Types of Business Entities in Singapore: Which Type to Choose

Are you looking to start a business in Singapore and are confused about the types of business entities in Singapore and which type to choose? This guide will show Singapore's different business entities and their characteristics. The type of business entity you choose can impact several aspects, including your tax obligations, the reputation of your business with clients and suppliers, the administrative workload, personal liability, borrowing capacity, and potential for business expansion.

Overview of Business Entities in Singapore

Main Types of Companies in Singapore

There are three main business entity types in Singapore. They are:

Private Limited Company

A private limited company is a business structure where fewer than 50 individuals hold ownership shares that are not publicly traded. This type of company, denoted by "Private Limited" or "Pte Ltd" in its name, is Singapore's most common form of incorporation.

Private limited companies are favoured by serious entrepreneurs in Singapore due to their advanced, flexible, and scalable nature, unlike sole proprietorships or limited liability partnerships. 

There are many reasons as to why entrepreneurs prefer private limited companies. Here are some reasons:

• Separate Legal Identity:
  A private limited company has its own legal identity, distinct from its shareholders and directors. It can own assets, incur debts, enter contracts, and pursue legal actions in its own name.
• Limited Liability:
  Shareholders' liability is limited to the amount they agreed to contribute as capital to the company. Their personal assets are protected from business debts.
• Perpetual Succession:
  The company's existence is not affected by changes in membership. Shares can be transferred easily, ensuring continuity even in cases of shareholder or director changes.
• Ease of Raising Capital:
  Capital can be raised by issuing new shares or bringing in new shareholders. Investors prefer companies with a clear separation of personal and business assets, making it easier to attract funding.
• Credible Image:
  A private limited company projects a more professional image than sole proprietorships or partnerships. This enhances credibility with investors, clients, suppliers, and other stakeholders.
• Ease of Ownership Transfer:
  Ownership can be transferred without disruption through the sale of shares or issuance of new shares, avoiding complex legal procedures.
• Tax Benefits and Incentives:
  Singapore private limited companies enjoy efficient tax policies, with a flat 17% corporate tax rate. Additionally, there are no capital gains taxes, and dividends can be distributed tax-free after corporate taxes are paid.

🔎 Read more: Here’s a guide by Statrys on how to set up a private limited company in Singapore.

Public Limited Company by Shares

A Limited Liability Company (LLC) with more than 50 shareholders is known as a public limited company (PLC). PLCs have the option to offer shares to the general public and are identified by the suffix 'Limited' or 'Ltd' in their name. These companies can be listed on stock exchanges and must submit a prospectus to the Monetary Authority of Singapore (MAS) before listing to raise capital from the public. However, not all PLCs are listed. Some PLCs might choose to remain unlisted but still have the ability to offer shares to the public. 

PLCs share similar benefits with private limited companies, such as limiting shareholders' liabilities, enjoying competitive corporate tax rates, and maintaining a prestigious image. They also have enhanced access to capital, as they can raise funds by offering public shares, debentures, and bonds. Shareholders benefit from increased liquidity, as they can easily buy and sell shares in the capital market.

However, PLCs are subject to stringent regulations and face greater public scrutiny regarding financial matters. Compliance costs are high, and the board and management are accountable to shareholders for their decisions and actions.

Public Company Limited by Guarantee

A Public Company Limited by Guarantee is established for public good and non-profit purposes. These companies, often used by societies and organisations promoting arts or charity, have members whose liability is limited to the amount they agree to contribute to the company's assets in case of winding up. This guaranteed amount is typically nominal and stated in the Memorandum of Association. Unlike other companies, the names of such entities do not include the word 'Limited'.

It's important to note that Public Companies Limited by Guarantee does not involve shares. Members are not required to pay any capital as long as the company continues its operations. Non-trading and non-commercial entities like trade associations, charitable organisations, professional societies, religious bodies, clubs, and other not-for-profit endeavours commonly adopt this structure.

Sole Proprietorship

A Sole Proprietorship is formed when a single individual registers themselves as the owner to establish a formal business. This arrangement is common among small-scale ventures, such as a person operating a convenience store at home, a freelancer providing services, or an artisan selling handmade goods.

In a Sole Proprietorship, the individual and the business are not considered separate entities. As a result, all liabilities incurred by the business are borne by the individual owner. For instance, if the business accrues debts or sustains losses, the owner is personally liable and risks losing their assets.

It's important to distinguish Sole Proprietorships from Partnerships, as regulatory authorities often group them together. More details on this distinction will be provided in the following subsection.

There are many reasons as to why some business owners prefer to set up a sole proprietorship. Here are some reasons:

• Ease of Formation

Sole Proprietorships are straightforward to establish, with minimal legal formalities and lower setup costs than other business structures.

