Everything you should know about establishing a company limited by guarantee
Singapore allows non-profit organizations to operate all their business activities by forming a company limited by guarantee, charitable trust, and societies. The benefit that you receive by registering Companies Limited by Guarantee (CLGs) involves limited liability and tax benefits.
In this article, we have covered some of the characteristics of a CLG and the process of incorporation.
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6 To What Extent are Companies Limited by Guarantee Subject to Tax and Qualify for Tax Deductions/Exemptions?
About Company Limited by Guarantee?
A Company Limited by Guarantee is mainly incorporated to conduct non-profit activities such as charity work.
Since CLGs are governed by the Companies Act and registered with ACRA, they are usually established by non-profit organizations seeking corporate status.
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How do companies limited by guarantee differ from companies limited by shares?
Like the company limited by shares, the company limited by guarantee does not enjoy the benefit of holding share capital. As a result, the liability of members of the company limited by guarantee is limited to the specific amount they usually undertake to invest in the company’s assets during the time of winding up.
A company limited by shares, on the other hand, is liable for the amount of capital that that shareholder has taken up.
Are companies limited by guarantee private or public companies?
Companies limited by guarantee are called public companies, while those with share capital are considered private companies.
Do I need to establish for-profit organisation as a company limited by guarantee?
The company limited by guarantee is not granted to pay dividends and profit to their members since the structure is not suitable for a for-profit organisation. However, the profit organisation is for those seeking a return on their investment in the form of dividends.
Why Incorporate a Company Limited by Guarantee?
As opposed to not incorporating at all
Several organizations might avoid registration to acquire flexibility and lower cost. Furthermore, the company’s registration in Singapore offers numerous benefits to organizations.
Members who incorporate receive limited liability protection. For example, once a CLG is incorporated, it is regarded as a separate legal entity. Therefore, a CLG can take legal action or sue in its name, although its members are not liable for the actions of the CLG.
At last, the company incorporation might provide you with excellent tax benefits. The companies limited by guarantee needs to pay corporate tax at 17% and can also enjoy the tax directions. In contrast, CLGs those have been given charity status and hence are not subjected to taxation.
As opposed to choosing other legal structures suitable for non-profits, e.g. society or charitable trust
If you are not interested in registering business structure as a company limited by guarantee, non-profit organizations also provides the option like society or charitable trust to conduct their activities. However, before proceeding further, it’s better to look at some crucial differences between these structures.
No doubt CLGs offers you limited liability and tax benefits, still it is imperative to consider your organization’s characteristics before deciding if a CLG is the best structure for your organization.
Usually, a society is composed of about 10 people and is the best choice for a small non-profit group with few members. Hence, a society can prove to be the ideal choice for small non-profit groups with few members. Unlike CLGs, societies are not required to file annual returns to ACRA.
In general, trusts are established by people who want to keep aside some portion of income for charitable purposes each month or annually. That’s why the expenses of establishing and managing the trust can be a bit higher than other charitable options.
Separate legal personality
Like the CLG, society and trust are not legally separate entities. Therefore, members are not entitled to sue or be sued on behalf of society and trust. Instead, individuals have to defend themselves on their own behalf.
In societies and trusts, it is the members who bear their losses; trustees are only liable for the losses of the trusts. On the other side, the companies limited by guarantee are regarded as a separate legal entity and allows its members to enjoy limited liability.
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How to Incorporate a Company Limited by Guarantee in Singapore
The company limited by guarantee needs to follow the application process as specified ACRA to be successfully registered as a legal organisation in Singapore. To register their company limited by guarantee, the organisation needs to apply to ACRA’s BizFile+ website.
A company’s constitution should also specify what each member is obligated to pay if the company is wound up. A firm’s objectives should also be clearly mentioned.
The procedure, documents and fees
You need to pay for registering the company name is $15. The registration fee of a company limited by guarantee is $300. Once the registration fee has been paid, the company gets registered within 15 minutes.
Depending on the stage of the application, it can take up to two months for the application to be approved.
Regulatory Compliance Requirements for Companies Limited by Guarantee
If the CLG undertakes certain activities, it may need a license. This should be done when registering with ACRA.
To What Extent are Companies Limited by Guarantee Subject to Tax and Qualify for Tax Deductions/Exemptions?
CLGs qualify for exemption and tax deductions when it comes to corporate taxes, but the amount of taxable income depends on the type of income earned.
If the CLG:
- Engages in professional or trade associations; and
- Approximately half of its revenue comes from membership fees collected from Singaporeans, which are tax-deductible under section 14 of the Income Tax Act.
- The company is treated as conducting a business, which means the company’s income from Singaporean members and non-members will be addressed to taxes.
Applying for Charity Status for a Company Limited by Guarantee
The company limited by guarantee looking to register for the charity status may be beneficial since it provides total tax exemption on its income.
The CLGs must comply with the regulations laid down by the Commissioner of Charities in order to qualify for the charity status. Charities are allowed to engage in some business activities, but their scope is restricted.
Charity organisations in Singapore do the following:
- Conduct activities on a not-for-profit basis;
- Dedicated exclusively to charitable causes; and
- Conduct activities aimed at achieving those purposes that benefit the public.
Among the charitable purposes are:
- Relief of poverty;
- Advancement of education;
- Advancement of religion; or
- A beneficial purpose to the community, such as promoting health and improving animal welfare.
A charity must apply for charity status via the Charities Portal within three months of being established. The organization must demonstrate to the Commissioner of Charities the following things:
- A charity’s purpose or object is exclusively charitable;
- It must have a minimum of 3 board members, members of the governing board must be Singaporeans or permanent residents, at least two of whom must be Singaporean citizens; and
- Its purpose or object is in the interest of the Singapore community.
Dissolution of a Company Limited by Guarantee
The company limited by guarantee can be dissolved in various ways like winding up and striking off.
The winding-up condition arises when the particular company fails to pay debts. As a result, the business closes down, proceeding from asset sales distributed among creditors. Involuntary wound ups or voluntary wound ups are both possible.
The other way the company limited by guarantee can be dissolved by striking off. Whenever the company has ended its operations or has been fully wound up, its director may apply to ACRA to have its name removed from the register.
What happens to the CLG’s remaining funds/assets? Can they be distributed to members?
Upon dissolution or winding up of the company limited by guarantee, its remaining funds or assets cannot be distributed among the members.
Instead, all its remaining funds should be distributed among the organization performing similar objectives to that of a company limited by guarantee or to the registered charitable trusts determined by the Commissioner of Charity.
The above article involves all the details on how you can set up a company limited by guarantee in Singapore. In the company incorporation process, if you need a certified legal documents translation service in Singapore, then Singapore translators can get all your translation needs covered.