Course Week 1c Study Notes Form and Nature of Business 2023-2024 (1).pdf

The Lee Kong Chian School of Business Academic Year 2023-2024 Loo Khee Sheng Form and Nature of Business and Societal Entities PART A: INTRODUCTION To understand the way business is conducted today, we need to understand the business forms in which business is conducted. The diversity in business...

The Lee Kong Chian School of Business Academic Year 2023-2024 Loo Khee Sheng Form and Nature of Business and Societal Entities PART A: INTRODUCTION To understand the way business is conducted today, we need to understand the business forms in which business is conducted. The diversity in business forms is due to the varied purposes that the business forms serve. The nature and characteristics of these business forms affect the way the owners, managers and other parties behave, which in turn affect the society they operate in. The same applies to non-business forms. We will look at some business forms below, followed by some non-business forms. We will then focus on the company or corporation, whose impact on society has been larger than the other business forms. We will then examine the problems that the corporate form has given rise to. PART B: BUSINESS FORMS In this part, we will discuss the following:● ● ● Business forms in Singapore A few foreign business forms not available locally How foreign businesses can operate in Singapore. PART B1: Business Forms Available in Singapore We will begin by discussing some of the main types of business forms in Singapore. Form and Nature of Business (Academic Year 2023-2024) Some of these forms have mixed business and non-business objectives. A Sole Proprietorship The most basic business form is the sole proprietorship. As the name suggests, a sole proprietorship is a business owned by a single person, the sole proprietor. The sole proprietor can be a natural person (for example, Mr Tan or Miss Lee) or a legal person (for example, a company). Although a sole proprietorship can have a business name different from the sole proprietor (for example, a sole proprietorship known as Scrumptious Sotong owned by its sole proprietor, Valentino Lee), the sole proprietorship does not exist separately from the sole proprietor. Instead, it is considered a part of the sole proprietor. As the sole proprietorship does not exist by itself, separate and apart from the sole proprietor, the sole proprietorship is considered “unincorporated”, meaning that it is not a separate legal entity or a legal personality separate from the sole proprietor. This means that the sole proprietor, as owner, owns all the assets of the sole proprietorship and has the final say over the business. On the flip side, the sole proprietor is also liable for all the debts and liabilities of the business. Accordingly, the liabilities of the sole proprietor can potentially be unlimited. As the sole proprietor’s responsibility for the liabilities and business of the sole proprietorship is unlimited, the regulations governing sole proprietorships are relatively lesser than the regulations governing other types of business entities, where the owners’ liabilities may be limited. Sole proprietorships are usually used by natural persons when the risks and liabilities are manageable and the lighter touch of regulation is preferred. Examples of sole proprietorships are hawkers, traders, lawyers, accountants and book keepers operating alone. Sometimes the sole proprietor is a company and not a natural person, which can lead to the mistaken impression that a natural person is behind a sole proprietorship when a company actually is. A sole proprietorship is commonly called a “firm”. The word "firm" is commonly used to refer to any business entity generally but this usage has to be distinguished from its more technical legal meaning of a business of 2 or more persons1. When we call a sole proprietorship a firm we are using its common meaning. 1 Section 2 of the Business Registration Act (Cap 32) defines a firm as “an unincorporated body of 2 or more individuals, or one or more individuals and one or more corporations, or 2 or more corporations, who have entered into partnership with one another with a view to carrying on business for profit.” Section 4 of the Partnership Act (Cap 391) is also consistent with section 2 of the Business Registration Act. Section 4 provides as follows: “Persons who have entered into partnership with one another are for the purposes of this Act called collectively a firm, and the name under which their business is carried on is called the firm-name”. Similarly, section 2 of the Limited Liability Partnerships Act (Cap 163A) adopts the Business Registration Act’s definition of the “firm”. _____________________________________________________________________ 2 Form and Nature of Business (Academic Year 2023-2024) A Partnership A partnership is a business firm owned by two or more partners. The partners can be natural persons or legal persons. Like a sole proprietorship, a partnership is an unincorporated association as it is not a separate legal entity separate from the partners. There are 2 types of partnerships in Singapore, the general partnership and the limited partnership. In a general partnership, every partner in the partnership is liable jointly with the other partners for all the debts and obligations of the partnership incurred while he or she is a partner. The liability applies regardless of the arrangements between or among the partners themselves over their partnership contributions, rights, responsibilities, liabilities and interests. Every partner’s liability, therefore, is potentially unlimited. When someone outside the partnership (say, a customer) deals with the partnership, he or she sees only one type of partners. As far as the third party is concerned, the partners are all responsible to him or her in the transaction. In Singapore a general partnership can have a maximum of 20 partners, except for some professions. As the responsibility of the partners in general partnerships is unlimited, the regulations governing general partnerships are relatively less than the regulations governing other types of business entities where the owners’ liabilities are limited. However, the regulations governing general partnerships are relatively more than those governing sole proprietorships, as there are more owners involved. General partnerships are viable for natural persons if the risks and liabilities are manageable and the lighter touch of regulation is preferred. An example is a partnership of 2 hawkers. Sometimes partnerships are formed because they are required by law. Examples are partnerships of lawyers and accountants. Goldman Sachs was a well-known partnership until it was converted into a corporation in the late 1990s. Sometimes the partners are companies. Examples are construction companies forming partnerships to undertake projects together. A limited partnership has 2 types of partners: the general partner and the limited partner. A general partner can take part in the management of the limited partnership but the general partner’s liability is unlimited. A limited partner, on the other hand, does not take part in the management of the limited partnership and registers himself as such. A limited partner is not liable for the debts or obligations of the limited partnership beyond the amount of his or her agreed contribution. In Singapore there