Legal Structure of a Singapore Company
When deciding whether to incorporate a private limited liability company in Singapore, it is helpful to understand the structure and attributes of this corporate form. This guide explains what a Singapore company is and how it is organized. Some of the questions it will answer are: a) What is the legal status of a Singapore company? b) What can and can’t a company do? c) Who owns the company? d) Who operates a company? e) What is the Constitution of the company?
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If you already understand the basics of a Singapore private limited company’s corporate structure and simply want to know how to register one in Singapore, please see our Singapore Company Registration Guide which details the procedure and steps for registering a private limited company in Singapore. But if you want an introduction to this corporate structure, please continue reading.
Legal Nature of A Singapore Company
To understand what a limited liability company is and what it can and cannot do, you must understand the legal nature of a company in Singapore. Companies are defined in the law by two characteristics: Separate legal personality and Legal capacity.
SEPARATE LEGAL PERSONALITY
Under the doctrine of separate legal personality, a company is distinct from its owners (shareholders) and operators (directors, officers and employees). Because it is its own legal entity, a company:
- Can own property in its own name
- Can enter into contracts with its employees, directors and officers, customers, suppliers and other third parties
- Can sue and be sued in its own name
- Is responsible for its own liabilities and debts
- Accrues profits in its own name and is taxed on those profits at the corporate tax rate
- Has perpetual succession so continues even if its owners or operators change
This separation of the company from its owners and operators is called the “corporate veil”. One of the greatest benefits of structuring your business as a limited liability company is that it limits the liability of all shareholders. Your business becomes a separate legal person, the only one responsible its own debts and liabilities. In other words, liabilities of the business are insulated from its individual shareholders and therefore do not endanger the personal assets of any shareholder. A creditor can only attack the assets of a shareholder that he or she has invested in the business.
In exceptional circumstances, the corporate veil can be pierced as described on page 5 of this article — and the shareholders, directors, officers or employees held responsible for the liabilities and debts of the corporation — when the company:
- Is used to commit fraud
- Is used to avoid an existing legal obligation or duty
- Is taking wrongful trading positions
- Is acting as the agent or partner of the person(s) who controls the company
Under those circumstances, a court may decide to treat the company and one or more of its associated individuals (shareholders, directors, officers or employees) as one and the same and to hold them personally liable.
Legal capacity refers to the ability of a company to act with legal effect. Companies have the legal capacity to do most things a person could do. In particular, they have the right to engage in any activity or enter into any transaction to benefit the business. In addition, a company can do things a person cannot do, such as issue shares.
When a company is created, the people starting it can place limits on the powers of the company by spelling them out in the Constitution of the company.
Constitution of the Company
Singapore company law states that the Constitution of the company is the legal document through which a company is established and delineated. The Constitution describes the key characteristics of the company and sets forth the framework on the basis of which a company is managed.
Companies can design their own Constitution, or can use a sample . The sample Constitution is shown below and it is appropriate for use in most cases.
The Constitution is a statutorily-endorsed contract between the company and its members and between the members themselves. It applies to all members at the time of incorporation and even those who join after incorporation. If there is an instance of non-compliance with the terms of the Constitution, it is a procedural irregularity, where a member may be able to obtain a declaration or injunction requiring the company to comply in case of non-compliance by a company, and vice versa.
CONTENTS OF THE CONSTITUTION
The Constitution is a simple document that defines the company. It must be dated and contain the following:
- Name of the company; the name must conform to specific rules
- Detailed description of the company’s share capital
- Full name, address and occupation of the members who are subscribing to the company’s shares (also called “subscribers” or “shareholders”)
- Statement displaying the affirmative desire of the subscribers to create a company and their agreement to purchase its shares
- How share capital is issued and the different classes, if any
- Liens and calls on shares and the forfeiture and transmission of the shares
- Procedures for general meetings and how notices of these meetings shall be provided.
