How to

structure your

business?BY: SAMUEL YUEN

MANAGING DIRECTOR

Who are we?

Award winning law firm

that was named “Client’s

Choice for Boutique

Private Client Choice”

and “Fast Emerging Law

Firm” i

Specialises commercial,

corporate, intellectual

property, and private

client matters

Business Structures

Business Structures

Sole Proprietorship

Partnership

General Partnership

Limited Partnership

Company

Private Limited Company

Public Company limited by guarantee

Current requirements for

audit exemption

An Exempt Private Company (EPC) which has 20

or fewer shareholders and

Its shares are not held by any corporation

Revenue not more than S$5 million for the

financial year .

Any company, which is dormant for the financial

year after 15 May 2003.

New requirements for

audit exemption (2015)

Under the amended Companies Act, expected

to take effect in Q2 2015, a private company has

to fulfill 2 out of 3 of the following conditions toenjoy this exemption:

Total annual revenue of not more than $10 million

Total assets worth not more than $10 million

Has 50 employees or less

How should I structure my

business?

What is so

different about

sole proprietors, partnerships and

companies?

Isn’t it similar to

choosing

xiaolongbaos

with different flavors but the same filling?

Isn’t structuring like

packaging? The

packaging may be

different, but is it

not the same?

Case Study

Lim is inspired by the 3rd wavecoffee movement in Singaporeto run his own little coffee jointselling coffee to young coffeeconnoisseurs

He wants to keep it small,simple, uncomplicated – withonly 1 person running the show:himself.

How can Lim set up his business?

Sole Proprietorship

Only one person owning andmanaging the business, knownas the sole proprietor In this case, Lim is the sole proprietor

One requirement – registrationof the business name under theBusiness Registration Act Lim can register his business name “Lim

Coffee Shop”

Sole Proprietorship

Business debt = Personal debt ofsole proprietor Lim is solely responsible for all business debts

without limit. (ie. He has to fork out his ownmoney to pay for overheads)

Sole proprietor will have to relymainly on himself to financebusiness

Only personal income tax on soleproprietor’s profits

Back to case study

Lim’s friend, Khor, sees that Lim’s business is very popular and earning a lot

She has some savings and wants to chip in as partner of the business.

How should Lim and Khor set up a business together?

General Partnership

2 or more persons carrying out business

and interested in making a profit

Maximum number of partners = 20

“Lim Coffee Shop” can request ACRA to change its name to “LIM KHOR Coffee”

General Partnership

Contractual relationship

Express Agreement e.g. verbal agreement or

partnership agreement

Course of dealings e.g. running of the business

No separate legal personality

Lim and Khor are responsible personally for business’

liabilities.

Lim and Khor carry out business as principal partners

and agents (representatives) on behalf of each otherand the partnership

General Partnership

Actions of all partners to 3rd

parties will bind the other

partners and the partnership

If Lim carelessly spills hot coffee

on a young coffee connoisseur

(“Seow Seow Armani”) and

causes 80% burns, Seow Seow

Armani can take legal action for

a claim against (a) Lim, (b) Khorand (c) Lim Khor Coffee.

General Partnership

Partners have unlimited personal liabilityto 3rd parties

Partner’s liability is joint and severable

Although Lim & Khor agree that Lim will bear 60%liability and Khor 40%, 3rd parties (eg Seow SeowArmani) can take legal action against either ANDboth Lim and Khor for 100% of the damages.

If Seow Seow Armani obtains S$5,000 from Lim ascompensation, Lim can turn around and requestthat Khor reimburse him 40% of S$5,000 that he paidout as they were in partnership together.

General Partnership

No perpetual succession

No legal existence of its own

If a partner dies, leaves, retires, the partnership

dissolves automatically.

If Lim has a heart attack and dies, the partnership

dissolves automatically. The business can still be

registered under its former name, Lim Khor Coffee,

but it is a sole proprietorship under Khor.

Tax – only personal income tax on each

partner’s profits

Back to case study

Pete sees that Lim Khor Coffee is very popularand is highly ranked on hungrygowhere andburrple.

He is also a talented barista and cancontribute to the partnership.