is no limit to the number of _____________________________________________________________________ 3 Form and Nature of Business (Academic Year 2023-2024) partners in a limited partnership. Similar to the general partnerships, the regulations governing limited partnerships are relatively less than the regulations governing other types of business entities where the owners’ liabilities are limited and relatively more than those governing sole proprietorships. The limited partnership structure is flexible enough to be used for ship financing in Germany, property investment in the UK and investment and management consultancy services in Singapore. In the USA, the limited partnership structure has been used by well known investment funds such as Blackstone, Apollo, Carlyle, and until June 2018 KKR. When the limited partnership is publicly traded and listed on a national securities exchange, it is known as a master limited partnership. The general partner manages the partnership while the investors buy units in the master limited partnership as limited partners. The general partner is usually incentivised with a profit-sharing agreement. A Limited Liability Partnership (LLP) A limited liability partnership (LLP) is formed by 2 or more partners, like a partnership. However, an LLP is different from a partnership in that an LLP is a separate legal entity or personality, whereas a partnership is not. An LLP is, accordingly, a body corporate separate from the partners. The LLP has a “personality” of its own. The LLP can sue or be sued, hold property and operate a business in its name like a person. For example, if a property is transferred from the partners to the LLP, the property is considered the property of the LLP and no longer that of the partners. An important advantage of an LLP, compared to a partnership, is that a partner of an LLP is only liable for his or her own wrongful act or omissions and is not liable for the obligations of the LLP or for the wrongful acts or omissions of the other partners of the LLP. Some partnerships have converted into LLPs because of the protection accorded to the partners. For example, some law firms are LLPs. A Company A company is in law a legal entity with a legal existence. In law, it has a personality and existence of its own. The company is considered distinct from its owners, members, shareholders or stockholders. The company is also considered distinct from its board of directors, CEO, managers and employees. Various terms have been used to describe the legal existence of the company, such as separate legal personality, separate legal person, _____________________________________________________________________ 4 Form and Nature of Business (Academic Year 2023-2024) separate legal entity, legal person, artificial person and incorporated person. The concept of the company as a person is somewhat artificial but it does serve useful purposes. The company can serve as an embodiment of a group of persons, such as a group of investors, to facilitate business. The artificial person (ie. the company) can make it easier for a large group of investors to own assets. Without the company it would be cumbersome to reflect the ownership of the assets in the many names of the investors. This purpose can be seen from the origin of the word “company”, which is derived from 2 Latin words, com (meaning “with”) and panis (meaning “bread”), and refers to persons having meals together. The name “company” is historically suitable for an organisation involving a plurality of persons undertaking something together. However, the requirement for a plurality of members has since been relaxed. Nowadays, it is not uncommon for a modern company to be formed and directed by one person only. Another useful purpose of the company is that a company can exist longer and is not limited to the life span of a natural person. For example, Kongo Gumi Co., Ltd, a Japanese company, is reported to have been in existence since 578 AD. Examples of older Singapore companies are Greatearth, Boustead, Haw Par, Eu Yan Sang, Yeo Hiap Seng, CYC Company and Leung Kai Fook Medicine. The continuity of the company is also more certain unlike a natural person whose time of death is uncertain. The existence of a company also makes it easier for contracts to be entered into. All the employees, suppliers, customers and other parties contract with the company as the nexus (ie connection) of contract. The managers, employees and shareholders of the company can change but the company can continue to exist. This facilitates business and gives it more certainty going forward. Companies are formed or created when the requirements for incorporation have been complied with. In earlier days, a company was formed by a charter from the government. For example, the East India Company received a Royal Charter from Queen Elizabeth on 31 December 1600. Some companies are formed by law. An example is Saint Andrew's Mission Hospital which was formed by the Saint Andrew’s Mission Hospital Ordinance. Nowadays, companies are normally formed under enabling laws such as the Companies Act. The laws specify what needs to be done for a company to be formed. This normally requires the promoters of the company to submit certain documents to the relevant authority. In Singapore the documents are submitted to the Accounting and Corporate Regulatory Authority (ACRA). If the documents are in order and the requirements complied with, the company is incorporated and registered by ACRA. The documentation usually includes a document(s) that sets out the basic characteristics of the company. In Singapore it is called the constitution (previously called the _____________________________________________________________________ 5 Form and Nature of Business (Academic Year 2023-2024) memorandum and articles of association). Some countries use other names such as company charter or other names. There are various types of companies. Some types are common across countries although there may be differences from country to country. Below we will look at some of the common types. Companies can be divided into 2 types in terms of liability: the limited liability companies (or limited companies) and the unlimited liability companies (or unlimited companies). A limited liability company means that the liability of the owners of the company is limited. For example, the company may owe a creditor S$10 million. An owner of a limited liability company is only responsible for the amount of money he or she has agreed to contribute to the company, say S$10. The owner is not responsible for any amount beyond that. The limited liability of the owners is a main reason why businessmen prefer to conduct business in the form of limited liability companies. The law limits their liability to encourage them to invest in the business. If investors must bear the liability of the companies they invest in, they may be deterred by the liability they might be exposed to. The investors might not be in a position to determine how the companies are managed or how the business will turn out. There are, however, exceptions to the limited liability of the members. The exceptions include cases of fraud or where the company is a sham or façade. An unlimited liability company, on the other hand, is one where the owners of the company have unlimited liability and are fully responsible for the debts of the company. When the company does not