Entrepreneurs must seek ways to protect their business assets. Over the years a number of strategies have been developed to help them do so. One of the most effective methods is to divide your business into several subsidiary entities, all owned and controlled by a single holding company. This blog post will take a closer look at this time-tested and popular way to help mitigate risks to your company. Such a strategy can also be useful in optimizing your tax obligations.
Proper Structure Is Key to Long-Term Success
The corporate structure you choose influences not only your business’s day-to-day operations but also the degree of risk to your personal and business assets. Your business structure influences factors such as taxes payable, your ability to raise money, the paperwork you need to file, and your personal liability.
If you want to build an enduring business, create a corporate structure that gives you the right balance of legal protections and benefits. It’s better to develop the proper structure before you register your business. While you can convert to a different business structure in the future, there may be restrictions on the type of change that is permitted. A later change can also result in adverse tax consequences and may sometimes require unintended dissolution, among other complications.
Below are some tips for structuring your new business right at the outset.
Register an “operating entity” rather than a sole proprietorship
Set up an operating entity with limited liability, such as a Private Limited Company, through which to conduct your business. While establishing a partnership or operating as a sole proprietor is certainly easier, doing so means the shareholder can’t protect personal assets from the business’s debts and liability.
Think of your partners’ shares
If you set up your business with partners, there should always be one shareholder with a majority share. Splitting 50/50 or the equivalent can lead to discord, and you will eventually reach an impasse where you disagree on a decision and nobody wants to give in. Allowing one person to hold 51% ensures the company has a true leader. While it won’t reduce the risk of infighting around decisions, it will help your business move forward with minimal delay. You can design a structure where the financial rewards are shared 50/50 but the decision-making authority is split 51/49.
Consider different share classes
If you attract investments or have other reasons for including people other than the founders in the shareholders list, consider issuing differentl share classes. This will enable you to keep voting power in the right hands.
Separate IP from your operating business
You may think that your new venture has no Intellectual Property (IP), but you’d be mistaken. The most obvious and potentially valuable piece of the IP your business already owns is its website.
Imagine that in 5 years from now your company is very successful, and a frivolous lawsuit is brought against your venture by a competitor. If your company loses the lawsuit and it owns the website, trademarks, and other IP, your competitor could legally take over your IP and benefit from your reputation. A simple solution is to let your holding company own all of your business’s IP and simply license those assets to your operating business. This solution separates the IP assets from your operating company in the event it faces any problems, and it could create some tax benefits as well.
Establish a holding company owning your operating entities
It’s wise to have a “buffer” between you and your operating businesses so that challenges that you or your companies might face in the future will be segregated and not threaten everything else that you own. Establishing a Singapore holding company is the easiest way to create such a buffer, and it can provide a number of other benefits.
What Is a Holding Company?
A holding company or a parent company is a business entity that doesn’t manufacture anything, sell any products, services, or conduct any other business operations. It is created for the purpose of holding shares in other companies called subsidiaries and owning other assets. Some of the subsidiary companies it owns actually do manufacture, sell, or otherwise conduct business. These entities are called operating companies. Other subsidiaries can also own real estate, IP, vehicles, equipment, or anything else of value that may be used by the operating companies.
Singapore holding companies are used in the corporate structure of many famous organizations including Alphabet, American Express, Berkshire Hathaway, and many others.
Key Benefits of a Holding Company
There are a number of reasons why holding companies are used. Below are a few:
- Reducing Risks
Placing operating companies and assets such as IP, equipment, etc., in separate entities provides a liability shield. The debts of each subsidiary belong to that subsidiary. This minimises the risk of losing those assets if the operating company performs poorly or becomes insolvent.
- Minimising Taxes
A holding company can be set up to reduce the amount of tax that the group as a whole has to pay.
- Lowering Borrowing Costs
A holding company that has financial strength and lower risk can often obtain loans at a lower interest rate than its operating companies could. The parent company can then loan the funds to the subsidiaries.
