Incorporating in Singapore

Dragon Law

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This version was published on 2016-08-05

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© 2016 Dragon Law

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The first step of starting a business: Form a company . . . . . . . . . . . . . . 2

The most common business types . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Why a private limited company? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

How a private limited company works . . . . . . . . . . . . . . . . . . . . . . . . 6Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Company Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Articles of Association/Constitution . . . . . . . . . . . . . . . . . . . . . . . . . 11

Why you should incorporate early . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

How do you incorporate in Singapore? . . . . . . . . . . . . . . . . . . . . . . . . 13

Incorporating in other jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . 14

About Dragon Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Contact Us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

IntroductionYou often hear people talking about setting up a company, and the word “limited”after a business name comes as no surprise, but what is a company, why do peoplecreate companies, and how do you do it?

This is an introduction to private limited companies in Singapore, what it means, howyou create one, and some of the advantages of a private limited company over otherbusiness structures.

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The first step of starting a business:Form a companyThe first step in starting a business is to decide on a businessstructure. Your choice of a particular type of business vehiclewill depend on your particular situation and plans.

Factors such as whether you intend to carry on businessactivities for profit or want to raise capital through exter-nal investment can influence your decision regarding yourchoice of a business entity.

Your choice of a certain business structure will dependon the following factors:

• What is the nature and purpose of your business?• What is the size and scope of your business?• What is the extent of your personal liability in choosing a particular businessvehicle?

• How much money is required for starting your business? Can you raise capitalon your own or do you need outside investors?

• Can your business attract outside investors?• What are the start-up procedures, costs, timeline, and other requirements?• What are the tax implications in choosing a particular business structure?• What are your current and future business needs?• What is the extent of control you wish to have over your business?• Does your business involve risks?

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The most common business types

Private Limited Company (also known as a Limited Liability Company)The most common business vehicle in Singapore. A private limited companyoffers protection of personal assets from business risks and liabilities and is aseparate legal entity. Compliance requirements and increased formalities aremore complex than other business structures.

Sole ProprietorshipSuitable for small scale and low risk businesses with a sole owner and thisstructure is easy to set up. However, this is not a recommended businessstructure for entrepreneurs as it does not constitute a separate legal entityand does not protect the owner’s personal assets from business liabilities.

PartnershipThis business structure allows two or more people to share ownership of asingle business. Partnerships enable a sharing of responsibility and increasesthe ability to raise funds. However, partners are jointly and individually liablefor the actions of the other partners. The most common form of partnershipis a limited Partnership, as it offers limited liability to limited partners.

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Why a private limited company?A private limited company is the most popular choice of business structure as, unlikesole proprietorship and partnership, the separate legal entity allows owners of thebusiness to avoid personal liability and risk.

Advantages

• Separate legal entityA private limited company has a legal identity of its own, distinct from itsshareholders. This enables the company to acquire assets, go into debt,enter into contracts, or sue or be sued in its own name.

• Limited liabilityThe liability of the shareholders is limited to the amount of their respectiveshareholdings/investment.

• Perpetual successionA change of membership does not affect the company’s continued exis-tence. Shares can be easily transferred and changes in shareholders hasno bearing on the business operations of the company. This means thecompany has perpetual succession notwithstanding the death, resignation,or insolvency of shareholders OR directors.

• Ease of raising moneyBusiness expansion is facilitated by the ease of raising finances, by bringingin new shareholders or issuing more shares to existing shareholders. It iseasier for private limited companies to secure bank loans when comparedto other business entity types.

• Positive imagePrivate limited companies are taken more seriously when compared tosole proprietorships and partnerships, and investors are more willing tocontribute their resources to private limited companies.

• Easier transfer of ownershipComplete or partial transfer of ownership of companies can be done byselling all or part of its total shares or through the issue of new shares toadditional investors. Business operations can continue unaffected and legaldocumentation is not complicated.

• Tax benefits and incentivesThere are several tax benefits that private limited companies enjoy

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Why a private limited company? 5

Disadvantages

• Complex to set-upA private limited company is generally considered more complex andexpensive to establish when compared to sole proprietorships or partner-ships.