have sufficient money to pay its debts, the owners must cover the shortfall without limit. They do this by contributing to the assets of the company. Given this characteristic of the unlimited liability company, businessmen do not prefer this type of companies. Unlimited liability companies exist, however, usually because of the law of the place where the company operates. The law may require certain businesses to be conducted in the form of unlimited liability companies. Sometimes, unlimited liability companies are given special exemptions under the relevant law, such as exemption from disclosing its financial statements to the public and tax privileges. For example, the Irish subsidiary of Apple Computer is an unlimited company and is exempted from filing its accounts under Irish law. For both limited and unlimited companies, the company's liability is unlimited. A company must pay off every cent it owes to its creditors. If the company is not able to pay its debt, it can be wound up and dissolved. Most companies issue shares. These companies issue shares to the members on agreed terms, such as the issue price. Some companies do not issue shares. These companies are called companies limited by guarantee. The members do not own shares in the company _____________________________________________________________________ 6 Form and Nature of Business (Academic Year 2023-2024) as the members do not expect to receive any dividends from the company. Instead the members guarantee to contribute an agreed amount if necessary when the company winds up. If the company is wound up, a member pays the amount he has agreed to contribute on winding up. Once the contribution has been fully paid, the member is no longer liable to contribute further on the winding up of the company. Companies limited by guarantee are usually used as corporate vehicles for charitable, scientific, religious or artistic purposes. Under Singapore law, companies are divided into private and public companies. A private company must satisfy 2 requirements. It must limit its members to not more than 50 and there must be restriction on the right of members to transfer their shares. A company that is not a private company is a public company. Accordingly, a public company can have more than 50 members or it can have no restriction on the right of its members to transfer their shares or both. A private company need not necessarily be small. Temasek Holdings (Pte) Ltd is a private company but it manages a portfolio of more than S$100 billion. It just means that Temasek complies with the 2 conditions, namely, it restricts the right of a member to transfer the member's shares in the company and it has not more than 50 members. Listed companies are public companies and not private companies because a listed company normally has more than 50 members and the right of the shareholders to sell their shares is not restricted. Otherwise, whenever investors wish to sell their shares they must obtain approval from the company. Some professional companies can only be used by the professionals in their practice. Public accountants can practise in Public Accounting Corporations (PACs), while lawyers can practise in Law Corporations (LLC). There are in form companies but they are subject to regulations pertaining to their professions. The Singapore limited liability company is to be distinguished from the United States limited liability company (LLC). While the member of a USA LLC enjoys limited liability, the member is treated as a sole proprietor if there is only one member. If the LLC has more than one member they are treated as partners. One consequence is the tax treatment of the LLCs. Further, the USA has Anonymous LLCs, whose members' identities can be kept secret. Consequently, if a property in the USA is owned by an Anonymous LLC, the public may not be able to find out the identity of its real owner. Co-operative or Co-operative Societies A co-operative or co-operative society is a group of persons who join together (called _____________________________________________________________________ 7 Form and Nature of Business (Academic Year 2023-2024) the members) to pool resources to promote their interests. As the name suggests, a cooperative is a co-operation of a group of people. By acting together, they can achieve economies of scale and greater bargaining power. Below are some examples:● ● ● ● ● A group of members sets up a co-operative to operate a retail outlet to provide goods to themselves (consumer co-operatives). A group of members sets up a credit co-operative or a loan and thrift cooperative. The members place deposits with the co-operative and the co-operative gives loans to its members. A group of farmers sets up a co-operative to sell their produce in the market. By pooling their resources and selling as a group they can market their products more effectively and obtain better prices for their products (producer or marketing co-operatives). A group of farmer sets up a co-operative to source for equipment from suppliers. By acting as a group they can obtain better prices from the suppliers (supply cooperatives). A group of workers sets up a co-operative to manufacture and provide goods and services (workers co-operatives) A co-operative society can also promote the interests of both members and non members. Some co-operative societies facilitate the operations of other co-operative societies (apex organisations). Membership in an apex organisation is limited to co-operative societies. The Singapore National Co-operative Federation, established in 1980, is an apex cooperative set up to promote the interests of co-operatives. Below is the basic structure of a co-operative society:- _____________________________________________________________________ 8 Form and Nature of Business (Academic Year 2023-2024) Member-Owners Elect Reports to Board of Director Hires Reports to Management Hires Reports to Staff In Singapore, a co-operative society is a body corporate and has separate legal personality, like a company. To ensure that a co-operative society promotes the interest of its members, rather than a particular individual, the rights of its members are regulated. In Singapore, an individual member can hold not more than 20% of the share capital of a cooperative society and has only 1 vote regardless of the number of shares he or she owns. These rules ensure that no individual member dominates a co-operative society and that the benefits of a co-operative are spread out more evenly among the members. Further, membership in a co-operative society is limited to individuals, societies and trade unions. As a result, a company is prohibited from becoming a member of a co-operative society. This lessens the profit motive of co-operatives. The table below sets out some differences between a company limited by shares and a cooperative. Company limited by shares Predominantly for profit 1 share 1 vote No legal limit to number of shares owned by an individual Usually cannot return shares to get back the capital invested. The share capital can be maintained. Co-operative Promote interest of members 1 member 1 vote Legal limit to individual ownership of shares Usually can return shares to get back the capital invested. If members return their shares, the capital of the co-operative will be reduced accordingly. Can transfer shares to third parties but may Usually cannot transfer shares to third party