Deciding Your Business Structure: A Sole Proprietorship, Partnership or a Company?
Before registering your Singapore business with the Accounting and Corporate Regulatory Authority (ACRA), you should first conduct research and decide which business entity best suits your business model. There are several business entities available in Singapore – namely sole proprietorships, partnerships, limited partnerships (LP), limited liability partnerships (LLP), and companies.
ACRA also provides a summary table of the different business entities in Singapore.
When deciding which business entity is most appropriate for your business, here are the main differences between the various business entities you should first take into consideration:
Number of Owners
A sole proprietorship is run by only one business owner.
A partnership is run by a minimum of 2 partners, and a maximum of 20 partners. Once a partnership exceeds 20 partners, it will have to be incorporated as a company under the Companies Act (except for professional partnerships).
LPs and LLPs have a minimum of 2 partners and there is no maximum limit to the number of partners in the business.
The ownership structure in companies is slightly more complex. There are mainly 2 types of companies – Private or Public companies. Private companies have a maximum limit of 50 owners. Public companies have more than 50 members and are listed on the Singapore Exchange (SGX). Once a private company has more than 50 members, it will have to be listed as a public company as well.
Companies and LLPs are business structures in which businesses and their owner(s) are considered separate legal entities. If your business is a separate legal entity, this means that the law regards it as a separate “person” from its owner(s). Your business will also have limited liability, i.e. owners are not personally liable for the company’s debts or any legal action taken against the company.
Apart from the capability of suing and being sued in its own name, your company will also be able to own property in its own name.
Unlike companies and LLPs, sole proprietorships and partnerships are business structures in which the business and its owner(s) are considered a single legal entity. Hence, the individual business owner or partners have unlimited liability and are personally liable for the business’ debts and any other legal action taken against the business.
In addition, partners are legally responsible for the losses incurred by other partners. This necessitates a high degree of trust and agreement between partners before a partnership is formed.
Ease of Obtaining Capital
Companies are capable of obtaining equity capital (i.e. funding from selling shares). Because of this, attracting potential investors for the company is generally easier. As shareholders, investors can profit from the company while limiting their liability.
Sole-proprietors and partnerships do not offer the option of selling shares, and hence are less attractive to potential investors. Also, it is more difficult for small businesses to obtain loans. Most of the time, majority of capital invested comes from the or from the partners’ individual capital contributions.
Legal Formalities and Expenses
Companies are subject to more legal formalities and compliance procedures which make them more burdensome and costly to run compared to business structures not subject to such formalities, such as sole proprietorships.
For example, companies are required to keep accounting records which explain their transactions and financial position and which have to be retained for at least 5 years from the financial year which the transactions relate to.
Sole-proprietors and partnerships on the other hand, merely have to renew their business registration annually and declare income tax based on the owners’ personal income tax rates. They are not subject to stringent compliance requirements, such as the holding of Annual General Meetings (AGMs) or filing of annual returns, as companies are.
Ownership and Profit Sharing
For companies, they are owned by shareholders who then appoint directors to manage the company. The directors are answerable to the shareholders for the company’s performance, and whether the company is making a profit. Profit very much depends on the performance of the company as managed by the directors. It will be split among the shareholders depending on the number of shares each shareholder holds.
On the other hand, partnerships are managed by their owners (i.e. the partners) and in a sole proprietorship, the sole proprietorship has absolute control over the business. Profit depends on the performance of the owner(s) in the company and how they run the business. Profits are shared by the partners in the case of a partnership, and for a sole proprietorship, all profits go straight to the sole proprietor.
Business Succession and Ownership Transferability
Only companies and LLPs have perpetual succession. In other words, they will continue to exist even if all their owners and/or controllers die, until they are wound up or struck off the register. This ensures that business operations may continue as per normal even if an owner or controller suddenly dies. The ownership of the company is transferrable from one owner to another.
Sole-proprietorships, partnerships and LPs do not have perpetual succession. They will cease to exist upon the death of the business owner(s). In other words, the business “dies” together with its owner(s). The transfer of ownership is not as fluid as that of companies and LLPs.
If you need legal advice on choosing a legal structure for your Singapore business, please consult our experienced corporate lawyers.
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