• Ongoing complianceThere are a number of statutory compliance requirements that privatelimited companies must adhere to.

• Disclosure requirementsA company has to make certain information available (capital structure,personal particulars of shareholders, directors and secretary etc.) to thepublic by filing returns with the Companies Registry.

• Complex winding up proceduresClosing a company is more complex, time consuming, and expensive whencompared to other business entities.

How a private limited company worksA private limited company has a separate legal personality – it is a separate “person”in the eyes of law, and separate from its owners (the shareholders) and the peoplewho run the business (the directors). Shareholders are liable for the share capital theyprovided only, not the company’s debts.

The company’s legal status allows it to do any of the following:

• Enter into contracts in its own name;• Take legal action and be sued in its own name;• Exist perpetually independent of its shareholders - the company continues toexist even on the death of its shareholders;

• Own its own property and assets; and• Create security for loans for its creditors i.e. the creditor might receive a chargeover the assets of the company.

The directors and shareholders are responsible for what the company does, as theiractions constitute the company’s actions.

The extent of power that the directors and shareholders can exercise is defined bycompany law in general and the company’s Articles of Association (its constitution).

The task of managing the company rests with the board of directors who makepolicy and management decisions. Certain directors’ decisions are then agreed toby shareholders who are entitled to vote their agreement (or dissent) at a generalmeeting. The shareholders’ voting rights are defined by the Articles of Association ofthe company.

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How a private limited company works 7

Non-Singapore individuals

Two local agents (Singapore citizens, permanent residents, or foreigners with em-ployment or dependent passes) must be appointed as local agents by a foreigncompany setting up a branch in Singapore.

Foreigners can run a business overseas and visit on a visitor visa. The businesswill need local involvement in the incorporation, and the appointment of companysecretary and director. To act as a local resident director, a non-Singapore residentwill need to obtain an Employment Pass or Entrepreneur Pass (EntrePass).

Directors

A private limited company must appoint at least one share-holding or non-shareholding director. The director must bean ordinarily resident of Singapore through:

• Singapore citizenship;• Singapore Permanent Resident;• Employment Pass;• Dependent Pass; or• EntrePass

Additional requirements include a minimum age of 18 yearsand bankruptcy or convictions of fraud or dishonesty can disqualify an individual.

Directors perform a supervisory and managerial role in the company. The extentof the directors’ involvement in the day-to-day business operations will vary, but

How a private limited company works 8

all directors, irrespective of the company size, must retain effective control of thecompany and ensure that it is legally compliant at all times.

Directors must have a good working knowledge of all aspects of the company andmust participate in corporate planning, financial decision making, and other strategicplanning of the company.

Additionally, directors have statutory duties to perform as well as a duty of loyalty andgood faith (a fiduciary duty) to the company and shareholders.

Directors’ duties include the following:

1. Duty to act in good faith for the benefit of the company as a whole.2. Duty to use powers for a proper purpose for the benefit of shareholders as a

whole.3. Duty not to delegate powers except with proper authorisation and duty to

exercise independent judgement.4. Duty to exercise care, skill, and diligence.5. Duty to avoid conflicts between personal interests and interests of the company.6. Duty not to enter into transactions inwhich the directors have an interest, except

in compliance with the requirements of the law.7. Duty not to gain advantage from the use of position as “director”.8. Duty not to make unauthorised use of company’s property or information.9. Duty not to accept personal benefit from third parties.

10. Duty to observe the company’s Articles of Association.11. Duty to keep proper books of account.

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How a private limited company works 9

Shareholders

A private limited company must have at least oneshareholder and a maximum of 50 shareholders. Ashareholder can be a person or another companyor a trust; local or foreigner; above 18 years ofage. Shareholders are also sometimes referred toas members.

Shareholders make a financial investment in thecompany by buying shares in the company. Theyown a part of the company in proportion to theshares they own. In the event of the company mak-ing a profit, shareholders are entitled to the profitsby way of dividends.

Usually, shareholders are not directly involved in the management of the company.In a way, the board of directors runs the company on behalf of the shareholders, towhom it is accountable.