be restricted for private companies _____________________________________________________________________ 9 Form and Nature of Business (Academic Year 2023-2024) In Singapore, the earliest co-operative societies in the 1920s took the form of thrift-andloan societies. They encouraged thrift by receiving deposits from members and help members by extending loans to them. At that time, bank loans were not so readily available and loan sharks held sway.2 The Singapore Government Staff Credit CoOperative Society Ltd., registered on 7 October 1925, is Singapore's first co-operative society. It is still in operation today. Its members are staff employed in the Civil Service, Statutory Boards and Government-Linked Companies. NTUC Fairprice Co-operative Ltd, owner of the supermarket chain, FairPrice, is a well-known co-operative society in Singapore. Well known co-operatives overseas include:● ● ● ● Spanish football club FC Barcelona. Sunkist, the oldest citrus fruit cooperative in USA whose members are fruit growers. Danish butter manufacturer Lurpak. Dutch Rabobank (a bank). In Europe a guarantee society can take the form of a co-operative. Small businesses with insufficient assets may have difficulty obtaining loans from banks. By pooling resources to form a guarantee society, the guarantee society can provide guarantees to the banks to facilitate the financing of smaller businesses. Some co-operatives have converted to corporations. NTUC Comfort, a taxi co-operative and then Singapore’s biggest taxi operator, was corporatised and renamed Comfort Transportation Pte Ltd in 1993. In 2022 NTUC Income Insurance Co-operative Limited started its corporatisation exercise to convert to a company called Income Insurance Limited. Social Enterprises A social enterprise is a business which aims to strike a balance between the making of profits and the achievement of social purposes, such as employment for ex-prisoners or persons with disability. A social enterprise aims to generate revenue to sustain itself and meet social needs at the same time. The owners of a social enterprise do not expect to reap much profits or returns from their investments. However, some businesses promote themselves as social enterprises but they are actually for-profit businesses in disguise. 2 Speech by Mr Lim Boon Heng, Minister without Portfolio, at the First Co-operative Leaders’ Conference (Co-operative Strategic Review) at York Hotel on Sunday, 27 February 1994 at 10 am. https://www.nas.gov.sg/archivesonline/data/pdfdoc/lbh19940227s.pdf (accessed 22 July 2022) _____________________________________________________________________ 10 Form and Nature of Business (Academic Year 2023-2024) In Singapore, social enterprises take the form of companies, co-operatives or societies. Singapore does not have any specialised business form for social enterprises, unlike other countries with specialised forms such as community interest companies, benefit corporations, low profit limited liability corporations and the flexible purpose corporations (which are discussed below). Examples of organisations that hold themselves out as social enterprises are: ● ● ● Eighteen Chefs (employment of ex-convicts), Pope Jai Thai (employment of the disadvantaged) and Breakthrough Cafeteria (opened by Reverend Simon Neo, a former drug offender, to hire reformed drug addicts to help them get back on their feet). Unit Trusts A unit trust in Singapore is a trust arrangement involving 3 parties, namely, the trustee, the manager and the investors. A Unit Trust structure Manager Trustees Assets and Liabilities Unitholders A trust is an arrangement where a trustee(s) holds property for the real owner called the beneficiary. The trustee can be the real owner’s family member, a trusted friend or a professional. Trusts are put in place for various reasons, such as to preserve confidentiality, for administrative convenience or for legal reasons. Some trusts are secret and unknown to outsiders while some are public and disclosed. When the trust relationship is secret, the trustee is reflected as the owner in the public records while the existence of the trust and identify of the real owner are unknown. The real owner can obtain signed documentation from the trustee (such as a trust deed) to evidence the trust and to safeguard his interest. _____________________________________________________________________ 11 Form and Nature of Business (Academic Year 2023-2024) In the case of a unit trust the investors collectively invest in the unit trust and are issued units in the unit trust (hence its name). The units reflect their ownership of the unit trust. The trustee holds the assets and investments of the unit trust for the investors but does not manage the investment of the unit trust. The investment of the unit trust is handled by a manager, which must be independent of the trustee. The trustee acts as the custodian of the invested moneys and assets and ensures that the managers invest the funds according to the terms of the unit trust. In Singapore a unit trust is also called a collective investment scheme. REITS A REIT is a Real Estate Investment Trust. It takes the form of a unit trust but invests predominantly in real estate. Singapore REITs are commonly referred to as S-REITs. There are various REITs listed on the Singapore Stock Exchange. Capitamall Trust is an S-REIT, with a market capitalisation of more than S$6 billion as at June 2011. Business Trusts A business trust is similar to a unit trust in that the assets and business are held on trust for the investors. Unlike a unit trust, a business trust does not have separate trustee and manager. Instead, one entity acts as the trustee-manager of a business trust, as the roles of trustee and manager are combined in one entity. An example of a business trust is Hutchison Port Holdings Trust which is listed on the Singapore Stock Exchange. A Business Trust Structure Trustee-Manager: Assets and Liabilities Holds the assets and manage the business Unitholder(s): Holder of the only unit in the Business Trust _____________________________________________________________________ 12 Form and Nature of Business (Academic Year 2023-2024) Chit Fund In a Chit Fund a group of persons each contribute an equal amount into a pool. On an agreed day each person can bid to borrow the money in the pool. The pool is lent to the person who is willing to pay the highest interest. When the borrower repays the loan plus interest, the money is divided amongst those who contributed towards the pool. In a notorious Singapore case that took place in the 1960s and early 1970s involving one Abdul Gaffar Mohamed Ibrahim and the Gemini Chit Fund Corporation Ltd, thousands lost an estimated S$50 million in a swindle perpetrated by Abdul Gaffar. He was eventually found guilty and sentenced to life imprisonment. Variable Capital Company A variable capital company (“VCC”) is a body corporate having the sole object of being one or more collective investment schemes (see unit trust above). A VCC can be an umbrella VCC meaning a VCC which consists of 2 or more collective investment schemes (called “sub-funds”). The assets of a sub-fund are not affected by the liabilities of the VCC or any other sub-funds of the VCC. The assets of a sub-fund are only affected by the liabilities of the sub-fund itself. PART B2: Foreign Hybrid Business Forms Other countries have come up with hybrid business forms for the pursuit