Moving on to incorporated businesses.
By the end of this section, you will understand:
- the characteristics of an incorporated business
- the types of incorporated business and
- the relationship between incorporated businesses.
What is an Incorporated Business?
Basically, “incorporating” is a formal process for setting up a business entity that is completely separate or standalone from the owners. If you want to create and run an incorporated company, you actually want it to be liable for its own profits and losses, taxes, and stand alone in the courts.
The process of incorporation obliges you to strictly follow the stipulated legal procedures of the state, including filing forms, paying fees, appointing a corporate secretary, among others. Once completed, your newly created entity is distinct from you as the owner.
In accordance with the Companies Act, an incorporated company has the power to carry out certain activities that can be performed by a business owner. In other words, your company is humanized or it is considered a natural person who can own property, take up contracts, sue and be sued.
Characteristics of Incorporated Businesses
The following are the condensed characteristics of an incorporated business entity according to Section 19(5) of the Companies Act:
- a corporate body with the power to exercise all functions of an incorporated company;
- may use its business name to prosecute and be prosecuted;
- has perpetual succession;
- can use its business name to own land; and
- has limited liability, including its members.
1. Separate Legal Entity
An incorporated business is seen as an artificial person who can manage all operations like a real human being. The law considers such a company a separate “individual” who follows the principle of separate legal personality.
This means that the quitting, removal, or death of any stakeholder in the company does not affect its continuity in any way. The company can work independently by entering into legal contracts with the remaining directors and members.
2. Legal Right to Own Property
Your incorporated company has the right to own property under its name without any legal drawbacks. In a deeper perspective, even if you are the majority shareholder, you will never have any equitable interest in the company’s property.
This principle similarly applies to a company that is a wholly-owned subsidiary of another. Following from the doctrine of separate legal entity, the holding company does not own the property of its subsidiary.
3. Liable for Its Own Debts
Largely, all liabilities accrued by incorporated businesses remain with it, meaning, any member or director cannot be responsible for its profits or losses since they are seen as a separate legal entities. No one else can pay the debts other than the company itself.
4. Can Prosecute and be Prosecuted
An incorporated company has the power to use its business name to prosecute or be prosecuted in a court of law. The members are not allowed to take its place, but can act as witnesses, which is referred to as the “proper plaintiff rule”.
However, to certain extents, members are allowed to take derivative action, meaning, they can enforce an action in the company’s best interests without enforcing their own personal rights as explained below.
5. Derivative Action
Common Law Derivative Action
This common law principle puts forward that company shareholders can sue other members in relation to a breach of duty. This mostly happens when the company itself is unable to prosecute for those internal irregularities, especially when the party is of a higher authority, such a director or a majority shareholder.
For instance, a director may mobilize majority shareholders to illegitimately shift a democratic vote in their favour. Consequently, a minority shareholder may take up the matter in his/her own hands to sue the transgressors, thus, instituting a derivative action.
Statutory Derivative Action
In accordance with the Companies Act (Sections 216A and 216B), company members can bring statutory derivative actions in the best interests of a company regarding various causes of action.
Provisions under Section 216A(2) allows shareholders to apply for a leave of absence in order to focus on bringing statutory derivative actions against the company. The complainant must also bring the action to court after giving a 14-day notice to all company directors with clear indication that he/she is acting in good faith.
Provisions under s 216A state that the legal action shall not be continued or dismissed even if the company members acknowledge the breach. However, the court may use their evidence of approval to make legal orders under s 216A.
One key advantage that a statutory derivative action has over a common law derivative action is that the company is likely to compensate any legal fees incurred by the complainant for any application made under s 216A.
Types of Incorporated Businesses
1. Limited and unlimited companies
As stipulated in the Companies Act, there are 3 types of companies categorised according to the members’ liability:
- unlimited company
- limited by shares; and
- limited by guarantee.
If you want to form an unlimited company, your shareholders’ liability will not be limited, meaning, they cannot lose their personal assets in the event of a legal dispute. When the company is dissolved, sold or is making losses, the shareholders only lose a proportion of their investment.
Launching or creating an unlimited company usually aims at carrying out specific operations in accordance with certain legislations stipulated by a professional body. For instance, to provide accounting and bookkeeping services.
Generally, the key distinguishing factor that a limited company has compared to other entities is the additional term “Limited” (Ltd) to its business name. Members are limited by the amount of their shares or by guarantee.
a. Limited by Shares
In Singapore, this is the predominant type of limited company. This is because many shareholders prefer using the amount of their share capital as a benchmark for restricting their liability when it comes to any debts incurred and unpaid shares.
Shareholders are only legally responsible to the extent of their original investment, and can only lose the capital they initially put into the business. As soon as the shareholders pay up their original investment in full, creditors cannot ask them to pay any extra amount in case the company wants to wind up due to unpaid debts.
b. Limited by Guarantee
If you are looking forward to creating a company limited by guarantee, ensure your business objectives are aligned for non-profit activities, such as charity, religion and scientific endeavours.
This type of limited company operates on the principle that the liability of its members is limited to the agreed amount of their contribution in the event that it wants to wind up.
