Before you incorporate and register your business, you will need to decide what is the appropriate business vehicle or structure for your business model. In this article, we set out the different types of business vehicles as well as their benefits and disadvantages, to help you reach an informed decision.
Sole Proprietorship
What is it?
Refers to a business carried on by a sole person. If the person intends to carry on the business under a business name, he or she must register the name of the business with ACRA.
A sole proprietorship has no separate legal personality. This means that it cannot own property in its own name.
Advantages
In general, there are minimal formalities and regulatory requirements to register a business name. There are also very minimal statutory compliance requirements to administer and operate a sole proprietorship.
In addition, it is easy to dissolve a sole proprietorship (i.e., close down the business).
Disadvantages
The owner of the business faces unlimited personal liability for the debts and liabilities of the business. In addition, the business will cease to exist on the bankruptcy, or death of the sole proprietor.
Partnership
What is it?
Where two or more persons seek to carry on a business with a view to earning profit from it, they can do so under a partnership. If they intend to carry on the business under a business name, they will need to register the name with ACRA.
Like a sole proprietorship, a partnership has no separate legal personality and therefore cannot own property in its own name.
Advantages
As for a sole proprietorship, there are minimal formalities and regulatory requirements to register a business name. In addition,minimal statutory compliance requirements are involved to administer and operate a partnership.
There is also tax transparency under a partnership, as each partner is taxed on an individual basis. Finally, it is easy to dissolve a partnership.
Disadvantages
Each partner is regarded as an agent of the partnership, and has unlimited personal liability for the debts and liabilities of the business. This includes being held liable for the wrongful acts or omissions of other partners that might occur in the ordinary course of business.
Do note that a partnership cannot be made up of more than 20 partners, unless the partnership is formed to carry on professional services (e.g., legal services, or accounting services).
In addition, the bankruptcy/winding-up or death of a partner will lead to the dissolution of the partnership.
Company
What is it?
A company that is incorporated and existing under the Companies Act has a separate legal personality from its owners/shareholders and can also own property in its own name. A company is usually in the form of a company limited by shares. This means that the liability of the shareholders is limited to the amount that they have agreed to pay for their shares.
Advantages
A shareholder of the company has no personal liability for any debts and liabilities of the business.
In addition, a company has perpetual succession. This means that the company is not affected by the death or bankruptcy/winding-up of any shareholder, and can continue to carry on the business.
Finally, there is no cap on the number of shareholders, although private companies cannot have more than 50 shareholders.
Disadvantages
There are certain formalities and regulatory requirements that must be met in order to incorporate a company. These requirements have been covered in our previous article on ‘Incorporating a Business in Singapore’.
Finally, there are several statutory requirements that must be complied with in order to administer and operate a company. These requirements also apply with regard to the dissolution of a company.
Limited Partnership (LP)
What is it?
A limited partnership refers to a partnership consisting of a minimum of two partners, with at least one general partner and at least one limited partner. A limited partner refers to a partner who is registered as such by a general partner under the Limited Partnerships Act.
An LP has no separate legal personality, and therefore cannot own property in its own name.
A general partner is responsible for the actions of the LP and is liable for all the debts and obligations of the LP. On the other hand, a limited partner is not liable for the debts and liabilities of the business beyond its agreed contribution, provided it does not participate in the management of the LP.
Advantages
LPs are a useful business structure in “labour-capital” partnerships, where one or more financial backers or investors prefer to contribute money or resources while the other partner performs the work.
There are also minimal formalities and regulatory requirements for a general partner to register a limited partner under the Limited Partnerships Act.
In addition, there are minimal statutory compliance requirements for the administration and operation of an LP. An LP structure also affords tax transparency, as each partner is taxed on an individual basis.
A limited partner has limited personal liability for the debts and liabilities of the business.
Finally, the bankruptcy/winding-up or death of a limited partner will not lead to dissolution of the LP. In addition, an LP structure is easy to dissolve.
Disadvantages
On the other hand, a general partner has unlimited personal liability for the debts and liabilities of the business.