of both profits and wider social or environmental purposes. We will briefly look at a few of them below which are presently not available in Singapore. A Community Interest Company (CIC) Community Interest Companies (CICs) originated from the United Kingdom. A CIC must register and apply to the CIC regulator for its CIC status. One unique characteristic of a CIC is that it must meet a “community interest benefit test”, namely, whether its activities are being carried on for the benefit of the community. The community benefited must be a genuine section of the community. Hence, the goals of a CIC are not to solely benefit shareholders. A CIC must submit a report detailing its activities annually to the CIC regulator. _____________________________________________________________________ 13 Form and Nature of Business (Academic Year 2023-2024) Another unique characteristic of the CIC is the “assets lock”. The assets of a CIC are locked up for charitable purposes. The disposal or transfer of the assets is restricted by regulation. If the CIC is dissolved, the remaining assets, after payment of liabilities, must be transferred to another CIC or charity. A third characteristic of the CIC is the restrictions on the payment of dividends. There are limits on how much dividends are payable to the members, which is presently fixed at 35% of distributable profits. An example of a successful CIC is NextGenUS, a provider of high-speed internet in the UK. A Low-Profit Limited Liability Company (L3C) A low-profit limited liability company (L3C) is a hybrid between a for-profit company and a non-profit. It is non-profit in that it must have a primarily charitable purpose with profit making as a secondary purpose. It is for-profit in that the investors are entitled to distributions and appreciation in their investment. L3Cs can be incorporated in several states in the USA. A Benefit Corporation Benefit corporations are a new class of corporations that are intended to "create a material positive impact on society and the environment, taken as a whole, assessed against a third party standard." They are required to publicly report on their overall social and environmental performance against a third party standard annually. However, the report need not be audited or certified by any third party standards organization. They are also not required to adopt any particular third party standard in preparing their reports. Benefit corporations were first introduced in the state of Maryland and have been adopted in several states in the U.S. Patagonia, Inc., a seller of sustainable outdoor clothing, is an example of a benefit corporation. B Corporation B Corporations are sometimes confused with benefit corporations. B Corporations are corporations certified by B Labs, a non-profit organisation, to meet certain standards of social and environmental performance. A B Corporation may or may not be a benefit corporation. _____________________________________________________________________ 14 Form and Nature of Business (Academic Year 2023-2024) A benefit corporation may register with B Labs as a B Corporation and hence be both a benefit corporation and a B Corporation. When a benefit corporation does not register as a B Corporation, it is just a benefit corporation and not a B Corporation. On the other hand, a company that is not a benefit corporation may register as a B Corporation with B Labs. If so, the company, while not a benefit corporation, is a B Corporation. Bettr Barista Pte Ltd is Singapore’s first certified B Corporation. A Flexible Purpose Corporation (FPC) Flexible Purpose Corporations (FPCs) are a new type of corporations introduced in California, USA. A FPC must specify at least one “special purpose” in its constitutive document, such as promoting environmental sustainability or minimizing adverse effects on its employees. The boards and management are allowed to consider the special purpose(s) against shareholder value. A FPC is required to publish regular reports on the impact or returns of its social or environmental actions. A FPC is distinguished from a company in that a FPC is expressly allowed to promote the interest of the community or the employees rather than the members. PART B3: Other types of Foreign Business Forms One should be aware that the business forms discussed above are not exhaustive. Other countries have created different types of business forms. The business forms discussed above can also have different characteristics in other countries. This note will mention just one which is the Decentralised Autonomous Organisation (DAO). Decentralised Autonomous Organisation (DAO) Under Wyoming law, a decentralised autonomous organisation (“DAO”) is a type of LLC that is governed by a smart contract (basically automated transactions comprised of code, script or programming language that executes the terms of an agreement). A DAO is denoted by the word "DAO", "LAO" (standing for limited liability autonomous organization) or "DAO LLC.” in its name. The management of a DAO can be vested in its members, if member managed, or the smart contract, if algorithmically managed. DAOs are “decentralized” organizations because all their members, as opposed to directors and executives, can make decisions. DAOs are “autonomous” because they can employ smart contracts that automatically execute actions when certain conditions are _____________________________________________________________________ 15 Form and Nature of Business (Academic Year 2023-2024) met, without requiring human approval. Each member can have one vote each or a member can have a number of votes based on the digital assets contributed by the member (eg. different amount of tokens). Wyoming became the first state in the United States of America to pass legislation into law recognizing DAO as a distinct form of LLC. All decisions are made by majority vote by either by members or through a computer algorithm. American CryptoFed Dao is the first legally recognized DAO in the U.S.3 PART B4: Foreign Businesses in Singapore A country usually regulates the local activities of foreign businesses. A foreign business that wishes to engage in business in the host country has a number of options. It can duly register itself in the host country as a branch or it can set up a subsidiary company in the host country. When a company establishes a branch in the host country, the branch exists as a part of the company and not as a separate entity. A subsidiary, on the other hand, is an entity separate from the foreign company. For example, Commerzbank AG, a German bank, operates in Singapore through its Singapore branch instead of a Singapore subsidiary. On the other hand, AIG, the US insurer, operates in Singapore through its Singapore subsidiary, AIA Singapore Pte Ltd. An entity with branches may find it easier to relocate moneys, assets and personnel among its branches as all the branches are part of the same entity. On the other hand, each branch’s prospects may be dependent on the other branches of the entity. The Singapore branch may be forced to close down when the entity as a whole is insolvent even though the Singapore branch is doing well. A foreign company can also engage in business through a local agent or distributor. In Singapore if a foreign company does not engage in business in Singapore but merely wants an outpost for market research, feasibility studies and liaison work, it can set up a