How Do You Choose The Best Structure For Your Business?

November 13, 2018

Find out how to select the structure that suits your business best

 

 

Many SME owners neglect the importance of choosing the right structure, not realising that it will impact many aspects of their business: personal liability, intellectual property protection, borrowing ability and more.

Whether you’re just starting out or deliberating over the right structure for your existing company, understanding the law involving business organisation is essential.

It is also important to consider the unique aspects of your business when deciding which structure to choose. Consult a lawyer before finalising your decision to make sure that you made a sound choice, and that the process is completed properly.

 

3 Common Business Structures In Singapore

 

1. Sole Proprietorship

A sole proprietorship is the most basic business structure where one person or one company owns the business. There are no partners, and the sole-proprietor will receive all profits and has the absolute say in the running of the business.

Self-employed individuals and freelancers usually favour this structure, as it is easy to set up without a huge amount of money and paperwork. Sole proprietorships have fewer compliance requirements than incorporated companies, so you do not have to adhere to formalities such as annual reporting. The owners also do not have to pay corporate tax.

The biggest drawback to consider when choosing this structure is that the business and its owner are considered a single legal entity, which means that you are personally responsible for any debts or legal action taken against the business – you can be sued personally and have unlimited liability, and your personal assets can be seized to repay debts.

Raising money for a sole proprietorship can be difficult, as most banks may be reluctant to approve business loans to sole proprietors. In most cases, you’ll have to depend on your own financing sources, like savings, home equity or family loans.

 

2. Partnership

If your business is owned and operated by several individuals, you may want to consider structuring your business as a partnership. A partnership is a business formed by two to twenty partners (once there are more than twenty partners, the partnership must be registered as a company under the Companies Act, Cap. 50).

In a general partnership, the business and all its partners are considered a single legal entity, which means that partners are personally liable for any debts or legal action taken against the business. Partners may also be personally liable for the actions of other partners in the business.

In a limited partnership (LP), there are both general and limited partners. The general partners own and operate the business and assume liability for the LP, while the limited partners serve as passive investors and are not subject to the same liabilities as the general partners.

LPs are generally not ideal for new or small businesses due to the required filings and administrative complexities, unless you’re expecting to have many passive investors. If you have two or more partners who want to be actively involved in your business, a general partnership would be much easier to form.

A limited liability partnership (LLP) is a business structure that allows businesses to operate and function as a partnership while giving it the status of a separate legal person. There has to be at least two partners in a LLP, and the partners can be individuals or companies.

In a LLP, the partners have limited liability and will not be personally liable for the actions of other partners in the business.

If your business involves selling your services based on the specific profession that you hold, such as an accountant, architect or lawyer, and you have one or more additional partners in a similar profession interested in building a joint practice, setting up a LLP may be a suitable business structure for you.

 

3. Company

The company structure is more complex and expensive than most other business structures. A company usually has the words ‘Pte Ltd’ or ‘Ltd’ as part of its name, and is a separate and distinct legal entity from its owners and distinct from its shareholders and directors. This means that owners are not personally liable for the company’s debts or any legal action taken against the company.

The corporate existence of a company will last as long as its shareholders decide it should – it will not cease to exist if one or more of its shareholders pass away, ensuring a more stable succession plan for the company.

However, a company requires complying with more regulations as compared to sole-proprietors and partnerships, such as filing annual returns, paying corporate taxes and holding annual general meetings.

To register your business, you must submit an application online via Accounting and Corporate Regulatory Authority (ACRA)’s electronic filing system, BizFile.

 

Vanilla Law LLC is a boutique law firm that provides Small and Medium Enterprises (SMEs) with solutions tailored to their long-term business growth. Contact us for specific legal advice on the information provided in this post or related topics.

This article is for informational purposes only and should not be treated as legal advice.