If the limited partner wishes to enjoy limited liability under the structure, he or she cannot participate in the management of the LP.
Finally, an LP cannot be made up of more than 20 partners, unless it is an LP that is formed to carry on professional services (e.g. legal, accounting services).
Limited Liability Partnership (LLP)
What is it?
An LLP is a partnership registered under the Limited Liability Partnerships Act. It has a separate legal personality from its partners, and can own property in its own name.
Advantages
There are minimal formalities and regulatory requirements for partners to register as an LLP. In addition, there are minimal statutory compliance requirements for the administration and operation of an LLP.
An LLP structure also affords tax transparency, as each partner is taxed on an individual basis.
In addition, a partner bears no personal liability for the debts and liabilities of the business, or for the wrongful act or omission of another partner.
An LLP also has perpetual succession, and is not affected by the death or bankruptcy/winding-up of any partner in the LLP. It is also easy to dissolve an LLP.
Finally, there is no cap on the number of shareholders in an LLP.
Disadvantages
In an LLP, every partner is regarded as an agent of the LLP.
In addition, an LLP must make an annual declaration of solvency. Finally, there are various statutory requirements that apply to the dissolution of an LLP.
Variable Capital Company (VCC)
What is it?
The Variable Capital Company (VCC) is a new corporate structure for investment funds. The Variable Capital Companies Act 2018 came into operation on 14 January 2020, allowing for the incorporation of a VCC. A VCC incorporated and existing under this Act has a separate legal personality from its owners or shareholders and can own property in its own name.
A VCC may be set up as a single standalone fund or an umbrella fund. A sub-fund of an umbrella VCC does not have a separate legal personality from the VCC. However, a VCC can sue or be sued in respect of a sub-fund as if each sub-fund were a legal person. The property of a sub-fund is also treated as if the sub-fund were a separate legal personality.
Advantages
A member or shareholder of a VCC has no personal liability for the debts and liabilities of the business. In addition, a VCC has perpetual succession, and is not affected by the death or bankruptcy/winding-up of any member. There is also no cap on the number of members of shareholders of a VCC.
The use of an umbrella VCC allows the sub-funds to share a board of directors and have common service providers. These include the same fund manager, custodian, auditor and administrative agent. Certain administrative, accounting, and compliance functions can also be consolidated under this arrangement.
In terms of the sub-funds, each sub-fund of an umbrella VCC operates as a cell in which its assets and liabilities are segregated and ring-fenced from those of the other sub-funds.
VCCs can also issue shares and redeem fully-paid shares without the need for their shareholders’ approval.
VCCs can pay dividends out of capital, which gives fund managers the flexibility to meet dividend payment obligations.
Finally, the constitution, register of members/shareholders and financial statements of a VCC are not required to be made available for public inspection. This ensures the privacy of the investors. However, the register of shareholders must be disclosed to public authorities when requested for regulatory, supervisory and law enforcement purposes.
Disadvantages
There are certain formalities and regulatory requirements that must be met to incorporate a VCC. These include requirements that a VCC must have:
- a permissible fund manager;
- at least one director who is ordinarily resident in Singapore; and
- at least one director (who may be the same person as the Singapore resident director) who is either a director or a qualified representative of the fund manager of the VCC.
Various statutory requirements also apply to the administration and operation of a VCC. These include the requirement that a VCC must engage an eligible financial institution for the purposes of conducting the necessary checks and measures for compliance with applicable anti-money laundering or counter terrorism financing requirements.
An umbrella VCC must also apply to ACRA to register a sub-fund within seven days after forming the sub-fund.
Various statutory requirements also apply to the dissolution of a VCC or its sub fund (where applicable).
The contents of this article are purely for informational purposes and do not constitute legal advice in any way whatsoever. Nothing published by Steadbook constitutes a legal recommendation, nor should any data or content published by Steadbook be relied upon for any legal proceedings.
Steadbook strongly recommends that you perform your own independent research and/or speak with a qualified lawyer before making any legal decisions pertaining to your company.