The owners of the company
A company is owned by its shareholders, who invest in the company hoping to receive a return on that investment through dividends or through growth in the value of the company and their shares.
NATURE OF SHARES
Singapore companies must have at least one shareholder. Thus, when a company is created, the founders must determine how many shares to issue, to whom and in what proportion. Typically, founders issue shares to themselves. It is not the total number of shares that you own that is important; rather, it is the percentage of the total shares you own because it indicates how much of the company you own. Ownership of shares is documented through share certificates issued to the shareholders.
As the company grows, more shares can be issued and thus a company can raise additional capital for running its business.
RIGHTS AND POWERS OF A SHAREHOLDER
Because a company is a separate legal entity, owning a share in a company does not give the shareholder a legal interest in the company’s property, assets or intellectual property. Instead, it gives the shareholder a bundle of rights as defined by the company’s constitutional documents so long as the company exists and is a functioning business. When the company is no longer functioning, the shareholder has the right to a portion of the value of the company’s assets.
While shareholders do not have a say in the day-to-day running of the company, they are granted certain powers under Singapore law, depending on the class of shares. The different classes of shares will be discussed in the next section. For ordinary shares, the main powers are:
- To attend general meetings and vote: At general meetings, shareholders can vote to elect the board of directors and can propose and vote on resolutions.
- To share in the company’s profits: Company profits are distributed to shareholders through a dividend. In the absence of an agreement, the company pays the dividend in proportion to the shares held by each shareholder. Sometimes the company’s shares are split into different classes, and the dividend allocated to each class can vary.
- To get a final distribution when the company winds up: If the company closes or fails, the shareholders get any assets remaining after the company’s debts and costs are paid. If the absence of an agreement, the residual assets would be divided among the shareholders in proportion to their shareholdings. Sometimes the company’s Articles will give priority in the distribution of residual assets to one class of shares over another.
According to Singapore law, shareholders have the following powers:
- The power to veto certain types of capital reduction for a public company.
- The power to modify, adopt, or annul any provision in the Constitution of the company.
- The power to approve auditors for the company.
- The power to remove directors of the company.
The law provides protections for minority shareholders through the following rights:
- Rights granted through the Constitution of the company.
- The right to information about the company affairs.
- The right to attend, vote and call general meetings of the company.
- The right to be treated fairly. Shareholders have remedies under Section 216 if they feel their rights are being prejudiced.
- The remedy of winding up the company.
Classes of Shares
Singapore law defines specific provisions and obligations for a company in relation to its shares and share capital. While companies, and particularly private companies, often only issue one type of share, namely ordinary shares, Singapore company law does not restrict the type of shares that can be created. Thus, different classes with different rights are permissible. This freedom and flexibility allows a founder to structure the company in a way that allows for varying degrees of management control and distribution of profits.
A founder who wants to keep control over the company can create a class of shares that ensures his or her ongoing management of the business. Or, the founder may want to share the profits with family members without giving them any control over the business. Or, he or she might want to create a pay package for employees that includes a share in the company only while the employee continues to work for the business.
Some common classes of shares with their associated rights are listed below. However, these share classes are created by custom and are not legally defined. You can rename them or redefine them when you set up a new company.
- Ordinary Shares: Every share gets: 1) one vote, 2) and equal part of the dividends, and 3) an equal share in the remaining assets when the company is wound up.
- Alphabet Shares: Used if you want to create different classes of ordinary shares, like Class A, Class B and Class C, to differentiate between shareholders in terms of dividends or rights.
- Management Shares: Issued with extra votings rights. Often given to the founders of the business so they can retain control when additional shares are issued to outside investors.
- Redeemable Shares: Issued with the condition that the company can or will buy it back at some future date. These are often issued to employees.
- Non-voting shares: Issued without the right to attend general meetings and vote. These are often issued to employees and family members of the founders or main shareholder.
- Deferred Shares: No dividend is paid until other classes have received a minimum payment.