Singapore Representative Office. PART C: ENTITIES NOT PRIMARILY FOR PROFIT 3 Adriana Hamacher, America’s First Legal DAO Approved in Wyoming, https://decrypt.co/75222/americas-first-dao-approved-in-wyoming (accessed 22 July 2022). _____________________________________________________________________ 16 Form and Nature of Business (Academic Year 2023-2024) In contrast to business forms, there are entities or arrangements that do not have profitmaking as their main objective. Some of them engage in business to sustain their operations but the members do not expect to reap any dividends or financial returns from their contribution. We will discuss a few of these entities below. Societies A society is a group of people coming together for a common purpose. In Singapore societies are associations of 10 or more persons and are not bodies corporate. They are not to be confused with the Co-operative Societies discussed above. In Singapore, even though a society is not a body corporate, it can sue and be sued in its registered name. However, a judgment against a society cannot be enforced against its officers or members. A society is not a suitable vehicle for the pursuit of profits, as its place of business and branches must be approved. Examples of Singapore societies are Nature Society (Singapore), AWARE, Securities Investors Association (Singapore)(SIAS) and various political parties. Trade Unions Trade unions are associations of workmen or employers, whose principal object is to promote the interests of the workmen or employers. In Singapore a trade union is not a body corporate. 2 or more trade unions can form a federation of trade unions. Examples of workers trade unions are the unions representing SIA pilots and SIA workers. An example of an employers’ trade union is the Singapore National Employer Federation. The National Trades Union Congress is the only federation of trade unions in Singapore. Management Corporations A management corporation is a body corporate formed when a development is subdivided into separate units. This allows for each unit to be owned by a separate owner. The common property, such as the lifts, refuse bin and guard house, is owned by all the unit owners collectively. Examples of strata title developments are condominiums, office buildings and factories. The management corporation is constituted by the owners of the units in the development and manages the common property for the owners. A development that is not subdivided, on the other hand, is owned as one property. Consequently, it does not have a management corporation. Management corporations had been widely reported in the media due to the disputes _____________________________________________________________________ 17 Form and Nature of Business (Academic Year 2023-2024) among the owners over the sale of their units en-bloc (ie. as a whole), such as those of Gilman Heights and Horizon Towers. Singapore used to have HUDC developments (such as Braddell Heights) with management corporations but HUDC developments had all been converted into private properties. Companies Limited By Guarantee Companies limited by guarantee are discussed above and are not entities for profit. Examples of companies limited by guarantee are charitable foundations, such as the Lee Foundation, educational institutions, such as Singapore Management University, and churches. Non-Profit Organisations, Charities and Institutions of Public Character The name “non-profit organisation” suggests an organisation that does not make a profit, but it is actually a misnomer because some non-profit organisations do make profits. The difference between a non-profit organisation and a “for-profit organisation” is that a non-profit organisation does not have profit as its main objective, even if profit is actually made, whereas a for-profit organisation is expected to do so. The members of a non-profit organisation do not expect any financial returns from their investments, whereas the members of for-profit organisations do. Due to the misnomer, some prefer to use the term “not-for-profit organisation”. However, the use of the phrase "non-profit organisation" has become too prevalent to be discontinued altogether. Non-profit organisations are also known as voluntary welfare organisations. Non-profit organisations can take the form of a company limited by guarantee, a society or a charitable trust (where the properties and assets are managed by trustees for charitable purposes). In Singapore, non-profit organisations that are exclusively charitable can be registered in Singapore as charities. This gives them tax exempt status and the status of a charity to help them raise funds from the public. In Singapore, some charities are further registered as Institutions of Public Character (IPC). Donations to IPCs enjoy tax deductions. National Kidney Foundation is a well known charity and Institution of Public Character in Singapore. Some businessmen and companies engage in charities by setting up charities or foundations separately from their businesses. The separation helps the charities to operate _____________________________________________________________________ 18 Form and Nature of Business (Academic Year 2023-2024) as charities thereby gaining them tax exempt status while the businesses continue to operate on a commercial basis subject to tax. One example is The Shaw Foundation Pte, a company limited by guarantee, was set up by the Shaw brothers in 1957 and is a registered charity. It owns the Shaw Centre at Orchard Road and various properties. It donates the income received to various charities. Another example is Google.org which is the charitable arm of Google. To fund the organisation, Google granted three million shares to Google.org. The Walmart family has also set up Walmart Foundation as a charity. Walmart Foundation had been accused of making donations to reduce local opposition to the expansion of Walmart, the retailer, into some urban areas. They argue that this violated the terms of the Foundation's tax-exempt status by directly benefiting the business of Walmart, the retailer. Non Governmental Organisations (NGOs) Non Governmental Organisations are basically organisations that are not part of the government or are independent of the government. Societies and charities, such as the Red Cross, are examples of NGOs. Mutual Benefit Organisations Mutual Benefit Organisations are organisations in which their members pool funds to provide relief in times of need. The following are some examples are mutual benefit organisations:● organisations for the relief or maintenance of the members or their family members during their sickness or infirmity ● organisations for the relief of members during unemployment or in distressed circumstances ● organisations for the payment of money on the death of a member ● organisations for the care of orphan children during their minority. An example is the Funeral Fund Society of the Church of St. Peter & St Paul. PART D: THE COMPANY _____________________________________________________________________ 19 Form and Nature of Business (Academic Year 2023-2024) Having looked at various business and non-business forms above, we now focus on the company or corporation. A company can serves many functions. A company can be:● ● ● ● ● ● ● ● ● the sole proprietor of a sole proprietorship a partner of a partnership a partner of an LLP a shareholder of another company a subsidiary