However, after hearing about the 80% burnepisode, he is unwilling to full bear all liabilitiesof Lim Khor Coffee

How can Pete be involved?

Limited Partnership

Essentially a partnership (and its characteristics), but:

Limited Partnership Agreement

Register itself as LP under Limited Partnership Act (“LPA”)

Business Registration Act will not apply

Same partnership principles apply

Compliance with LPA

File changes in particulars of the LP

Publication of the LP’s name, registration no on invoices, official documents

Keep proper accounts

Limited Partnership

General partners – like in general partnership, liable for alldebts, obligations of the firm

A partner may be personally liable for claims from lossesresulting from his own wrongful act or omission

Limited partners

Contribute $ and share in profits

Not liable for LP’s debts, obligations beyond the amount ofhis agreed contribution

Cannot be involved in management of LP

Do not have power to bind LP

Pete can be a Limited Partner, while Lim & Khor remain asGeneral Partners. He cannot be involved in managementand cannot sign contracts with other suppliers, etc. onbehalf of Lim Khor Coffee

Limited Partnership

LPs need to notify 3rd parties oftheir limited partner status

Or 3rd parties entitled to treat LPas normal partner, limitedpartnership as normalpartnership

Dissolution occurs when limitedpartner dies/leaves/retires

Only personal income tax oneach partner’s profits

Back to case study

Lim Khor Coffee continues to

grow & thrive

Lim, Khor & Pete are planning to

expand the business but need

additional funds.

More than 20 relatives and friends

want to contribute $$$, and hold

a stake in the company, but

don’t want to be involved in

managing the coffee joint

Company

Separate legal personality

The company is recognised under law as a different

legal person from its owners, as opposed SP/partnership

It has the powers, rights, duties of a natural person.

Lim, Khor and Pete can incorporate a Company which

will contract with other parties.

Perpetual succession

Company will continue to exist, despite shareholder-

changes, until it is properly wound up through

liquidation

If any of Lim, Khor and Pete, or their contributing

shareholders pass away, etc. the company will still exist

Companies

Private Limited Companies

Company Limited by guarantee

Private Limited Company

Company Limited by Shares

Members/Shareholders subscribe to

shares in the Company

Liability is limited to amount that

remains unpaid on a member’s

shares

Shares confer rights – right to vote,

entitlement to participate in

dividends/profits of the Company

Lim, Khor and Pete decide to incorporate a

company with paid-up share capital of S$100, for

themselves and other investors.

In the event that they require more capital, the issue

of fund raising and dilution will be dependent on the

shareholders’ agreement.

Lim

(20%)

LIM KHOR PETE

F&B Pte Ltd

Khor

(20%)

Pete

(20%)

Others

(40%)

Private Limited Company

Company limited by

guarantee (CLG)

Usually used for non-profit making

purposes (charities, recreational clubs)

Member (not shareholder)

liable for the Company’s debts when

winding up

Amount is determined by the fixed

guaranteed sum in the memorandum.

Society vs Company Limited

by Guarantee (CLG)Characteristic Society CLG

Registration Registered with the

Registrar of Societies

Registered with

ACRA

Legal Entity Not separate legal

entities

Separate entities

Liabilities Full liability Limited liability

Statutory reporting

requirements

More flexible

(Self-regulating)

Stringent reporting

requirements

Members &

Management

Committee

10 or more persons

with no particular

qualifications

At least 1 director, 1

company secretary

and 1 auditor

AGM Self-regulated Compulsory

Setting up considerations

How should you structure your business?

Size of the business?

Is there an owner-manager divide?

Would you like the business to have perpetual succession?

Would you like to be liable for others’ debts as business owner?

Main takeaways

How you structure your business will determine

Your personal/business liabilities and risks

How you “Cash-out” your business

Your compliance costs

Your business succession plans, handover

Your business growth opportunities

Checklist for a co-founder’s

agreement

Board composition

Reserved matters

Financing the shareholders’ capital

Obligatory Transfers

Events of default

Non-solicitation and non-competition

Shareholders agreement to prevail company’sarticles

The EndANY QUESTIONS?