- Preference Shares: Issued with a preferential right over ordinary shares with respect to getting dividends and/or assets when the company winds up. Preference shares often are non-voting and redeemable.
Start-ups that are seeking outside funding should establish an equity framework that will accommodate investors with different share classes. Even those that are not seeking funding at the outset should consider setting up such a structure. It gives your company flexibility going forward and communicates business acumen to all third parties with whom you and your business will interact.
A company is run by its directors and officers. They are responsible for overseeing the goals and direction of the company, as well as the day-to-day management of it. Directors of a Singapore company have specific duties and responsibilities.
Under Singapore law, a private company must have at least one director, and a public company must have at three or more. One director must be a local resident of Singapore. Directors are voted in by the shareholders.
Generally, directors have broad powers of management, as defined by Singapore company law and the particular company’s Constitution. In a small private company, the director will manage the company’s business, making all or most of the day-to-day decisions. In a large company, a director will perform a more supervisory and visionary role while the day-to-day decisions will be left to the executive management. Because directors have such broad powers and a supervisory role, they are answerable to the shareholders.
The following document by ACRA provides a comprehensive overview of the role of a director within a Singapore company:
DUTIES OF DIRECTORS
Because directors have broad powers of management over companies that shareholders have invested in, directors are charged with two categories of duties to ensure that they do not abuse their power and squander the investors’ capital:
- Administrative duties of care, skill and diligence
- Fiduciary duties of loyalty and good faith
The administrative duties are enforced by the Accounting and Corporate Regulatory Authority of Singapore (ACRA) and include:
- Satisfy the duty to disclose
- Hire an auditor within 3 months of incorporation
- Maintain a register of the company members and other statutory books at the Registrar
- Maintain proper accounting records
- Hold the first Annual General Meeting within 18 months of incorporation and every year thereafter, at an interval not to exceed 15 months
- Prepare a financial statement for the company’s Annual General Meeting
- Hold regular shareholder and director meetings to review the company’s trading and financial position
The fiduciary duties of directors include:
- Act in good faith: Directors must act honestly when dealing with shareholders, creditors, employees, customers, other companies and the community.
- Use discretion: Directors must use their freedom in making decisions about the company.
- Avoid conflicts of interest: Directors cannot put themselves in situations where their personal interest conflicts with that of the company.
- Avoid debts that cannot be paid: The Companies Act prohibits directors from incurring debts that it knows the company cannot pay.
- No insider trading: The Companies Act prohibits directors from using information gotten through their position at the company for personal gain or for the detriment of the company
CONSEQUENCES OF A BREACH OF DUTY
For a breach of an administrative duty, ACRA can fine the director. If the director breaches his or her fiduciary duty, the director may be subject to censure, discipline or legal action by the corporation. In certain circumstances, the government can criminally prosecute the director and, if found guilty, the director will have to pay a fine and/or go to prison.
Singapore law requires that every company appoint one officer, the company secretary. The company secretary must be a person who is a local resident of Singapore. The director or directors appoint the company secretary.
The company secretary’s role is to ensure that the company complies with Singapore’s regulations for corporations by preparing and filing the required paperwork with ACRA and ensuring all procedural requirements are met. The secretary’s key duties are:
- Organizing the mandated meetings of directors and shareholders
- Taking the minutes of those meetings
- Maintaining the company register
- Preparing and filing required paperwork with ACRA
- Assisting in the preparation of the annual reports
- Acting as a liaison with the Stock Exchange to ensure compliance with all of its requirements
- Arranging for the issue and allotment of shares along with handling the transmission and transfer of those shares
- Acting as advisor to and intermediary between directors, officers and other employees, and shareholders
- Taking care of the common seal of the company as well as its legal documents
A private limited company is owned by its shareholders and operated by its directors and officers. However, it is a separate legal entity from all of them. This separate legal identity insulates the shareholders, directors and officers from personal liability if the company encounters financial problems. As a result, most entrepreneurs looking to start a business in Singapore choose to incorporate a private limited company.