How to choose the right legal structure for your startup in Singapore

Singapore has one of the fastest-growing startup communities in the world with the number of startups doubling to 55,000 over the last decade.

With world-class infrastructure, a robust economy, and countless opportunities to raise startup capital from Singapore-based investors, it is no wonder that many aspiring entrepreneurs are ready to start a business despite the looming uncertainties in the global market.

If you're thinking about starting a business this year, the first step is to identify which business (legal) entity is most appropriate for your startup plan. Keep reading to find out more about the different types of business entities which are suitable for early-stage startups.

Types of business entities for startups in Singapore

Every business entity must comply with a different set of terms and conditions from the Accounting and Corporate Regulatory Authority (ACRA).

This implies that the legal entity you choose may impact your business structure, taxes, personal liability, and opportunities such as obtaining government grants and adding new partners. Here are three common types of business entities for startups:

• Sole proprietorships
• Partnerships
• Private limited companies

Sole-proprietorship

If you intend to run a business on your own without distinction between the business owner and the business entity, this form of legal structure may be ideal for you. 

As a sole proprietor, you’ll be entitled to all the profits of the business but also personally liable to all the business debts and obligations.

This is one of the easiest methods to set up a company in Singapore that meets the statutory requirements and the taxation part is kept simple because profits are taxable as personal income instead of corporate revenue.

To set up a sole proprietorship, you must be at least 18 years old, a Singapore Citizen, Singapore Permanent Resident, or an EntrePass or an Employment Pass Holder.

If you are a Foreign Identification Number (FIN) holder, you’ll have to seek consent from the relevant pass issuing authorities such as the Ministry of Manpower (MOM) or Immigration & Checkpoints Authority (ICA) before registering for a business on BizFile.

Pros of a sole proprietorship startup

• You have full control of the business since there is no need to consult another partner about your business decisions
• You’re entitled to all profits and income earned from the business
• The easiest and most inexpensive way to set up a company in Singapore with an option to switch to another business structure like a partnership or private limited company in the future

Cons of a sole proprietorship startup

• You have unlimited liability for your business, meaning that you are liable for all losses incurred by the business and your personal assets are exposed to losses that result from company debts
• Your profits are taxed based on personal income rates which are higher compared to corporate tax rates
• Your business is not eligible for corporate tax benefits such as the Tax Exemption Scheme which can be as much as 75 per cent exemption on the first $100,000 of income and a further 50 per cent exemption on the next $100,000 of chargeable income

ALSO READ: Starting your company in Singapore: A guide to all the costs

Partnership

If you have business partners who are joining you in forming the startup, a good business entity to consider is Partnership. Such an entity can accommodate a minimum of two and a maximum of 20 business owners in the venture.

Just like a sole-proprietorship, those in a partnership need to pay personal income tax on the income received from the business activities. They are also personally liable for their business activities. There are three types of partnership and the pros and cons largely depend on the partnership type that you choose.

What are the Major types of partnership?

Private limited company

While there are different types of company structures, a private limited company is the most common in Singapore. It is a type of limited liability company with one to 50 shareholders (owners) and at least one of the directors needs to be a resident of Singapore.

Pros of a private limited company startup

• Your company is a separate legal entity with limited liability and the business can contract, acquire assets, and incur debt on its own without affecting personal assets of the owners
• Your business will be eligible for corporate tax benefits and the taxes for private limited companies in Singapore is about 17 per cent but with rebates and incentives schemes, the tax payable is usually lower
• Raising capital is much easier through issuing additional shares to current shareholders or bringing in new shareholders

ALSO READ: Man quits $20k Singapore job to build own startup, matches previous salary after 3-year grind

Cons of a private limited company startup

• Your business needs to go through complex accounting and auditing processes and submission to relevant authorities every year and all companies must file their annual return within seven months after the closing of the financial year
• A private limited company must adhere to guidelines such as the appointment of director and company secretary, and holding Annual General Meetings (AGM)
• Due to the legal procedures, such an entity may be difficult to liquidate and it can be challenging to find buyers who are willing to buy the shares of your company

Factors to consider when choosing a business entity

According to ACRA, there are some basic factors that you need to consider before deciding on a business structure. Your decision will have a long-term impact on how you operate your business, so, doing all the research you need and making an informed decision based on the following will be your best bet:

• How much financial capital do you have to start your business?
• How many owners will there be in the business?
• What liabilities and responsibilities are you prepared to assume?
• What risks are you prepared to take?
• What are the advantages and disadvantages of the different business entities?
• Is the business entity easy to close?

ALSO READ: 9 career lessons we learnt from the K-drama Start-Up

Optimise Your Startup Growth Potential

Choosing the right business entity for your early-stage startup in Singapore is an important first step that will save you a lot of hassle and costs in the long run. If you intend to run a solo business, a sole proprietorship could be a better choice than a company because you can avoid a lot of corporate secretarial and accounting issues.

However, if your business requires financial funding through loans or credit cards, having a private limited company can offer you a lot of corporate benefits and even safeguard your personal assets.

This article was first published in ValueChampion.