How To Choose The Right Legal Entity To Start A Business In Singapore

Becoming an entrepreneur has become a lot easier and cheaper in recent years. In the past, running your own business meant renting an office space, a large marketing budget and hiring multiple workers to perform various scope of work. But today, you can run a business from the comfort of your home. 

But before you carry out any business activities in Singapore, you must register your business with the Accounting and Corporate Regulatory Authority (ACRA) unless otherwise exempted.

As explained by ACRA, the reasons that you may be exempted from registering as a business are as such. 

1) You conduct your business using your full name as reflected in your NRIC.

2) You choose to conduct the business with one or more partners using their full names as reflected in their NRICs.

Read Also: Step-By-Step Guide To Registering Your New Business In Singapore

For example, if you are a private tutor providing tuition lessons under your own name, then you do not need to register as a business. On the other hand, if you are a private tutor operating under a tuition outfit called Timothy’s Tuition Centre, then you need to register your business in order to operate. 

There are three types of business entities that you can register for in Singapore – Sole-Proprietorship, Partnership and Private Limited Company. Choosing the right legal entity when you first start a business can save you a lot of trouble and inconvenience in the long term. 

The intent for most entrepreneurs is to carry out profitable business activities. But there are different types of businesses we can operate and depending on how we intend to run the business, we have to choose the right legal entity that will suit our needs. 

Sole-Proprietorship

A sole proprietorship is an ideal choice if you are 1) intending to own a business on your own with no external investment or owners and 2) likely to run it alone or have just a small team helping you only. 

In the eyes of the law, the business, while registered with ACRA, is not seen as a separate legal entity from the individual who owns it (you). This means any liability for the business is also yours to bear. Any profits made by the business is added to your total income and taxed as a personal rate.

A sole-proprietorship makes sense if you wish to own the business without having any business partners and you don’t intend to take any external investments. You can consider a sole-proprietorship if you are running a lower-risk business. That could be your own freelancing work or a small home-based business.

Partnership: Limited Liability Partnership (LLP) or Limited Partnership (LP)

If you intend to run a business with one or more business partners, you can consider a Limited Liability Partnership (LLP) or Limited Partnership (LP). Both types of partnerships require a minimum of two partners. 

Unlike a sole-proprietorship, both LLP and LP are seen as a separate legal entity from its partners. Partners in an LLP or LP are protected from being personally liable for business losses, debts or legal actions against the LLP. Compared to a private limited company (more below), the compliance requirements for an LLP or LP is lower. 

It’s important however to note that for partnerships, partners are taxed on the profits of the entities as an individual level. For example, if the business that you own (via a 50% stake in the partnership) makes $500,000 for the year, $250,000 of the profits will be attributed to you and taxed at the personal income tax rate. 

Whether the profits are kept by the company or received by you in cash, you must still pay for the tax on your share of profits ($250,000).

The difference between a limited partnership (LP) and a limited liability partnership (LLP) is that a limited partnership requires a general partner and limited partners. The general partner is personally liable for the debts and liabilities of the business while the limited partners are only limited to the amount of contribution they made to the business. 

A limited liability partnership (LLP) will have partners whose liabilities are limited to the amount of contributions they have made to the business. In a LLP, a partner may be held personally liable for claims from losses resulting from his own wrongful act or omission. However, this will not impact the other partners in a company. 

Private Limited Company 

A private limited company is the most common type of business entity that we see around us. It can be owned by 1 to 50 people, with at least one of the directors being required to be a Singapore resident. A company is also able to issue shares, making it easier to get access to external investments and the transfer of ownership. Similar to a LP and LLP, it is a separate legal entity. This means any debts and liability incurred by the company is not the liability of its shareholders.

When you register a private limited company, there are more corporate governance and compliance issues that you need to handle. This includes needing to appoint a qualified company secretary, appointing at least 1 Singapore resident as a company director, and needing to file annual returns and minutes of Annual General Meetings. Companies are also required to retain documents of financial transactions for at least the past 5 years.

A private limited provides a company structure which allows for succession planning, transfer of ownership, ease of expansion and external investments. Being a separate entity also means shareholder(s) are not liable for the risk the business faces.

Read Also: Entrepreneurs Share With Us Their Favourite Productivity Tips And Apps

To conclude, here are some basic questions that you should ask yourself before proceeding to register your business. 

1) Are you running your business operations as an individual under your own name? If you are, you may be exempted from registering as a business in the first place

2) Number of owners for the business. If you are intending to be a sole owner, then a sole proprietorship or a private limited company are options that you can consider. If you have co-founders/business partners, you need to consider either a partnership or private limited company 

3) If you intend to have external investors, you should opt for a private limited company

4) Level of risk for the business. Should the risk of the business be de-linked from you as an individual? If yes, then you should consider a private limited company.

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