Fund Structures

Limited Partnerships

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A limited partnership (LP) consists of at least one general partner and one limited partner. An individual or a corporation can be a general partner or a limited partner. A limited partner has limited liability for the debts and obligations of the LP, unless the limited partner takes part in the management of the LP. The general partner is liable for all debts and obligations of the limited partnership incurred while it is a general partner. Usually in a fund structure, the general partner will be a limited liability entity formed by the fund’s principals.

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A limited partnership is registered by the general partner with the ACRA. It is possible to maintain the particulars of the limited partners of the LP confidential from the general public if the manager of the fund is a person that is regulated to carry on fund management in Singapore, and other requirements under the Limited Partnership Regulations are satisfied. 

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The advantages of structuring a fund as an LP include:

• The structure suits the different roles of the fund manager (the general partner) and investors (the limited partners) in a fund. In practice the general partner may delegate the investment management to a separate fund management company to help ringfence the fund manager from the liabilities of a general partner. Similarly the fund manager may use a limited partner vehicle to receive carried interest.

• A partnership agreement governs the relationship between the partners, the content of which is only lightly regulated and which means the structure is free from many of the legal constraints and formalities usually applicable to corporate entities, in particular regarding contribution and return of capital and distribution of profits.

• No solvency statement is required when returning capital.

• Distribution of profit or capital can be made at any time as long as the general partner is solvent and would not become insolvent as a result of the distribution.

• LPs can take advantage of some of the financial incentives offered to funds under Singapore law.

 

A disadvantage of structuring a fund as an LP is that it will not be treated by the Inland Revenue Authority of Singapore (IRAS) as a legal person qualifying for tax treaty relief.

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Returns and Interests

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Partners collectively own the partnership’s property, and this gives a partner the right to distribute the partnerships’ profits in accordance with the terms of the partnership agreements. It also gives partners the right to distribute partnership property and assets in accordance with the terms of the partnership agreement upon dissolution of the partnership.

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Liabilities

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Usually, the general partner(s) are fully liable for any debts, obligations or liabilities the limited partnership has. They may be jointly or severally liable for any liabilities of the limited partnership. For limited partner(s), they are liable only up to an agreed contribution.

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Continuity in Law

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The limited partnership continues in perpetuity unless dissolved by an agreement of the general partner(s) or in accordance with the terms of the partnership agreement. This can also be dissolved upon the death or bankruptcy of any general partner. The capital maintenance rules would not apply to a LP.

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Taxation

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The limited partnership would not pay any taxes. However each partner pays a personal tax on their share of the profits.

 

Private Limited Company

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A private limited company incorporated in Singapore may be used to establish a fund. Being a separate legal entity, liability for its debts and obligations lies with the company and the members are liable only to the extent of any amount unpaid on their shares. Members are entitled to a share of any dividends, when declared. Dividends can only be paid out of profits. A private limited company is generally subject to strict accounting and auditing requirements.

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Private limited companies are subject to restrictions on the modes and methods of returning capital to an investor. Buybacks of ordinary shares are limited to 20% of the issued ordinary capital of the company. These can be repurchased out of distributable profits or, if the company is solvent, out of capital. Companies can otherwise only return capital to their shareholders if they follow one of the procedures in the Companies Act for companies to carry out a reduction of capital. Private equity funds typically issue redeemable preference shares to investors. Provided that the shares are fully paid they can be redeemed out of the capital of a company, as long as the company is solvent.

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Despite these drawbacks, company structures are still a viable option for reasons such as ease of establishment and familiarity, and they tend to be used in more joint-venture type deals where there are fewer investors.

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Composition

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The company is owned by shareholders, who own shares in the company. It should have a board of directors who are responsible for the day-to-day management of the business. The board of directors should comprise of at least one director, who may or may not also be the shareholder. Although a fund manager would be appointed to manage the operations and business of the company, the board of directors is ultimately responsible for the company’s business and affairs. 

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Returns and Interests

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The shares in a private company limited by shares gives the shareholder a right to vote at shareholder meetings (unless the shares issued are not voting shares), receive dividends from the Company’s profits, and receive distribution of proceeds of the Company’s assets upon winding up.

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Liabilities

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The shareholders of the company would not be impacted as the company, being a separate legal entity, would be liable for any debts, obligations and liabilities. If the company is unable to pay its debts, its members are liable for the amount unpaid on shares. Usually, the liabilities of the company are to be met out of the company’s assets.

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Continuity in Law

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The company would enjoy perpetual succession until it is wound up in accordance with the Companies Act. The rules on capital maintenance would apply to private companies limited by shares.

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Taxation

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The company would be taxed based on the prevailing corporate tax rate on profits, unless any tax incentive scheme for investment funds reduces the tax liability. Shareholders, on the other hand, do not pay tax on dividends due to the single-tier tax regime.

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Details of the variable capital company structure are provided in separate dedicated sections of this website.

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