The guaranteed amount is usually specified in the company’s constitution, and the members do not have a share capital all through its existence.
Some of the key provisions that a company limited by guarantee must have in their constitution include:
- the number of members during registration; and
- the specific amount that the members agree to contribute to pay for any accrued debts in the event of being wound up or within one year of ceasing to be a member.
Once the company starts operating, the constitution must also specify that all revenues are limited by guarantee and can only be channelled towards operations without directly or indirectly dividing any it to members.
c. Limited by Shares and Guarantee
As stipulated in Section 17(5) of the Companies Act, in Singapore, business entities limited by both shares and guarantee are not recognised.
2. Private companies
In accordance with the Companies Act Section 18(1), you can register a private company if your constitution:
- Disallows share transfer; and
- Restricts its membership to a maximum of 50 individuals (joint shareholders are counted as 1)
If there are any discrepancies with the constitutional provisions, the restrictions stipulated in Section 18(1) of the Companies Act will carry the day. In addition, Section 18(1)(b) allows a private company to modify any restriction on share transfers as well as the number of shareholders needed to pass a special resolution.
The board of directors must also approve the altering of share transfer restrictions before undertaking them or prior to denying members the right to buy shares.
Generally, the key distinguishing factor that a private company has compared to other entities is the additional term “Private Limited” (Pte Ltd) to its business name.
Exempt Private Companies
Abbreviated as “EPC”, this subdivision of private companies bears all the key features of private limited companies, but with the below factors that they must abide by:
- Restricts its membership to a maximum of 20 individuals.
- All shareholders must not be a company, whether directly or indirectly; and
Even with the above-mentioned restrictions, EPCs enjoy a number of benefits. These companies are relieved from certain bans when it comes to credit transactions, grants, quasi-loans, and having company directors who are related by blood.
However, you cannot identify an EPC from other private companies just by looking at their certificate of incorporation. This is because their status constantly changes over the years.
Since you can register an Exempt Private Company as a private company that is limited by shares, it can be considered an “EPC” without the need to acquire a new certificate from the government to ratify their new status.
3. Limited liability companies
Abbreviated as LLC, a Limited Liability Company is one of the new business entities in Singapore that has tremendously grown in popularity over the years.
In accordance with the Companies Act, LLCs are essentially private companies that are limited by shares and they are allowed to have shareholders as individuals only, companies only, or even both.
Some of the prevailing LLCs in the country take account of professional business entities, including accountancy firms, law firms, and other emerging ones.
4. Public companies
Just like the name suggests, public companies refer to companies that are not private, and they are easily distinguished by the term “Limited” (abbreviated as “Ltd”) added at the end of their business names. Public companies are either limited by shares or by guarantee.
In contrast to a private company, this type of a business entity may have more than 50 shareholders and can sell their shares and offer debentures in the public domain. If you are a shareholder of a public company, be rest assured that the Monetary Authority of Singapore had its prospectus prior to the corporation selling its shares and debentures publicly.
This type of business entity is highly regulated compared to its private counterpart because it is allowed to run its operations using public capital.
It is also important to note that not all public companies are considered as listed companies, but every listed company in Singapore is considered a public company.
Existing relationships between Companies
1. Subsidiary companies
In accordance with the Companies Act Section 5(1), Company X can be considered as the subsidiary of Company Y if the following factors fully come into play:
- Has majority members as the board of directors of Company X;
- Has over 50 percent of the voting majority of Company X; or
- Company X is a subsidiary of another corporation that Company Y is a subsidiary.
As further explained in Section 5(3), a company can be considered a subsidiary of another company if:
- It holds the shares of another company in a fiduciary capacity;
- Shares are held:
- By a nominee of Company X (except in a fiduciary capacity); or
- By a nominee of Company X who is a subsidiary of another corporation in a fiduciary capacity.
- Any shares are held by another corporation;
- Any shares are held by an individual according to the provisions of debentures of Company X or of a disregarded trust deed; and
- Any shares are held by a nominee for Company X or its subsidiary.
2. Holding companies
This refers to a business entity that has subsidiaries with the aim of regulating the outstanding stock of other corporations. While holding companies are not allowed to produce goods and services, they are legally permitted to own property, including stock, trademarks, real estate, and related assets.
So how do holding companies generate revenue? They make money through:
- Purchasing and selling various assets;
- Profits generated from their company’s shares or dividends; and
- Offering services to the corporations they own.
3. Related companies
In Singapore, companies are considered as related to one another in three key ways:
- Company X is the subsidiary Company Y;
- Company X is the holding company of Company Y; or
- Company X is the subsidiary of the holding company of Company Y.
In most cases, Company X, which is deemed as the first corporation to be mentioned, is usually related to Company Y and collectively considered both related.
Conclusion - Incorporated businesses
Now that you have fully understood the various types of incorporated businesses in Singapore, you should also know that as soon as the company is registered, you are obliged to hire a competent company secretary within 6 months, preferable a local resident.
Need professional guidance on the incorporation process of your company in Singapore? No worries! Feel free to contact Tianlong Services to learn more about our incorporation services.