Shareholders are entitled to the following rights:

• Right to voteThis includes voting for the appointment or removal of directors andauditors.

• Right to dividendsA company’s profits can either be reinvested in the company to increaseits value or paid out as dividends. If the profits are paid out as dividends,shareholders are entitled to receive a share.

• Right to own a portion of the assets if the company is liquidatedRetention for shareholders

• Right to receive information about the companyThis helps to prevent the company’s managers from acting to the detrimentof the shareholders. In addition, the ability to obtain information can beimportant for shareholders in decidingwhether to take action against them.

• Right to propose shareholder resolutionsAbility to submit non-binding recommendations for voting by the board ofdirectors at an annual meeting

How a private limited company works 10

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Company Secretary

A private limited companymust appoint a companysecretary within six months of incorporating. Thecompany secretary must be a natural person re-siding locally in Singapore. For private limited com-panies, individuals are not required to have anyspecific qualifications or experience. The companysecretary should be an individual that the directorssee capable of carrying out the functions of a com-pany secretary.

The company secretary is responsible for:

• Arranging meetings;• A degree of administrative duties;• Taking down minutes of the meetings;• Maintaining the company’s statutory books;• Filing necessary documents, such as annualreturns with the Companies Registry;

• Ensuring that the company’s statutory compli-ance is met with;

• Registering share transfers; and• Acting as the principal channel of communica-tion between the directors and officers of thecompany.

How a private limited company works 11

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Articles of Association/Constitution

A company’s Articles of Association are its lawful Constitution by regulating theinternal relations between the shareholders themselves and between the companyand its shareholders.

The Articles prescribe the rules for running of the company’s internal affairs.

The Articles usually state:

• Rules concerning the holding of meetings• The process for appointment of directors• The relationship, rights, duties, and responsibilities of shareholders

Why you should incorporate earlyIf you choose to incorporate a private limitedcompany, when should you do it? If you’ve al-ready considered the factors above and madea decision to create a private limited company,then there are certain advantages to incorpo-rating as early as you possibly can.

If you have co-founders, then you can agreeand set out the structure of the company’s own-ership before too much work has been done.A loose arrangement between friends with theidea of a company structure may not offer thestability and reassurance that shareholdings, aboard of directors, and a nominated companysecretary can offer.

As mentioned above, raising capital can be easier if you have a company in place. Forexample, it might be easier to secure a bank loan with a private limited company.

The founders are protected from personal liability from “day one” – i.e. from theearliest possible stage of the business.

You can start being compliant and demonstrating an audit trail of “good practice”from an early stage. Very useful for impressing future investors!

By ensuring youhave the right employment and consultancy agreements in place, youcanmake sure that the company (not youor any other individual) owns the intellectualproperty. The IP is a vital and a valuable business asset, and it should be protected byinclusion as a company asset.

Of course, deciding when to incorporate may depend on other strategic factors, suchas when you can get the right people on board or when your market research iscomplete.

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How do you incorporate in Singapore?Once you have decided to incorporate a private lim-ited company and have chosen a company name,you can apply for incorporation with the SingaporeRegistrar of Companies.

The entire Singapore Registrar of Companies pro-cess can be completed online and incorporationtakes 1 to 2 days.

Name approval. The proposed name of the com-pany must be approved first. Approval takes placeduring filing with the Company Registrar.

All the following information is needed for filinga company incorporation:

• Company name (subject to approval)• Business description• Registered address• Details on shareholders;• Details on directors;• Details on company secretary; and• Constitution (also known as Articles of Association)

The fees for incorporating a company limited by shares are:

• Registration fee of SGD 300 for a private limited company is due to SingaporeRegistrar of Companies at the time of incorporation.

Successful applications will be emailed a company registration number which servesa the official certificate of incorporation.

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Incorporating in other jurisdictionsMany business owners decide to incorporate in another jurisdiction, often what wedescribe as an “offshore” jurisdiction or tax haven, such as Cayman, BVI, or Gibraltar.

This is normally done to minimise tax liabilities or maintain the confidentiality of thebusiness owners.

Contact Dragon Law about incorporating in other justisdictions.

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