Your Company Structure defines the liability, the taxes your pay, and your relationship with other business partners. We explain the options with simple examples.
What Kinds of Company Structure Exist in Singapore?
There are 3 basic types of business organization you can choose from:
- Limited Liability Company (Pte Ltd or LLC)
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Partnership (LLP)
- B Corporation
- C Corporation
- S Corporation
- Close Corporation
- Non-profit Corporation
They vary in terms of liability, the number of owners, and relationships between them. We describe their key features, benefits, and shortcomings, so you can decide what works best for you.
Limited Liability Company (Pte Ltd or LLC)
Pte Ltd is the most common choice for entrepreneurs in Singapore. It’s an exempt private company limited by shares. There can be from 1 to 20 individual shareholders, not companies, and as many directors as you need. It provides a legal entity that is separate from its founders, thus limiting your liability (hence the name). This means that the debts, the risks, and the responsibilities are made in the company’s name, not in yours. It also means you will pay the corporate tax (17% maximum) as opposed to the personal tax (up to 22%), and makes your company eligible for the exemptions.
The downside is that there are certain requirements that the LLC needs to fulfill, such as employing a Company Secretary and filing annual returns to ACRA.
You want to open a cupcake business. You plan to get a bank loan, equip a prep area, employ several cooks, and cater to large events. You register “Cupcakes from Heaven Pte Ltd”.
Decide what’s best for you.
Between sole proprietorship and a private limited company, the decision will define the taxes you pay, the liability, and your obligations to the government bodies.
Sole Proprietorship is a business set up by one individual. It doesn’t provide a separate legal entity: the entrepreneur personally owns all the risks. For example, you’d have to take a bank loan in your name, and pay out the debts yourself. The upside is it is very easy to start and manage. As the owner pays the personal tax off the income, it may be cheaper than Pte Ltd in the beginning.
This is not an option for foreigners: they have to incorporate Pte Ltd.
You want to open an online cupcake shop. You will invest your own money, you don’t need any employees, and you plan to do everything yourself from your own kitchen.
A Partnership is formed by two to twenty partners. There are several ways to set it up:
- General Partnership (or just Partnership) is similar to Sole Proprietorship, except there is more than one owner. The liability is unlimited, and the partners are each taxed with personal tax off their individual income.
You and your friend open a consultancy bureau “Cupcakes and Macarons” where each partner manages and bills his own clients.
- Limited Partnership provides partners with different liabilities: one is a general partner and the other is limited (or dormant) partner. The role of the limited partner is often restricted to funding.
You want to open an online cupcake shop. You plan to do everything yourself, but you invite two friends of yours to invest their money and become dormant partners. They can’t participate in managing the business.
- Limited Liability Partnership (LLP) is a partnership similar to Pte Ltd: it creates a separate legal entity. However, it requires fewer compliance activities, for example, there’s no need to file annual returns. Each partner is taxed with personal tax off their individual income. If one of the partners is a company, it is taxed with corporate tax, but the LLP is not eligible for corporate tax exemptions.
Your company “Cupcakes from Heaven Pte Ltd”, you, and your friend form “Patisserie Gurus LLP”, where you offer services as a cupcake caterer, a consultant on cupcakes, and your friend consults on macarons.
B Corporation, also known as Certified B Corporation, is a new business structure that balances purpose and profit. A typical business structure is created to make profits. But for B Corporation, it does not only make profit but also channels their profits to solve social and environmental problems. Now you might be wondering why B Corporation is called Certified B Corporation. That’s because it’s certified by the non-profit organisation B Lab for the purpose of upholding the standards of social and environmental performance, accountability and transparency.
In 2021, there are close to 13 B Corporations in Singapore, which include PALO IT, Better Barista, Boxgreen, Pearl Consultation and many more.
In order to be certified as a B Corporation, companies are required to score a minimum of 80 points on the B Impact Assessment (BIA). What sets B Corporation certification apart from the rest is that the evaluation is based on the entire company’s worker engagement, community involvement, environmental food print and governance structure, instead of just on a single product or an aspect of a company.
C Corporation, or C-Corp, is a business structure in which the owners or shareholders are taxed separately from the business entity. On top of that, they also face corporate income taxation. This means, they are taxed on a corporate and personal level, which results in double taxation.
If you are a business owner of a C Corporation, your assets and income are not linked to the corporation. That is one of the advantages of a C Corporation. It limits the personal liability of investors, owners and employees. So what does that mean? People often invest in businesses they believe in. However, things might happen and business fails. In this instance, you will only lose the amount that you have invested in it. You do not have to worry if you will lose your personal assets if you were to invest in the business.
There is also a perpetual existence in C Corporation, which means that if the owner leaves the company, the business can still operate without a glitch. With C Corporation as a business structure, it gives you enhanced credibility towards your vendors, clients and external stakeholders.
