How to Choose Your Business Structure

June 26, 2013

in Business and Entrepreneurship

Setting up a business in Singapore is relatively easy, and there are many different business structures from which to choose what suits you best. This article will describe sole proprietorships, partnerships, limited liability partnerships, limited partnerships and companies, and discuss the advantages and disadvantages of each structure. It is important to be aware of the nature of each structure before deciding which one to use, in order to ensure the long term success of your business.

Sole Proprietorships

A sole proprietorship is a business firm with only one owner. The owner, or sole-proprietor, has absolute say in the running of the business, and profits and losses will be entered in his or her tax returns.

This structure is easy and fast to set up. Furthermore, there is little paperwork. It is thus easy to administrate as sole-proprietors do not need to audit their accounts. This business structure is easy to manage, with the owner being the sole decision maker and receiving all the profits. The business can also be ended easily.

However, this structure puts the owner at risk, as the owner bears all costs and risks, and is personally accountable for debts and losses. The business is not seen as a separate legal entity and thus, the owner may be required by law to sell personal belongings in order to repay debts.

Likewise, the owner cannot raise funds by selling a stake in the business to investors, as this structure requires ownership only by a single individual or company. Also, there is no perpetual succession and the business ceases upon the demise of the owner. Sole proprietors also have limited borrowing powers with banks, unless they use personal assets as collateral.

Partnerships

Owners of a partnership can be individuals or companies, but there must a minimum of 2 owners and a maximum of 20. Once there are more than 20 partners, the business entity must be registered as a company.

Like sole proprietorships, partnerships are easy to set up and administrate. However, it is advisable to draw up a Partnership Agreement with the help of a lawyer, in order to define the responsibilities of each partner. Partnerships ensure that the business has access to more resources, as each partner can contribute in various ways.

Like sole proprietorships, however, partners are personally accountable for business debts and losses. They may be required by law to sell off personal assets to cover debts and losses.

Furthermore, as each partner has the implied power to act on behalf of the partnership, a partner can be made accountable for the loss caused by another partner. In other words, each partner may be personally liable for the entire debt of the partnership, whoever those debts may be caused by.

Moreover, partnerships are automatically dissolved when a partner exits or dies. The remaining partners will have to form a new partnership.

Limited Partnerships (LPs)

An LP is characterised by having a minimum of 2 partners, with at least 1 general partner and at least 1 limited partner. There is no maximum number of partners in an LP. The general partner bears liability for all the debts and obligations incurred by the business. The limited partners have liabilities limited to their individual contributions to the business.

An advantage of this structure is that it will attract investors who do not wish to be active in the management of the business, and who can be limited partners instead. It is easy to administrate, like sole proprietorships and partnerships. Moreover, limited partners can enjoy limited liability, and not face the risk of being accountable for the entire business.

A disadvantage is that limited partners give up their rights to be involved in the management of business. Also, if an LP does not have any limited partners, the LP registration will be suspended. The general partners will become registered under the Business Registration Act, until a new limited partner registers and the LP registration is restored.

This structure was introduced in 2009, and being a new business structure, some legal issues may not be fully resolved.

Limited Liability Partnerships (LLPs)

This structure combines the limited liability features of companies, with the flexibility of partnerships. Under this structure, partners are deemed personally liable for debts and losses resulting from their own careless actions. However, a partner will not be deemed personally liable for debts and losses caused by other partners.

Personal assets of partners are thus protected. The business constitutes a legal entity, and can be sued in its own name instead of the partners’ names. This feature, like with LPs, makes the business more attractive to investors, as they are protected by limited liability.

This structure also ensures perpetual succession, and changes such as the resignation or demise of partners will not affect the LLP’s existence or rights. Furthermore, it is easy to administrate, like previous structures, as no auditing is necessary.

On the other hand, LLPs have more formalities and procedures to comply with, as compared to sole-proprietorships and partnerships. Furthermore, the acts of some partners can bind the entire business, even if such acts were initially unknown to other partners. Like LPs, LLPs are relatively new, having been introduced in 2005, and thus, some legal issues may be unclear.

Companies

Companies, like LLPs, are characterised as legal entities. They are defined as having shareholders, who are the owners of the company. There must be a minimum of one share owned by one shareholder.

Due to limited liability, personal assets of shareholders are completely safeguarded. Instead, liability is limited to the value of the shares. This is in contrast to LLPs, where partners can be held responsible for losses caused by their carelessness. In companies, shareholders will not be held personally liable for debts and obligations arising from the wrongful acts or omissions of either themselves or other shareholders. Furthermore, companies can fund their business and raise capital by selling shares. This also allows for greater growth of the business.

However, a company is more expensive to incorporate, compared to other structures. It also involves more formalities, for example, there are specific rules for the appointment of directors. There are certain exemptions to having to audit the company’s accounts. Otherwise, companies will have to undergo auditing. Termination of the business is also more complicated with this structure.

Ensure that you spend time considering the different structures available, and which one suits your business best. Keep in mind its scope and the resources available to you, as well as how comfortable you are with embarking on a business venture with others (except in the case of sole-proprietorship).

Be aware of the integrity of the people you will be working with while choosing your business structure. For example, in the case of partnerships, it is possible for you to be held liable for your partner’s actions.

Once you have decided on the business structure you will be using, you should decide if you want to register on your own, or engage a professional firm. Self registration can be done via BizFile, an electronic registration system by the Accounting and Corporate Regulatory Authority. Professional services, easily found in newspapers and directories, can be engaged if you would rather not do it yourself.

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