What are the features of each type of business structure?
LawGuide
There are generally 5 types of business structures you can choose from if you’re starting a new business:
Sole-proprietorship
General Partnership
Limited Partnership (LP)
Limited Liability Partnership (LLP)
Limited Liability Company (LLC)
To decide which business structure is most suitable for you, you will need to consider the following factors: –
How much capital you are prepared to invest?
How many owners there will be in the business?
What liabilities and responsibilities you are prepared to assume?
What risks you are prepared to take?
Whether a company of that structure will be easy to close?
Some of the main features of these structures include the following: –
Sole-proprietorship:
This is a business that is owned by a single person.
The sole-proprietor has absolute say in the running of the business because there are no partners involved.
However, a sole-proprietorship is sometimes considered risky because it does not offer any protection of the owner’s personal assets from business risks and liabilities and the owner will be personally accountable for all the debts and liabilities relating to his business.
This means that creditors will be entitled to claim their debt from the owner’s personal assets if the sole-proprietorship’s business assets are insufficient to pay its liabilities.
Nevertheless, you can consider using a sole-proprietorship if you are the sole owner of a small business which does not have much business risks.
Sole-proprietorships are easy to set up, maintain, manage and terminate because there are fewer administrative requirements.
A sole-proprietorship is not a separate and distinct legal entity. As such, it is not entitled to sue and be sued in its own name or own land in its own name. In addition, it will not have perpetual succession (i.e. it will terminate upon the death or departure of the owner). This is because only entities with perpetual succession can continue to exist and operate upon the death or departure of the owners without having to transfer property whenever there is a change of its ownership.
General Partnership:
A partnership is a business entity that is formed by at least 2 or more persons.
A partnership can only comprise a maximum of 20 partners. A partnership that comprises more than 20 partners must be registered as a company under the Companies Act.
The partners pay tax on their share of income from the partnership according to their own personal rates of income tax.
You can consider using a partnership if you feel that you can save money by paying tax based on your person rate of income tax because it is lower than the corporate tax rate (e.g. 17%).
A partnership is not a separate and distinct legal entity. As such, it is not entitled to sue and be sued in its own name or own land in its own name. Instead, the partnership can be sued in the names of individual partners.
In addition, it will not have perpetual succession (i.e. it will terminate upon the death or departure of the owners or partners). This is because only entities with perpetual succession can continue to exist and operate upon the death or departure of the owners without having to transfer property whenever there is a change of its ownership.
Limited Partnership (LP):
A LP comprises at least 2 partners of which 1 partner must be the general partner and 1 partner must be the limited partner.
A general partner is liable for all the LP’s debts. He also has control over the management of the entity.
A limited partner is only liable for the LP’s debts up to the amount of his own respective individual contributions to the business which would have been fixed when the entity was first formed.
A partners can be an individual or a foreign or local company.
The partners pay tax on their share of income from the partnership according to their own personal rates of income tax.
You can consider using an LP if you wish to invest in a business without participating in its management and you place a greater value on having limited liability protection compared to being involved in the LP’s management.
The limited partner must be careful not to carry out any activities that may be considered as “participation in management”.
This is because once a limited partner participates in the management of the business, he will lose the limited liability protection and he will instead become personally liable for the entity’s’ debts going forward.
A list of activities that the limited partner may carry out without being considered as “participating in management” may be found in the First Schedule to the Limited Partnerships Act.
An LP is not a separate and distinct legal entity. As such, it is not entitled to sue and be sued in its own name or own land in its own name. Instead, the LP can be sued in the names of individual partners.
In addition, it will not have perpetual succession (i.e. it will terminate upon the death or departure of the owners or partners). This is because only entities with perpetual succession can continue to exist and operate upon the death or departure of the owners without having to transfer property whenever there is a change of its ownership.
Limited Liability Partnership (LLP):
An LLP gives its owners the flexibility of operating as a partnership while having a separate legal identity like a private limited company. This means that the partners of the LLP will not be held personally liable for any business debts incurred by the entity.
It also provides its partners with limited personal liability. This means that a partner will not be held personally responsible for the losses that arise from another partner’s mistakes. A partner will only be personally responsible for the losses that arise from his own mistakes and acts.
It must have at least 2 partners at all times.
The partners’ respective profits and management responsibilities are agreed in advance when the entity is first formed.
An LLP is a separate and distinct legal entity. As such, it is entitled to sue and be sued in its own name or own land in its own name.
In addition, it has perpetual succession (i.e. it will not terminate or dissolve upon the death or departure of the owners or partners) and can continue to exist and operate upon the death or departure of the owners without having to transfer property whenever there is a change of its ownership.
Limited Liability Company (LLC):
Once a partnership comprises more than 20 partners, it must be registered as a company under the Companies’ Act.
An LLP is a separate and distinct legal entity. As such, it is entitled to sue and be sued in its own name or own land in its own name.
In addition, it has perpetual succession (i.e. it will not terminate or dissolve upon the death or departure of the owners) and can continue to exist and operate upon the death or departure of the owners without having to transfer property whenever there is a change of its ownership.
A company’s liabilities are limited to the amount of share capital raised.
The liabilities of the company’s owners are limited to amount of their assets in the company and their personal assets are protected from the company’s debts and business liabilities.
There are 2 types of LLCs:
Private Limited Company
Public Limited Company
Private Limited Company:
Denoted by the “Pte Ltd” or “Ltd” suffix after the company’s name, this is the most common type of LLC.
The company’s shares are held by a maximum of 50 shareholders and the shares are not made available to the general public.
This type of business structure is often chosen by business owners because of the following advantages:
It has a separate and distinct legal identity from that of its owners or members.
It has limited liability up to the amount of its share capital raised.
It has perpetual succession which allows it to easily transfer shares and ownership
It is generally regarded as being more stable and qualifies for most, if not all, financial support, grants or incentive schemes provided by financial institutions and the authorities.
Public Limited Company:
The company’s shares may be held by more than 50 shareholders and the shares may be made available to the general public.
It is subject to more stringent rules as the company is entitled to raise funds from the public.
This business structure is usually used by larger businesses including those listed on the stock exchange.