• Full Control

As the sole owner, you have complete control over decision-making and business operations without the need for consensus with partners or shareholders.

• Direct Profits

All profits generated by the business belong solely to the owner, allowing for direct and immediate access to income.

• Minimal Compliance Requirements

Sole Proprietorships typically have fewer regulatory obligations and reporting requirements, reducing administrative burdens and costs.

• Flexibility

Sole Proprietorships offer flexibility in adapting to changing market conditions, business strategies, and personal circumstances.

• Low-Risk Ventures

Sole Proprietorships are suitable for low-risk ventures or individuals who prefer to start small-scale businesses without significant financial commitments or liabilities.

However, due to its lack of liability protection for the owner, sole proprietorship has significant drawbacks to consider:

• Personal Liability

The owner's personal assets are at risk if the business accumulates debts or faces legal issues.

• Capital Constraints

Raising capital is challenging as funding typically comes solely from the owner, and lenders may require personal assets as collateral.

• Limited Growth Potential

Sole Proprietorships may struggle to attract capital and face a poor perception, hindering growth and expansion.

• Lack of Transferability

The business cannot be sold in parts, and licenses may not be transferable. Additionally, Sole Proprietorships cease to exist upon the owner's demise, lacking perpetuity.

Due to these limitations and risks, Sole Proprietorship may not be the ideal choice for those serious about growing their brand and business.

🔎 Read more: If sole proprietorship is the right business structure for you, you can read this guide to find out how to set up a sole proprietorship in Singapore.

Partnerships

The partnership business structure addresses the expansion limitations of sole proprietorships by allowing two or more individuals to establish and co-own a business. However, it's important to note that a partnership firm has no separate legal existence from its partners. It ceases to exist upon a partner's death, insolvency, incapacity, or retirement. Additionally, any partner can dissolve the partnership at any time by giving notice.

In Singapore, partnerships can be categorised into three types:

General Partnership

A general partnership is established by a minimum of 2 persons and a maximum of 20 persons. In this type of partnership, partners pay taxes based on their share of income from the partnership, which is treated as personal income.

However, a general partnership is not considered an attractive business structure in Singapore for the following reasons:

• Personal Liability

Similar to a sole proprietorship, partners are personally liable for the debts and liabilities of the business. This means their personal assets are at risk if the partnership encounters financial difficulties.

• Shared Responsibility

Each partner can be held responsible for the actions and decisions made by another partner. This shared liability can expose individual partners to legal and financial risks arising from their partners' actions.

Due to these inherent risks and limitations, general partnerships are not commonly recommended as a preferred business structure in Singapore.

🔎 Read more: If general partnership is the right business structure for you, you can read this guide to find out how to form a general partnership in Singapore.

Limited Partnership

A limited partnership is presented as an alternative to the general partnership structure in Singapore. Unlike a general partnership, a limited partnership includes both general partners and limited partners. Limited partners' liabilities are restricted to their investment in the partnership, whether in the form of capital or property. However, limited partners cannot participate actively in the business's management.

Despite these features, a limited partnership may not be an attractive option for setting up a business for most individuals.

Limited Liability Partnership

Limited Liability Partnership (LLP) is one of the newer ways of conducting business in Singapore, introduced through separate legislation in 2005 alongside the Companies Act of 1967. While the Companies Act governs traditional company structures, the LLP legislation offers a unique blend of features, positioning it between a Partnership and a Company.

According to Accounting and Corporate Regulatory Authority (ACRA), unlike a Partnership, where partners have varying levels of liability and the business is not a separate legal entity, an LLP provides the owners with the protection of a separate legal identity, akin to a Private Limited Company. However, unlike a company, an LLP does not have shareholders— instead, owners, whether individuals or corporations are known as partners. 

While Limited Liability Partnerships (LLPs) provide valuable benefits such as limited liability and operational flexibility, they also require meticulous management and clear operational agreements to ensure smooth functioning.

LLPs blend characteristics of partnerships and corporations, which can introduce complexities into management structures without clear agreements in place. Partners must establish comprehensive management agreements outlining roles, responsibilities, decision-making processes, profit-sharing mechanisms, and dispute resolution procedures.

By developing robust operational agreements, partners can mitigate potential conflicts and misunderstandings, foster effective communication, and ensure the LLP operates smoothly and efficiently. These agreements help establish clarity regarding the rights and obligations of each partner, promoting transparency and accountability within the partnership.

Therefore, while LLPs offer significant advantages, proactive management, and well-defined operational agreements are essential to maximise the benefits and mitigate potential challenges associated with this business structure.

Limited Liability Partnership (LLP) offers several benefits for businesses operating in Singapore:

• Limited Liability

One of the primary advantages of LLP is that it provides limited liability protection to its partners. This means that partners are not personally liable for the debts and obligations of the LLP beyond their capital contributions.