of another company a trustee of a unit trust or REIT a manager of a unit trust or REIT a trustee-manager of a business trust a unit holder of a unit trust or a business trust. A company can operate a profit-making business, a social enterprise or a non-profit endeavour, such as a charity. Given its utility, it is much used. We will look at some characteristics of the company, namely, the corporate structure, the life cycle of the company, and some of the problems associated with the company form. PART D1: The Corporate Structure When a company is formed, it becomes a legal or artificial person, with different “limbs”, “organs” or “parts”. The principal parts of the company are:● The directors or board of directors; ● The board committees; ● The management and employees; ● The secretary of the company; ● The auditors of the company; ● The members or shareholders The Board of Directors The law usually prescribes the number of directors that a company must have. Previously, Singapore companies must have at least 2 directors. Now a Singapore company need only have one director as long as he or she satisfies the requirements, such as residency. Normally the directors of the company are appointed and removed by the members of the company. Directors are sometimes paid director's fees for acting as directors. _____________________________________________________________________ 20 Form and Nature of Business (Academic Year 2023-2024) The head of the board of directors is commonly called the Chairman of the Board. The Chairman usually chairs and controls the meetings of the board of directors. The power of the Chairman is usually specified in the constitution of the company. The Responsibility of the Directors The directors' responsibility is to manage the business of the company. They can manage the company themselves or they can do so through managers, who actually manage the company. Whether the directors manage the business themselves or direct the management, the directors have overall responsibility for the business of the company. The directors of a company are fiduciaries of the company. The word "fiduciary" is derived from the Latin root "fidere" meaning "to trust". A fiduciary is a person entrusted with property or power for the benefit of another person, called the principal or beneficiary. A fiduciary relationship is based on a relationship of confidence and trust between the fiduciary and the principal. In the case of a director, the company entrusts property and power to the director to further the interest of the company. The director owes fiduciary duties to the company and act in the interest of the company. Generally, the directors must perform their duties in accordance with the law, the constitution and the binding resolutions of the shareholders. The scope of a director's duties changes over time and their application can be unclear at times but there are 3 major fiduciary duties of directors:● ● ● the duty to exercise due skill, care and diligence in performing his or her duties. the duty to act in the best interest of the company the duty to disclose and act transparently. The duty to act with due skill, care and diligence means that the directors must not be careless, reckless or absent minded. The duty to act in the best interest of the company means that the director cannot act in the director's own interest or the interest of other persons other than the company. The director should not place himself or herself in a situation where his or her duty to the company conflicts with his or her personal interest or the interest of other persons (such as the director's family members or friends). The director must employ the powers and assets of the company for the proper purposes of the company and not for any collateral purposes. The duty to disclose and act transparently is to ensure that the director is indeed acting _____________________________________________________________________ 21 Form and Nature of Business (Academic Year 2023-2024) properly and discharging his duties to the company. On the flip side of the director’s duties and responsibilities are the director’s rights and protection. The directors are accorded protection under the business judgment rule. Under the rule the court defers to the business judgment of directors and corporate executives as long as certain requirements are fulfilled. The requirements differ from country to country. Singapore adopts a more informal version of the business judgment rule while other countries adopt a more formal version. The rule usually requires the directors to act in good faith and in the honest belief that their actions are in the company's best interest and not to act in direct self-interest or self-dealing. Courts defer to the judgment of directors because business is inherently uncertain and directors cannot ensure corporate success. Under the business judgment rule, the directors may be free from liability from a bad decision taken honestly and in good faith. For example, the directors may approve a new project but it may turn out to be a loss. The business judgment rule protects the directors if they act in good faith and in the honest belief that the project is in the company's interest even if it eventually turns out to be a loss. Types of Directors 4 types of descriptions are commonly used to describe directors:● ● ● ● an executive director a non-executive director an independent director a non-independent director. An executive director is a director who is also an executive of the company. Examples of executives of the company are the chief executive officer, chief financial officer, manager or other persons in management. The executive of a company may or may not be a director of the company. If the executive is a director of the company as well, the executive is an executive director of the company. A non-executive director is a director who is not an executive of the Company. An independent director is a director who can exercise independent business judgment. Conceptually, there are at least 2 ways of determining independence: ● ● Independence from the relationship point of view Independence from the substance point of view. _____________________________________________________________________ 22 Form and Nature of Business (Academic Year 2023-2024) When a person is independent from another person based on the relationship point of view, we consider a person to be independent or not independent of another person based on certain relationship or the absence of certain relationship between the 2 persons. For example, if X is the father of Y, X may be considered not independent of Y from the relationship point of view. When a person is independent based on the substance point of view, we consider a person to be independent or not independent based on whether the person is in fact independent of other persons. For example, X is the father of Y but X is independent of Y in actual fact even though they are related as X makes his own decisions without being influenced or controlled by Y. An executive director is usually considered to be not an independent director because the executive director is involved in the management of the company. A non-executive director, on the other hand, may or may not be an independent director. If a non-executive director has a relationship with the management of the company which may interfere with the exercise of the director's