Now you might be wondering how C Corporation works. To put it simply, C Corporations have to pay corporate taxes on their yearly earnings. The remaining amounts will be distributed to the shareholders in the form of dividends. The shareholders will then be subject to personal income taxes on the amount of dividends they have received. As much as double taxation doesn’t appear favourable in this case, shareholders are allowed to reinvest their profits in the company at a lower corporate tax rate.
However, do bear in mind that C Corporation is required to hold at least one annual meeting for the shareholders and directors. Recording of minutes is important as it shows the transparency in business operations. Furthermore, C Corporation needs to file annual reports, financial disclosure reports and financial statements at the end of each financial year.
S Corporation, also known as an S subchapter, is a legal business entity that allows income, other credits, deductions and losses to be passed directly to shareholders without paying corporate taxes. In other words, the company is exempted from paying corporate income taxes. Shareholders are required to report income, gains and losses from the corporation on their individual tax returns, and pay taxes at their ordinary income tax rates. This way, it prevents double taxation.
This usually applies to small businesses with 100 or fewer shareholders. However, do note that S Corporation shareholders have to be individuals, specific trusts and estates or certain tax-exempted organisations. The good thing about S Corporation is that company directors, officers, shareholders and employees can enjoy liability protection. It also attracts investors through the sale of stocks, which creates investment opportunities. Just like C Corporation, the company can still operate even if the owner of the company passes away or there is a change in the management. So you might be thinking: what’s the difference between S Corporation and C Corporation?
The key difference C Corporation and S Corporation is the tax. C Corporation profits are taxed on a corporate level and are reported on the corporation tax return. On the other hand, S corporation must meet the requirements of Internal Revenue Code (IRC) which then allows the entire corporation exempted from paying corporate tax. Unlike C Corporation which requires you to file quarterly, S Corporation is only required filed once a year.
If you are planning to form an S corporation, your business must be incorporated. This business structure is good for companies that want the benefits of corporations and the tax advantage of partnerships.
Close Corporation is a company where the shares are held by a limited number of shareholders and they are not publicly traded. This means the general public are not allowed to invest in the company. Given that Close Corporation is not publicly traded, it means that they have more flexibility to operate compared to the other business structure. Unlike a public traded company, Close Corporation is exempted from many requirements such as publishing annual reports, holding annual meetings and establishing a board of directors. That way, it prevents other companies from learning the company’s plan and operations.
Non-profit Corporation is another type of business structure that is formed to serve the public such as doing charity, religious, literary, education and scientific work. Non-profit Corporations can be registered as limited by guarantee, society, or charitable trust.
The main purpose of a non-profit corporation is to support and engage the cause that benefits the society, rather than making profits. Unlike most for-profit corporations, the biggest advantage of a non-profit corporation is that it will receive the tax-exempt status. If the company is registered as Institutions of Public Character (IPC), it does not have to pay taxes on any profits earned. Instead, the company will retain the surplus income and channel these towards the company’s future activities. The income will not be distributed among the members.
Cooperative is a legal entity whose main purpose is to serve the interests of its members. Profits will be distributed equally to the members who are also termed as ‘owners-members’. From a business’s point of view, this business structure can also be considered as profit sharing. The benefit of starting a cooperative is that everyone has an equal say in the running of the company. That also includes the vote in the general meeting regardless of the number of shares they hold. A cooperative is usually anchored in a social mission that helps the members to access quality of goods or services.
How Do I Choose What’s Best for Me?
There are administrative costs.
Calculate how much it takes to manage a private limited company.
There are several issues to consider:
- Liability. Only Pte Ltd and Limited Liability Partnership provide a separate legal entity and limited liability. The other forms expose you to personal risks.
- Taxes. Only Pte Ltd pays corporate tax rate and can apply for tax exemptions, with other forms you pay personal tax. After a certain turnover, it is more beneficial to pay corporate tax.
- Compliance requirements. Pte Ltd calls for hiring a Corporate Secretary and submitting annual reports to ACRA. These duties can be outsourced to an agency.
- Funding. Separate legal entity makes it easier to apply for loans and attract investment.
|Feature||Limited Liability Company (Pte Ltd, LLC)||Sole Proprietorship||General Partnership||Limited Partnership||Limited Liability Partnership (LLP)|
|Owned by||At least 1 Director 1-50 Shareholders||1 person||2-20 partners||2+ partners||2+ partners|
|Taxes||Corporate tax (max 17%) Eligible for exemptions||Personal tax (max 22%)||Personal tax (max 22%)||Individual partners taxed at personal tax rate (max 22%) Corporate partners at corp tax rate (max 17%)||Individual partners taxed at personal tax rate (max 22%) Corporate partners at corp tax rate (max 17%)|
|Compliance requirements||Company Secretary Annual filings to ACRA||Easy||Easy||Easy||Easy|
In short, the go-to option is a private company limited by shares (Pte Ltd). A foreign company registered in Singapore has to be set up as a Pte Ltd.
Sole Proprietorship is a riskier alternative that might be easier and cheaper to maintain in the beginning. Partnerships solve specific needs of several people that don’t want to set up a Pte Ltd.