Types of Businesses: Which Legal Structure Is Right for Your New Venture
Starting a new business is an exciting venture, but it can also be daunting, especially when deciding on your business’s legal structure. The type of legal structure you choose can have significant implications on your personal liability, tax obligations, and the way you run your business. More specifically, your management preferences and a list of other factors dictate the business structure you choose.
In Singapore, there are several types of businesses you can register by hiring a business registration services in Singapore, and each has its advantages and disadvantages. In this article, we’ll look at the different legal structures you can choose from and help you decide which suits your new venture.
Types of Business Organization
1. Sole Proprietorship
A sole proprietorship is the simplest form of business structure in Singapore. As the name suggests, this structure involves only one owner responsible for all aspects of the business, including finances, decision-making, and management. However, the owner is also personally liable for all debts and obligations of the business. So, if the business incurs debts or legal liabilities, the owner’s personal assets may be at risk.
One of the main advantages of a sole proprietorship is that it is very easy and inexpensive to set up. You don’t need to incorporate your business; you can operate under your own or a business name. A sole proprietorship is also subject to personal income tax rates, which can benefit small businesses.
2. Partnership
A partnership is pretty similar to a sole proprietorship but involves two or more owners sharing profits, losses, and responsibilities. In a partnership, each partner is personally liable for the debts and liabilities of the business. There are two types of partnerships in Singapore: general partnership and limited partnership.
In a general partnership, all partners share equal responsibility for managing the business and are personally liable for its debts and obligations. In a limited partnership, there are two types of partners: general partners with unlimited liability and limited partners with limited liability who are not involved in the management of the business.
One of the advantages of a partnership is that it allows you to combine resources, skills, and expertise with other people. Partnerships are also easy and inexpensive, and the profits are subject to personal income tax rates.
3. Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a partnership and company hybrid. It is a separate legal entity from its partners. It has limited liability, which means that the partners are only liable for the debts and obligations of the business to the extent of their capital contribution. This structure is suitable for businesses that involve high risk or have a lot of creditors.
LLPs must have at least two partners and a registered office in Singapore. They must also submit an annual declaration of compliance with the Accounting and Corporate Regulatory Authority (ACRA). LLPs are taxed at corporate tax rates, generally lower than personal income tax rates.
4. Private Limited Company (Pte Ltd)
A Private Limited Company (Pte Ltd) is Singapore’s most common type of business structure. It is a separate legal entity from its shareholders and directors and has limited liability. This means that the shareholders are only liable for the debts and obligations of the business to the extent of their shareholding.
Pte Ltd companies can have up to 50 shareholders and must have at least one director who is a resident of Singapore. They must also have a registered office and comply with the filing requirements of ACRA. Pte Ltd companies are taxed at corporate tax rates, generally lower than personal income tax rates.
One of the main advantages of a Pte Ltd company is that it offers limited liability protection to its shareholders. It is also a preferred structure for businesses that intend to raise capital, as it allows for issuing shares to investors.
Factors Governing the Decision on Selecting a Suitable Form of Business
1. Nature Of Business Activity
A direct management style is preferable in small trading businesses and professional services. Therefore these businesses are primarily sole proprietorships.
A partnership is suitable in all cases where a sole proprietorship is, provided the scale of the business is more significant. It helps the business efficiently discharge its operations with two or more partners. A partnership business is advantageous in small-scale manufacturing, financial services, and real estate industries and agencies.
Incorporated business forms, such as Limited Liability Partnerships (LLP) and Companies, are usually suited for larger businesses with external capital requirements.
2. Scale Of Operations
If the scale of operation of a business activity is small, then a sole proprietorship is preferable. A modest scale of business operations would be suited to a partnership or a limited liability partnership. In the case of large-scale operations, a company is advantageous.
3. Capital Requirements
The requirement of external capital in a business is closely related to its scale of operations and the type of business. Enterprises that require sizeable Investments should be organized as companies. Conversely, small capital requirements indicate that a business may be best organized as a sole proprietorship or partnership.
4. Managerial Ability
In a sole proprietorship, if the business requires expertise in multiple functional areas, it would be difficult for one person to manage the business effectively. Further, the size of the business may not permit the engagement of professional management.
It is often the primary motivator to set up the business as a partnership or a company. In these forms of business, there is a division of work among the partners, which allows them to specialize in specific areas, which leads to better outputs and decision-making.
5. Degree Of Control And Management
This factor affects how directly the entrepreneur can affect the business choices of the organization.
In a sole proprietorship, the ownership management and control our vested in one person. Therefore, the entrepreneur has complete control of the business operations.
In a partnership firm, the partners share the management and control, and their specific rights, duties, and responsibilities are documented in the partnership deed.
In a company, there is a divergence between ownership and management. The management and control of the business are entrusted to the board of directors, who are generally the elected representatives of shareholders. They represent the best interest of the shareholders of the corporation.
6. Degree Of Risk And Liability
The size of the risk involved in the business and the willingness of the owners to bear it is an essential consideration in selecting a type of business organization.
A sole proprietorship business carries a small amount of risk compared to a partnership or company. It is because a sole proprietor is personally liable for all the death of the business to the extent of his entire property.
In a partnership, the partners are also individually and jointly responsible for the liabilities of the firm.
Incorporated forms of business, such as companies and LLPs, Enjoy a separate legal entity status and, therefore, limit the extent of risk and liability of the shareholders to the currency amount of the shares held by them.
7. Stability Of Business
Sole proprietorships are inherently not stable as it depends on the decisions of the proprietor. Anything that happens to the proprietor would hamper the course of business. In this perspective, a partnership is more stable. Companies enjoy a perpetual status and are the most stable form of business. They are not affected by who is involved in running the business operations.
8. Flexibility Of Administration
The simplicity of operations determines the flexibility of the administration of a business organization. If the organization’s internal functions do not require a clear distinction of responsibilities, then the business can be more agile in making decisions in terms of administration.
In this context, a sole proprietorship is flexible in terms of its administration where, as a partnership and a company are forms of business where the administration is not as flexible. It is primarily because the activities are conducted on a larger scale, requiring a rigid structure of operations.
9. Division Of Profit
Profit is the main motivator for any form of private business. An entrepreneur desirous of claiming all the profit would choose to set up his operations in a sole proprietorship form.
If he is willing to share the profits, a partnership form of organization may be preferred. In a company, the profits are distributed among the shareholders in proportion to their shareholding, but the liability of the shareholders is limited.
10. Tax Implications
As an individual, expenses, and incomes are taxed at a Standard rate. In a business, some systems provide tax benefits in terms of expenses. In terms of income, only the profits of the business are taxable.
For a sole proprietorship or partnership, the tax liability depends on the extent of the profits. However, in the case of Companies or LLPs, many strategies exist to fruitfully minimize the entity’s tax liabilities.
Conclusion
Choosing the proper legal structure for your new business is an important decision that can significantly affect your personal liability, tax obligations, and how you run your business. Each legal structure has advantages and disadvantages, and it is essential to carefully consider your business goals and needs before deciding.
A sole proprietorship or partnership may be a suitable option if you are starting a small business with low risk and don’t want to incur high registration costs. On the other hand, if you plan to expand your business or raise capital, a Limited Liability Partnership or a Private Limited Company may be a better fit.
In Singapore, it is critical to comply with your chosen business structure’s legal and regulatory requirements. Therefore, seek professional legal and financial advice to help you make an informed decision and set your new venture up for success.
