In this chapter, we will first delve into unincorporated businesses. I bet in the end, you’ll find a direct answer to the above questions.
By the end of this chapter, you will be able to understand the different types of:
- Sole proprietorships;
- Business trust;
- Associations and societies;
What is an unincorporated business?
This is a business that does not possess a separate legal identity from its owner(s). This means that the owners have natural rights in such a way that they are not treated separately from their corporation, which makes them shoulder all business activities personally and are responsible for all profits and losses.
Now, are you able to categorize your business is incorporated or unincorporated?
Almost there? Let’s jog your mind further.
It is important to point out that these are firms whose central objective is not to operate an organization or to make profit. For example, unincorporated associations, companies limited by guarantee and specific trusts.
An unincorporated association is a business venture established via a contract between individuals who come together in search of a common goal other than making income.
Unincorporated associations are guided by rules that the members have agreed upon and are bound by them.
Examples of unincorporated associations include clubs and societies that are established with the aim of carrying out specific activities other than making profit.
Although the primary goal of unincorporated associations is not to engage in profit-making activities, these organizations may generate income as a byproduct of its operations. The dissemination of such income should be used to realize the goals and objectives of the unincorporated association and not to single members.
Unlike business organizations, unincorporated associations are not separate legal unit from their members. Hence, these entities do not have the authority to hold property in their own name. Rather, single members or trustee hold property for the firm in their initials.
Furthermore, members of an unincorporated association do not have restricted liability on trust for the agency. Unincorporated associations do not have the power to make agreements on their own name. Therefore, they cannot engage in litigation on their own.
An unincorporated association with more than nine members can choose to register itself as a society as per the Societies Act (Cap 311). When unincorporated associations register as societies, they gain some qualities of unincorporated associations. This will be discussed in details below.
A society is established by individuals who come together in search of a common goal based on the rules of their constitution.
As per the Societies Act, a society includes any club collaboration that has more than nine individuals. However, it does not entail:
- Any organization established under documented law associated with business entities as enshrined in Singapore;
- Any firm or association formed under any written law;
- Any restricted liability collaboration established as per the Limited Liability Partnerships Act (Cap 163A);
- A trade union established as per any documented law connected to trade associations in the existing economic environment in Singapore;
- A co-operative established under any inscribed regulation;
- A mutual benefit entity established as per inscribed regulation connected to mutual benefits entities in the current Singapore business environment;
- A firm, partnership, or agency that has less than 21 one individuals, established in order to perform activities of a legal business in search for profit and other gains to the firm, partnership, or single members;
- A class, society, or association of overseas insurers conducting insurance activities in Singapore as per the existing overseas insurers scheme formed under Part IIA of the Insurance Act (Cap 142);
- A learning institution or school management committee established as per existing law that regulates learning institutions in Singapore.
A society is mandated to follow the procedures outlined in its constitution and the existing regulations in Singapore. Examples of these responsibilities as outlined by the Societies Act include:
- Having appropriate accounts and records of contracts and activities of the society for a period not less than five years;
- Providing an Annual return and audited balance sheet to the Registry of Societies every year;
- Submitting any fund raising appeal two months after its conclusion to the Registry of Societies.
- Applying to modify its brand name, location, and regulations;
- Applying to utilize a particular flag, logo, symbol, badge, or other brand aspects;
- Providing an audited balance sheet (with profit, revenue, and expenses) within two months after the completion of a fund-raising appeal;
- Providing a declaration of fixed assets and the name of every trustee; and
- Providing a certificate in case of a voluntary disbanding.
A co-operative society is guided by the Co-operative Societies Act and conduct business operations with the aim of benefiting its members.
The liability of an individual member in societies includes the nominal value of their shares in the entity.
Any net surplus is shared among the members through dividend or patronage reimbursement or by manner of grants to officers of the society, or distributed to any other funds established by the entity.
A sole proprietorship is an unincorporated business consisting of one individual established to perform business activities.
You have to register a business name for a sole proprietorship by strictly adhering to the Business Names Registration Act 2014 and the management guidelines stipulated by the law.
The person who owns and performs sole proprietorship is part of the business and is not separate from the venture. It entails that the business and sole proprietor are not separate legal entities.
Therefore, all debts and liabilities that befall this business venture is stomached by the sole proprietor on personal basis. However, the primary disadvantage is the lack or limited access to capital.
Nonetheless, sole proprietorship is the least sophisticated type of doing business in Singapore. A central element of sole proprietorship is the lack of corporate acquiescence as compared to other kinds of business arrangements.
An example of such scenarios is how these entities are not mandated to produce and maintain accounts for auditing reasons. The sole proprietor is only obliged to have accounts for filing their income tax.
Moreover, a sole proprietor does not require to be responsible to anyone else in the operations of the business and the profit generated by the enterprise is belongs to the sole proprietor.
As a result, the sole proprietor pays tax on the enterprise`s income as part of their personal income tax.
