Choosing the right company formation structure can be a monumental challenge, especially for startups.
Each option comes with distinct privileges and exclusions, particularly in terms of managerial efficiency and tax obligations.
In this post, we explore the top considerations when determining the right company structure for your new business.
Types of Company Structures
Before we delve into the key determinants of the ideal company formation structure for your business, it’s important to highlight the available options.
Businesses in Singapore may be organized under the following legal structures;
1. Sole Proprietorships
Sole proprietorships are companies owned and managed by single individuals known as sole proprietors.
While sole proprietors are entitled to full profits from their ventures, they absorb all the losses equally.
2. Partnerships
Partnerships consist of at least two owners, known as partners. The partners share all the profits and losses generated from a partnership based on a predetermined arrangement.
Partnerships are further split into two broad categories, namely;
General Partnership (GP)
A general partnership is a type of partnership in which a company’s owners share profits while bearing personal liabilities for its debts and obligations.
Limited Liability Partnership (LLP)
In limited liability partnerships, business owners share most responsibilities as general partnerships but with the flexibility of operating as separate legal entities. They’re more closely related to LLCs.
3. Limited Liability Company (LLC)
A limited liability company is a business formation structure in which a company’s shareholders exist as separate legal entities.
There are three different LLCs under the Singapore Companies Act, namely;
Private Company Limited by Shares
A private company limited by shares, better known locally as a Private Limited (Pte. Ltd) Company, comprises between 1 and 50 shareholders. The shareholders can be individuals or corporations.
Public Company Limited by Shares
In a public company limited by shares, the ownership comprises over 50 shareholders. It’s the ideal formation structure for established businesses that may need to raise capital in exchange for a stake in the company’s ownership.
Public Company Limited by Guarantee
A public company limited by guarantee is strictly for non-profit organizations.
4. Subsidiary
Subsidiaries are local businesses owned by larger, foreign companies.
Factors to Consider When Choosing the Right Company Formation Structure
1. Niche and Industry
The industry your business operates in determines the best formation structure.
For instance, freelance businesses can be easily organized as sole proprietorships, while consultancy firms may be established as partnerships.
For larger manufacturing plants, LLCs would be ideal.
2. Size and Complexity
Smaller businesses present fewer managerial challenges. As such, they’re best incorporated as sole proprietorships or partnerships.
Meanwhile, larger companies are typically owned by multiple individuals and would benefit more if registered as LLCs.
The specific LLC type you opt for will depend on the actual number of shareholders.
3. Ownership and Management
There are certain instances where single individuals own fairly large corporations.
Due to their sheer size, such businesses cannot be registered as sole proprietorships. A more suitable formation structure would be Pte Ltd.
4. Ownership Transfer
Transferring business ownership is a complicated legal process that may take months to dispense with. So, it’s an essential factor to consider when choosing the right company structure in Singapore.
Ownership of sole proprietorships is the easiest to transfer. Partnerships and LLCs follow in that order.
Regarding LLCs, Pte Ltd companies boast a more hassle-free ownership transfer process than other limited liability companies. That’s due to their flexible legal structures.
5. Tax Obligations
Pte Ltd companies enjoy more tax incentives than other LLCs. That includes a 17% corporate tax and conditional tax exemptions on the first SGD100,000 of Singapore-sourced or foreign-sourced taxable income.
However, other LLCs in Singapore don’t pay corporate tax in the literal sense. Instead, they’re subjected to a pass-through taxation system in which taxes are levied on the personal incomes of individual shareholders rather than at the business level. This helps avoid double taxation, which is the bane of various tax regimes worldwide.
Singapore’s income tax rates range from 0% to 24% and are applicable to annual incomes exceeding SGD20,000. The profits from sole proprietorships and partnerships are also taxed at the personal income tax rates of individual owners/partners.
Singapore tax laws generally make no distinction between local and foreign companies. So, subsidiaries can enjoy similar tax incentives as resident companies.
6. Liability
Pte Ltd companies offer limited liability to their shareholders.
This means the business’ owners bear no personal liability for debts and obligations. Their assets cannot be liquidated to finance priority projects or offset outstanding debts.
Besides, a Pte Ltd company is legally distinct from its owners. Therefore, the business can acquire assets, enter into contracts, and participate in a legal proceeding in its name.
7. Scalability
When registering a company in Singapore, it’s important to pick a structure that can adapt flexibly to your growing needs.
Limited liability companies are generally more scalable than sole proprietorships and partnerships. For instance, a public company limited by shares can quickly raise capital by offering its shares to the public.
LLCs also benefit from Singapore’s enabling business environment. Moreover, the companies can unlock the perks of hiring a larger workforce to optimize efficiency and productivity.
Summary
Choosing the right structure for your company goes beyond merely checking the boxes. There are critical factors to consider based on your business’s type and size.
Hopefully, this post gave you the insights you need to pick the right company formation structure from a point of information.
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