Date post: | 19-Jul-2015 |
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Small Business & Entrepreneurship |
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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?