• Flexibility

LLPs offer flexibility in management and operations. Partners can manage the business according to their agreement without the rigid formalities associated with other business structures.

• Taxation

LLPs are tax-efficient entities. They are taxed at the personal income tax rates of the partners rather than at the corporate tax rates applicable to companies. This can result in tax savings for the partners.

• Separate Legal Entity

Although an LLP is formed by its partners, it is considered a separate legal entity distinct from its partners. This provides credibility and legal recognition to the LLP in its dealings with clients, suppliers, and other stakeholders.

• Professional Services

LLPs are particularly well-suited for professionals such as lawyers, accountants, architects, and consultants. It allows professionals to pool their resources, share risks, and collaborate on projects while enjoying limited liability protection.

• Continuity

Unlike traditional partnerships, LLPs have perpetual succession. This means that the LLP can continue its existence even if partners leave or join the partnership, ensuring continuity of business operations.

• Ease of Formation

Setting up an LLP is relatively straightforward and involves fewer regulatory requirements than companies. This makes it an attractive option for small to medium-sized businesses looking for a simple and efficient business structure.

🔎 Read more: Here’s a guide on how to set up a limited liability partnership in Singapore.

Foreign Company Options

Foreign companies looking to establish a presence in Singapore have several options, including setting up a branch office, subsidiary, or representative office. Choosing between the three options will depend on the foreign company’s long-term goals in Singapore, its business model, and the level of commitment it wishes to make in terms of investment and presence in Singapore.

• Subsidiary Company

A subsidiary company is a private limited company incorporated in Singapore, with the parent company as its shareholder. This structure is often preferred by small to medium-sized foreign businesses due to its separate legal entity status, limited liability, and flexibility in operations.

• Branch Office

A branch office is registered in Singapore as an extension of its parent company without being separately incorporated. The branch office operates under the legal umbrella of its parent company, with its liabilities extending to the parent entity. This option may be suitable for foreign companies seeking to maintain tighter control over operations in Singapore.

• Representative Office

A representative office is established in Singapore as a temporary arrangement for conducting marketing research activities. Unlike subsidiary or branch offices, a representative office has no legal status and cannot engage in profit-yielding activities. It serves primarily as a liaison between the parent company and potential clients or partners in Singapore.

💡 Relevant: Read this guide to learn more about foreign company registration options in Singapore.

Recommended Business Entity to Choose

When choosing the right business structure for your venture in Singapore, it's crucial to consider your unique circumstances and future plans. Here are some general guidelines to help you make an informed decision:

• Sole Proprietorship

Suitable for local individuals running small businesses as the sole owner, especially if the nature of products/services doesn't involve significant liability issues. However, remember that personal assets may be at risk in case of business liabilities.

• Limited Liability Partnership (LLP)

Ideal for professionals (e.g., accountants, lawyers, architects) forming a joint practice with one or more partners in a similar profession. LLP offers personal liability protection while allowing partners to share management responsibilities.

• Private Limited Company

Recommended for most businesses in Singapore, regardless of size or industry. While compliance requirements may be slightly more complex, a private limited company offers distinct advantages in the long term. It provides limited liability protection and a separate legal identity and facilitates easier access to capital and business expansion.

Consider these factors carefully before choosing the most suitable business structure for your specific needs and objectives. It is important to consult with legal and financial advisors in Singapore to choose the most appropriate business structure for you and your business. This is because the optimal choice depends on specific circumstances, including the business sector, the scale of operations, and future expansion plans. 

🔎 Tip: Here are the five best company incorporation services in Singapore.

Conclusion

In conclusion, choosing the right type of business entity in Singapore is a critical decision that can significantly impact the success and longevity of your venture. Understanding the various options available, including Sole Proprietorship, Limited Liability Partnership (LLP), and Private Limited Company, is essential in making an informed choice.

For local individuals running small businesses with minimal liability concerns, Sole Proprietorship may offer simplicity and ease of setup. However, it's important to consider the potential risks to personal assets.

Professionals seeking to establish joint practices with partners in similar fields may find a Limited Liability Partnership (LLP) a suitable option, providing liability protection while enabling shared management responsibilities.

In most cases, incorporating a Private Limited Company emerges as the preferred choice. Despite slightly more complex compliance requirements, a Private Limited Company offers invaluable benefits such as limited liability protection, separate legal identity, and enhanced credibility. Moreover, it facilitates access to capital, fosters business expansion, and ensures long-term sustainability.

Ultimately, the decision on the type of business entity should align with your specific business goals, risk tolerance, and growth aspirations. It is advisable to seek professional advice and carefully evaluate the implications of each option before committing. By choosing the right business structure, entrepreneurs can lay the foundation for a successful business.