independent business judgment, he or she is not considered independent of the management. In other words, not all non-executive directors are independent directors. For example, the wife of the Chief Executive Officer of the company may be a non-executive director of the company (ie she is a director of the company but does not work for the company). However, if her relationship with her husband-CEO interferes with her independent business judgment she is not considered an independent director. Sometimes the rules go further. To be independent the director must also be independent of other persons or entities (such as the shareholders or certain shareholders) as well as the executives. Different countries have different definitions of who an independent director is. In Singapore, paragraph 2.3 of the Code of Corporate Governance 2018 defines an independent director as “one who is independent in conduct, character and judgement, and has no relationship with the company, its related corporations, its substantial shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent business judgement in the best interests of the company". Some have argued that an "independent director" is not truly independent when the director is elected by a major or majority shareholder. The director will be expected to act in favour of the shareholder who elected him into office. Should the director act against the wishes of the shareholder, the director can be removed by the shareholder. However, it is possible that a director may act impartially out of conviction even at the risk of being _____________________________________________________________________ 23 Form and Nature of Business (Academic Year 2023-2024) removed later. A non-independent director is the opposite of an independent director. An executive director is, therefore, a non-independent director. A non-executive director who does not exercise independent business judgment is also a non-independent director. Some companies have only executive directors. Small companies usually have only executive directors. An example of a large company without independent directors is Jardine Matheson. Some companies have a combination of independent and nonindependent directors, such as most listed companies. Nominee Directors and Real Directors A director on record may not be the real person directing the company in the sense that the director acts according to the instructions of someone else. If so, the director acts as a nominee director. The real director acts behind the scene telling the nominee director what to do. The real director may not even appear on the company records. The Board Committees Some companies, such as listed and larger companies, have board committees to assist the board of directors. Smaller companies usually do not have board committees. In Singapore a listed company is required to have an audit committee. The audit committee is appointed by the directors from among their number. It must have at least 3 members, a majority of whom must be independent directors. The functions of an audit committee include the review of the audit plan, internal accounting controls, internal audit procedures and the financial statements. Other common board committees are:● ● ● the executive committee (overseeing the management of the business) the nominating committee (recommending appointments and promotions) the remuneration or compensation committee (recommending remuneration). The Management The management comprises the executives who manage the business of the company. The management is usually headed by one person, but there are companies that have 2 or _____________________________________________________________________ 24 Form and Nature of Business (Academic Year 2023-2024) more co-heads. The common titles of the head of the executive are the Chief Executive Officer, Managing Director or General Manager. Other senior personnel in management are sometimes referred to as “C-level executives” because their titles usually start with “Chief”. Some of the more common titles are "Chief Financial Officer" (who manages the finances of the company), "Chief Operating Officer" (who manages the operations and activities of the company), "Chief Technology Officer" (who manages the technological and scientific matters of the company) and "Chief Compliance Officer" (who manages the legal and regulatory compliance matters of the company). Some companies have a "Chief Ethics Officer" (who manages the ethical issues faced by the company). Assisting them are the managers, employees and staff of the company. The management may, but need not, be directors of the company. Sometimes, the managers and the directors are the same people, especially in smaller companies. In some companies the Chairman of the Board of Directors and the Chief Executive Officer is the same person. One example is Jamie Dimon of JP Morgan Chase. The Secretary The secretary is in charge of preparing the documents for the company and for calling and recording the meetings of directors and members. In some countries there is no formal requirement for the appointment of a secretary but the company will still need someone who can attend to the company documents, such as preparing and filing company documents with the authorities. The Auditor The auditor is in charge of auditing the financial statements of the company and reporting on the financial statements to the members of the company. Although auditors are appointed by the members of the company, they are usually chosen by the directors. An auditor acts as a gatekeeper to try to sniff out any incorrectness in the financial statements or to detect fraud but there have been many cases where auditors have failed to discharge their roles properly. One contributing factor is the need to maintain goodwill with the management of the company, given that auditors are usually selected by the management. In Singapore some companies are exempted from appointing auditors and audit requirements, in particular small private limited companies. The Members, Shareholders or Stockholders _____________________________________________________________________ 25 Form and Nature of Business (Academic Year 2023-2024) The members of the company, also referred to as the shareholders or stockholders, are the owners of the company, owning shares, stocks or other securities in the company. The members usually control the appointment and removal of directors in Singapore. There can be more than one type or class of members. The most common are the ordinary members. Some companies have different types of members such as but not limited to the following:● ● ● preferred members with certain preferences such as priority to dividend payments or more votes as opposed to members with lower priority to dividend payments or less votes; members with voting rights as opposed to members with no voting rights; class A and class B members, owning shares with different rights, etc. The constitution of the company usually specifies the rights of the different types of members. When there are many members, a company may appoint a Share Registrar to manage the records and the transactions involving the members. Recently, in Singapore the rules have been changed to identify the person(s) who actually controls the company. Take the case of a company with only one member owing all the shares in the company. The sole member may or may not be the real