Chapter 5

Types of business structure

Your business structure can affect how much tax you pay, and how you're treated by the law.

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Business structures and their effects

The main types of business structures are sole-proprietorship, partnership, limited partnership, limited liability partnership, and company. Your choice will affect your setup costs, legal status, tax obligations, and admin workload.

What is a sole proprietorship?

A sole proprietorship or sole trader is a business that can be owned and controlled by an individual, a company, or a limited liability partnership. There are no partners in the business. It doesn't have to be a single-worker business, so you can hire staff.

Advantages of a sole-proprietorship

It’s easy to set up as a sole trader and tax is simple. Profits are taxed at the owner's personal income tax rates. If the owner is a company, then income is taxed at the company tax rate.

Disadvantages of a sole-proprietorship

A sole-proprietorship is not a separate legal entity from the business owner. This means that the owner is personally responsible for what the business does. If the business gets into debt or legal trouble, so does the owner. Your choice of insurance becomes very important.

What is a partnership?

A partnership is owned by two to twenty people. There are no rules about how it’s divided. One partner can own 99% of the business.

Advantages of a partnership

It’s easy to set up as a partnership, though you may need an official letter that sets out the agreement between partners. Otherwise the rights and responsibilities of each partner will be defined by the Partnership Act. Tax is simple too.

Disadvantages of a partnership

If the business gets into financial or legal strife, the partners do too. You could also get into difficulty if one of the other partners does something wrong. Your choice of insurance becomes very important.

What’s in a partnership agreement

A simple business partnership agreement should:

  • state the legal name of the partnership and say what you do
  • name the owners and show how many shares each has
  • appoint a primary business officer
  • say when and how income is distributed among the partners
  • include a process for resolving disputes
  • identify how bookkeeping and finances will be managed
  • outline how the partnership can be wrapped up (and how debts or profits would be distributed)

As you can imagine, even a simple business partnership agreement can get lengthy and complicated. Search the internet for examples or, better still, ask an accountant or lawyer to help.

What is a limited partnership (LP)?

A limited partnership is owned by two or more people with at least one general partner and one limited partner. There can be any number of partners.

Advantages of a limited partnership

The limited partners in the venture get some legal protection if things go wrong – your accountant or a lawyer can give you the lowdown. Tax is simple. Partners declare their share of business income on their personal tax return.

Disadvantages of a limited partnership

The general partners in the venture may be personally liable for business debts and legal troubles.

What is an LLP (limited liability partnership)?

A limited liability partnership is owned by two or more partners, and offers more legal protections.

Advantages of an LLP

You don’t necessarily get into legal trouble if one of your partners makes a mistake. Business income can be simply dealt with on your personal tax return.

Disadvantages of an LLP

You remain responsible for the debts of the partnership.

What is a company?

A company is legally separate from its owner (or owners), which means you’re less exposed to legal or financial issues. A company can be owned by one person or many.

Advantages of a company

You get some legal and financial protection if things go wrong – your accountant or a lawyer can give you the lowdown. Profits are taxed at corporate tax rates.

Disadvantages of a company

It will cost you more to operate as a company than as a sole trader or partnership. There’s also more admin. You’ll need to know how the company will operate before you get started, and you’ll have to regularly submit paperwork to the government.

You can change your business structure

You’re not locked into one structure forever. A lot of businesses start out as sole proprietors or partnerships and grow into companies. You might change your business structure if you start getting bigger and doing more complex projects which carry a greater financial or legal risk.

Where do franchises fit?

If you buy into a franchise, you don’t automatically become part of their business. You form your own business and enter into a deal with the franchisor. You will need to register your company in Singapore and may be able to choose your own business structure, or the franchise agreement may require it to be set up in a specific way, such as a limited liability company or sole proprietorship.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

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