As mentioned earlier, partnerships are one of the core unincorporated business entities. According to the Partnership Act (Cap 391), a partnership refers to “the relation which subsists between persons carrying on a business in common with a view of profit.” Some of the characteristics of a partnership comprised of
- The maximum number of partners is 20
- All the partners assume unlimited liability
- The partners share a collective legal entity, as is the case with sole proprietorships. Consequently, the firm’s actions represent those of the owners as stipulated by the rule of law.
The term “business” is at times used in the Partnership Act is said to refer to these kinds of business structures. People interested in starting a partnership are required by the law to enter into a contract known as the partnership agreement that contains the essential terms and conditions agreed upon by the partners.
This partnership agreement encapsulates important details such as the criteria for sharing the profits and liabilities of the organization, the duty of every partner in the business. Furthermore, the legal document determines the relationship between partners, the procedure for leaving the agreement, and the distribution of the assets of the firm when the partners decide to dissolve the partnership.
One of the partnership’s noteworthy characteristics is that the firm cannot be treated as a separate legal entity from the owners like the sole proprietorship. Therefore, the partners are liable to the obligation of the firm when it comes to legal matters.
In a general partnership, the partner acts as an agent for the other individuals in the contractual agreement such that the acts of one bind all the other partners. Consequently, the owners are held liable unless the partners act on his/her own without the consent from the others or when the other party dealing with the individual realizes that the partners do not represent the firm.
When the identity of one of the partner’s changes, the original partnership agreement is deemed null and void hence dissolving the entire business. A new agreement is created to facilitate the transfer of the old partner’s assets and responsibilities to the new owner.
In situations where the firm lacks the proper details on the procedure of dissolution and the distribution of assets and profits, the transfer of obligation to the new partner becomes a daunting task.
As mentioned earlier, the maximum number of partners required to enter into a partnership agreement is twenty. However, there are instances where this limit is overlooked when forming a general partnership.
According to the Pursuant to s17(4) of the Companies Act, “an association or a partnership formed solely or mainly to carry on any profession or call which under the provisions of any written law may be exercised only by persons who possess the qualifications laid down in such written law to carry on that profession or calling may consist of more than 20 persons.”
An excellent example of such an organization specializing in professional partnerships includes entities such as law firms and accounting firms that are governed by laws and codes of ethics created by accredited institutions that oversee the professions.
Limited partnerships (LPs) were first introduced in Singapore in 2009. A firm classified as a limited partnership is said to be the product of combining a sole proprietorship and a general partnership. Therefore, the rules and obligations of partners in a general partnership are observed, and any new modifications are made by the Limited Partnership Act (Cap 163B). All LPs observe the details stated in the Limited Partnership Act in the country.
In Singapore, LPs are expected to register as limited partnerships and abide by the rules stipulated by the Limited Partnership Act. Furthermore, the firm must ensure compliance with the regulations mentioned under the business Names Registration Act 2014. When it comes to LPs, there are two categories, namely, the general partners and the limited partners.
The general partners have similar obligations to those of the owners of a general partnership. Such partners are expected to
- take an active role in the management of the LP
- be an agent for the LP
- Assume personal liability to the debts and actions of the organization.
The limited partners have different rights and liabilities compared to those of the general partners. According to the terms and conditions laid out in the partnership agreement, limited partners are not liable to the firm’s debts past the amount contributed when creating the business entity (limited liability).
Apart from limited liability, the limited partners are exempted from taking part in the daily management of the company. Since they are also not agents to the firm, such partners’ actions are not binding to the organizations. Limited partners cannot conduct contractual agreements on behalf of the enterprise.
The only exception is when the limited partner is part of the team that runs the firm’s daily management and makes critical decisions. If a limited partner participates in the company’s management, he/she is expected by the law to be accountable for all debts the organization has sustained the same way a general partner assumes liability.
Limited partners are required to register with the Limited Partnership Act to differentiate them from general partners. Additionally, limited partners can exit the partnership agreement without any significant impact on the firm’s normal operations and existence.
LPs are said to exhibit longevity because the company is not dissolved when one of the partners dies or decides to liquidate their assets and contribute to the firm. The government has placed a tax rate on the profits earned by the firm (LP), whereas losses made by the entity cannot be paid off by the partners’ income.
Limited Liability partnerships
A Limited Liability Partnership (LLP) refers to an organization created by more than two individuals to earn profit by conducting legal business and registered under the Limited liability Partnership Act (cap 163A). An LLP that owns other business enterprises is required by the law to register with the Business Names Registration Act 2014.
The obligations and rules of the general partnership are irrelevant in an LLP. However, this does not necessarily mean that there are no similarities between LLPs and general partnerships such as the following
- The partners act as agents for the firm
- The terms of the agreement are written down on a legal document referred to as the LLP Agreement that is similar to the partnership contracts.
- The LLP Agreement outline the rules of engagement and the relationship between partners and the obligations are governed by the First Schedule of the LLP Partnership Act, and
- All partners are taxed on the earned profits depending on their shares in the LLP.
Some of the noteworthy differences between LLPs and general partnerships include;
- LLP is a separate legal entity from the owners
- Since the LLP is a corporate body, it is treated as a legal person implying that it can be sue and be sued by other parties.