Holding companies incorporated in Singapore enjoy additional advantages, because the country’s regulatory framework has been designed to provide preferential treatment to such structures. They include:
- No limitations on the domicile of assets owned by a Singapore holding company.
- Holding companies can benefit from the attractive tax regime of Singapore for holding companies.
- Favourable accounting treatment for consolidated books of a Singapore holding company, whereby losses from one subsidiary can offset gains from another.
- Favourable accounting and tax treatment of passive income of a Singapore holding company.
- Specialised regulations to simplify the compliance framework for holding companies, such as the Financial Holding Companies Act.
Special Incentive Programs
In addition to the above benefits, Singapore offers special government programs to support certain holding companies (often referred to as the Headquarter Incentives). Some of them are below.
- Finance & Treasury Centre (FTC) Incentive. This provides a tax credit for companies in growing treasury management capabilities and using Singapore as a base for conducting treasury management activities.
- Pioneer Certificate Incentive & Development and Expansion Incentive. This gives a tax exemption or a concessionary tax rate to companies that are growing their capabilities and conducting new or expanded activities in Singapore.
- Global Trader Programme. The incentive encourages international trading companies to choose Singapore as a base for their global trading activities by providing a reduced corporate tax rate on qualifying trading incomes.
If you would like to assess your eligibility and apply for any of the above Headquarter Incentives, please contact our Incentives specialist.
Most Foreigners Invest in Singapore Through Holding Companies
Successful entrepreneurs and investors understand the importance of a proper corporate structure involving holding companies. That is why a large number of entrepreneurs choose to invest in Singapore through such entities.
It is noteworthy that most of the Singapore inward Foreign Direct Investments (FDI) come through holdings. For example, U.S. Direct Investment in Singapore in 2019 totaled US $288 billion, primarily in non-bank holding companies, manufacturing, finance, and insurance. If we take the financial & insurance services sector only, the bulk of inward FDI stock comes to investment holding companies, and their share of FDI stock in the sector is usually about 70-80 percent from year to year. At the same time, banks directly receive only about 5 percent of the sector’s FDI, for example.
How You Can Set up a Singapore Holding Company
Setting up a holding company in Singapore is similar to incorporating any other company in Singapore. Among the many business forms in Singapore, such as Public Limited Companies, Limited Liability Partnerships, etc. the most suitable structure is a Private Limited Company, due to its separate legal status, its members’ limited liability, and its eligibility for many Singapore tax incentives.
One more thing you should keep in mind is that there are two types of Singapore holding companies: investment and financial. The first is for businesses operating outside the finance, banking, and insurance industries. The second is for the finance, banking, and insurance sectors. So you should choose accordingly.
How We Can Help
If you are a business owner looking to set up a holding company in Singapore, because of the advantages described above or for any other reason, consider engaging a corporate services provider such as CorporateServices.com to help you with setting up the holding company.
Apart from assisting you with holding company incorporation, our team will also help you meet all post-incorporation compliance requirements, so that you can focus on maximising the growth of your business.
“We engaged CorporateServices.com for the incorporation of two of our holding companies in Singapore. The level of service provided, clarity on pricing, responsive technology backup, proactive customer service, value for money offered will all make CorporateServices.com a valuable associate in your business growth. We highly recommend their services for companies from regions in North America due to quick responsiveness even across time zones and the expectations of similar work culture.”
SUVRA, Founder, KYANITE HOLDING PTE. LTD.
About CorporateServices.com
Headquartered in Singapore, CorporateServices.com, empowers global entrepreneurs with information and tools necessary to discover Singapore as a destination for launching or relocating their startup venture and offers a complete range of company incorporation, immigration, accounting, tax filing, and compliance services in Singapore. The company combines a cutting-edge online platform with an experienced team of industry veterans to offer high-quality and affordable services to its customers. Contact Us if you need assistance with setting up a new Singapore company or if you would like to transfer the administration of your existing company to us.
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