | Approximate tax you will pay as a LLC (first 3 years of business) | Approximate tax you will pay as a LLC (after first 3 years of business) |
|---|---|---|---|
| 100,000 | 5672 | 0 | 4250 |
| 200,000 | 21150 | 8500 | 12,750 |
| 300,000 | 40,550 | 17,000 | 29,750 |
Formalities
There are different levels of administrative requirements for the three different business structures. Generally, sole proprietorships and LLPs have fewer formalities to comply with, as compared to LLCs. Sole proprietorships are the simplest and easiest form of business structure to set up in Singapore. Apart from the annual renewal of the sole proprietorship, there are no ongoing filing requirements or statutory requirements to comply with. LLPs have more formalities to comply with. For example, LLPs are required to lodge an annual declaration of solvency to state whether the LLP is able to pay its debts in the normal course of business. If you intend to set up an LLC, you must be prepared to comply with the more complex formalities and procedures. For example, LLCs are required to file an annual return, hold an annual general meeting, and comply with the other statutory requirements for share allotments and directors’ duties. In addition, LLCs are required to appoint a company secretary within 6 months of incorporation and an auditor within 3 months after incorporation unless the company can qualify for an exemption from audit.
Expenses
If you intend to start a small business but have a tight budget to work with, a sole proprietorship or LLP is most suitable because they involve relatively low costs. The initial registration fee for both business entities is $115, which includes $15 for business name application and $100 for one year of business registration. However, it is likely that additional costs would be incurred for setting up an LLP as professional legal help is usually needed to draft a partnership agreement. In contrast, LLCs are more costly to set up. The initial registration cost is $315, which includes $15 for business name application and $300 for one year of incorporation fee. Because of the complex formalities, procedures and statutory requirements which are involved in setting up and running an LLC, it is highly advisable to hire an accounting or law firm to handle the initial set up and ongoing paperwork. Such legal and accounting services can amount to substantial costs.
Credibility and public perception
How your business is perceived by key stakeholders such as employees, banks, and customers can significantly impact the direction of your business. Important aspects of your enterprise, such as the ease of raising capital and ease of expansion can be affected by a business’s perceived credibility. While sole proprietorships offer many benefits such as lower setting up costs and simpler compliance requirement, it is generally perceived to have less credibility and hold lower public perception. If you intend to set up a serious business, it is best to go for an LLP or LLC. LLCs are most highly regarded and they are also perceived as most credible. This is especially important if your business is dealing with certain institutions such as banks.
Ease of raising capital
Raising capital is one of the most important aspects of a business, especially if you intend to expand your business further down the road. There are three ways for businesses to obtain capital: from the business owners, taking a loan, and issuing shares. In general, it is more difficult for sole proprietorships and LLPs to raise capital as compared to LLCs.
Sole proprietorships are generally limited to the finances of the business owner while LLPs are limited to the finances of the partners. However, sole proprietorships only have one business owner while LLPs are allowed to have an unlimited number of partners. As such, LLPs have greater ability to raise larger sums of money since there are more partners who can contribute. However, bear in mind that both sole proprietorships and LLPs are generally not viewed with much credibility and may find it difficult to borrow from banks. To secure bank loans, business owners may have to offer up personal assets as guarantee.
If you foresee your enterprise requiring large amounts of capital, LLCs are more preferable. LLCs have greater ability to raise money from its business owners and through bank loans. Private limited companies can have up to 50 shareholders and public limited companies can have an unlimited number of shareholders. To raise capital, LLCs can either sell more shares to existing shareholders, or issue shares to new shareholders. LLCs are also viewed with more credibility by banks and financial institutions, and such institutions are more willing to lend money to LLCs.
Ease of transfer of ownership
If you intend to pass on your business to another person eventually, sole proprietorships and LLPs are not recommended. It is difficult to transfer ownership in these two business structures as the business cannot be sold as a whole, and each assets, licenses and permits would have to be individually transferred. In contrast, ownership of an LLC can be easily transferred (partially or fully) by sale of shares, or through the issue of new shares to additional investors.
Foreigner setting up an enterprise in Singapore
If you are a foreigner who intends to set up a business in Singapore, it is especially important that you choose the type of business structure carefully. Depending on what business structure you choose, and whether you intend to reside in Singapore to run the business, different requirements may apply. In Singapore, foreigners are allowed to register sole proprietorships, LLPs or LLCs. However, should you decide to reside outside of Singapore, you must appoint one locally resident authorised representative for your sole proprietorship, one locally resident manager for your LLP, and one locally resident director in your LLC. Whether you are setting up a sole proprietorship, an LLP or an LLC, if you decide to be present in Singapore to manage the business, you must first seek approval from the Ministry of Manpower before registering your business.
| Factors | Sole Proprietorship | LLP | LLC |
|---|---|---|---|
| Number of people | 1 | At least 2, no maximum number | Private limited companies – up to 50 shareholders Public limited companies – at least 50 shareholders and no maximum number |
| Legal Status | No separate legal identity | Separate legal identity | Separate legal identity |
| Personal liability | Unlimited liability | Limited liability | Limited liability |
| Continuity | No continuity. Sole proprietorship ends when the business owner dies. | Perpetual succession | Perpetual succession |
| Formalities and expenses | Less formalities and procedures to comply with. No ongoing reporting requirements. Easy and inexpensive to set up. | Less formalities and procedures to comply with. Annual declaration of solvency must be filed. May require professional legal help to draft a partnership agreement. Relatively easy and inexpensive to set up as compared to LLCs | More formalities and procedures to comply with. Additional statutory requirements for appointing a company secretary, an auditor, annual general meeting, directors’ duties and share allotments. More costly to set up and substantial costs can be incurred if professional help is engaged. |
| Credibility and public perception | Less credible and low public perception | Moderately credible and moderate public perception | Most credible and high public perception |
| Raising capital | Difficult to raise capital | Difficult to raise capital | Easy to raise capital |
| Profit sharing | Business owner keeps all of the profits. | Profits are shared amongst the partners. | Profits are shared amongst the shareholders in the form of dividends. |
| Tax | Profits are taxed at the personal income tax rate of the business owner. Personal income tax rates are progressive and proportionate to earnings. | Profits are taxed at the personal income tax rate of each individual partner. Personal income tax rates are progressive and proportionate to earnings. | Profits are taxed at a corporate rate. Possible for certain corporations to take advantage of corporate tax exemptions. Corporate tax rates are fixed at 17%. However, certain tax exemptions and tax rebates apply. |
| Ease of transfer of ownership | Difficult to transfer ownership. | Difficult to transfer ownership. | Easy to transfer ownership, partially or fully, by sale of shares. |
| Foreigners set up business in Singapore | Foreigners can register a sole proprietorship in Singapore. Locally resident authorised representative must be appointed if sole proprietor does not reside in Singapore. | Foreigners can register an LLP in Singapore. At least one locally resident manager must be appointed if partners does not reside in Singapore. | Foreigners can register an LLC in Singapore. At least one locally resident director must be appointed if business owner does not reside in Singapore. |
| Examples | Convenience stores, stationery shops, freelance tutors or writers. | Law practice, accountant firms, architecture firms. | Large businesses such as airline and transport companies. |
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This article is written by Immanuel Lim of Covenant Chambers LLC and edited by Chua Shu Ying from the Asian Law Students’ Association.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.