- Changes in the identity o the partners of an LLP does not affect the liabilities and obligations of the partners and those of the organization.
- The procedure to dissolve is formulated by the statutes mentioned in the Limited Liability Partnership Act.
- Partners in an LLP have limited liability to the firm’s debts unless they are found guilty of a wrongful act. Each partner is only personally liable for his/her actions, as stipulated by the LLP Act.
- An operating LLP must have one human manager who has attained the requirements of being the topmost authority in the workplace. People who qualify to fill the managerial position in LLPs must reside in Singapore and participate in the firm’s management.
Partners who wish to exit a partnership agreement must comply with the legal document’s terms and conditions. In instances where no LLP agreement exists, the individual must provide a thirty-day notice to the LLP to inform other partners of the intention to resign.
In Singapore, business undertakings can be conducted through trust. The Trustees Act (Cap 337) governs the trusts in the country. When it comes to this business structure, the trustee engages in business activities on behalf of the beneficiary.
The beneficiary enjoys the earnings, such as profit and other proceedings from the invested property. The formation of trusts is done through the ‘trust instrument’ between the trustee and the beneficiary.
The trust instrument outlines the following;
- The invested property and the terms of the trust
- The obligation of the trustee
- The benefits enjoyed by the beneficiary
Since your trust is not considered a legal entity, the trustee is responsible for any debts incurred from investments made on behalf of the beneficiary. On the other hand, the beneficiary only shoulders the debt burden when the trustee was acting under directions his/her direction when the losses were reported. In this case, the debts are viewed as the beneficiary’s fault, not the trustee’s.
Business trusts are ventures or investments that share the same structure as a trust. According to Section 2(a) of the Business Trusts Act (Cap 31A), trusts are created on the property that exhibits the features outlined below;
- The business trust’s primary objective is to ensure the unitholders benefit from the profits and revenue collected from the property being managed. The proceedings and payments on the property can come in the form of rights of ownership, interests, or a title to a particular land.
- The unitholders are exempted from the daily operations and management of the property despite having ownership rights and having the power to provide directions to the trustee.
- The property mentioned in the business trust is managed by the trustee or agent working as per the trustee’s directives
- The unitholders’ contribution and the proceedings from the property managed by the business trust are pooled for either.
- “(A) the units in the business trust issued are exclusively or primarily non-redeemable, or (B) the business trust invests only in real estate and real estate-related assets specified by the authority in the Code on Collective Investment Schemes referred to in section 284 of the Securities and Futures Act (Cap. 289) and is listed on a securities exchange.”
In Singapore, the entity that manages the property on behalf of the beneficiary must be a registered company whose primary objective is to manage the business trust. Such organizations are required to perform their duties consistent with the Business Trust Act.
Since the business trust is not considered a separate legal entity like other firms, the trustee assumes ownership of the assets entrusted to him/her. Following this, the trustee-manager must include essential details in the trust deed, such as the following:
- the specific details concerning the business assets being managed by the registered trustee-manager including the structure and the number of units.
- the authority of the trustee-manager when it comes to overseeing all activities related to supervising the beneficiary assets and operating the registered trust
- the duration of the registered business trust must be stated if it is known
- the terms of the agreement between the trustee and beneficiary when transferring the units to the trust
- the particulars on the payments made to the trustee-manager for the operating the registered business trust and other fees paid for trust property
- the procedure for dissolving the trust instrument
The liability of the unitholder in the business trust depends on the amount contributed in a similar manner share are given to investors in the company. The profit is shared with the unitholder as dividends payable out of the business trust. Furthermore, unitholders do not pay taxes on money received from the trust. This is because the beneficiaries are provided certain privileges
- Limited liability
- The power to replace the trustee-manager
- The authority to change the provisions of the trust deed
- The right to sue for any injustice related to the management of the trust
- The right to be an agent to the business trust
The privileges given to the unitholder can differ depending on the terms on the trust deed. The regulations placed on the business trusts are similar to those of a public company. However, there are additional provisions provided by the Code on Collective Investment Schemes (CIS Code) that outlines the standards on management practices and interaction between the trustees and the trustee-manager.
Real Estate Investment Trusts (REITs)
REITs are similar to trust deeds but they only deal with real-estate assets.
In Singapore, the Securities and Futures Act, the CIS Code and SGX listing define the obligations of all parties involved in the REITs and set the code of ethic.
Conclusion - Unincorporated businesses
Now that you know all the types of unincorporated businesses, it is important to mention that unlike unincorporated businesses, other business can continue with their operations even after the death of the owner or in case an investor buys them off. You must also change the business name and draw up new deeds to facilitate the transfer of property. In addition, while incorporated businesses must report their activities to shareholders and the government, unincorporated business can keep their business activities private.
Fully understanding how to own and operate an incorporated and an unincorporated business in Singapore can help you determine the right model for you. If risk is a concern for you, do not hesitate to seek legal assistance from the experts of Tianlong Services to advise you on all matters if you are uncertain as to how to proceed.