Understanding different legal entities and choosing the most suitable one for your business venture.
After commenting on the entrepreneurship environment in Singapore previously in part 1 of our entrepreneurship mini-series, the second edition will cover the types of business entities that exist and what are the considerations for choosing each type of entities for your business.
Starting an online business may seem very attractive as there aren’t many legal obstacles in the way; you just buy a domain, set up a hosting account and install Livejournal or WordPress. And four of Singapore’s top 10 online searches are blogshops actually.
Online businesses fall into this grey questionable area because they’re not part of any legal framework. A real business requires a legal framework for many reasons, some being personal asset protection or tax benefits/ payment or regulatory requirements. For this reason, it cannot, and really should not, be overlooked or understated.
There exist three main types of entities entrepreneurs can register as: 1. Business; 2. Company; and 3. LLP (Limited Liability Partnership)
A business is defined to include every form of trade carried for the purpose of gains. There are two forms of businesses:
Sole proprietorships are owned by single persons
A partnership can be owned by up to 20 people.
This is the place many businesses start, including online businesses, simply because it’s the simplest way to start out. But it might not be the most ideal place to stay at. You and your business are not separated legally, which means any income coming in will be taxed as personal income, and offers no protection to your person assets. Any liabilities the company has will be your personal responsibility – you can be sued for issues related to your business and your personal assets, such as your HDB flat, will be at stake. As such, it can be considered as the riskiest type of business entity.
Foreign individual and companies can register a Business but must appoint a local resident manager. Citizens, residents, employment pass holders can register a Business.
Private Limited Company
Not more than 50 corporate or individual shareholders.
Exempt Private Company
These companies have not more than 20 individual shareholders.
Public Company limited by Shares
Locally incorporated company where the number of shareholders can be more than 50.
Public Company limited by Guarantee
Usually for carrying out non-profit activities that have national benefits and implications such as charities.
A Company is a legal entity – it has the right to sue (and be sued) and it has a right to own properties. The owners of the company are usually not liable for its liabilities which offers the most protection for personal assets, unless it comes about from that person’s wrong doing. This is the most complicated entity and can be difficult to establish and maintain given the legal and capital requirements.
Some companies may be able to enjoy certain benefits like tax reliefs and other such schemes.
Limited liability partnerships (LLPs) give business owners the flexibility of operating as a partnership while giving them a limited liabilities advantages to protect their personal assets, unless again it comes about from that person’s wrong doings.
It also has the benefit of being a legal entity, which we have gone through, it has the right to sue (and be sued) and it has a right to own properties. Even in the event partners change, an LLP continues to function. This form of “hybrid” entity is relatively simple to set up, however it may involve more initial legal complexities compared to a Business.
LLPs are highly favoured, and suitable, for individuals engaged in professional services, such as lawyers, accountants and consultants.
Foreign individual and companies can register an LLP but must appoint a local resident manager. Citizens, residents, employment pass holders can register an LLP. We hope you enjoyed this part of our entrepreneurship series!
Royalty-free photo from Getty Images. Used with appreciation.
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