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Chapter 8 of 16

Types of business structure

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Types of business structure

When first thinking about how to start a business, not many people worry about structure. But your business structure can affect how you're treated by the government and by the law. Here are some of the ins and outs.

Business structures and their effects

The main types of business structures are sole-proprietorship (one owner), Partnership (Two or more owners), Limited Partnership, Limited Liability Partnership, Company.  Your choice will affect admin burden, tax, legal status, statutory obligations, registration requirements, set up fee, continuity in law and how you close the business.

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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.

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. 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 big and complicated. Search the internet for examples or, better still, ask an accountant or lawyer to help.

What is a Limited Partnership (LP)?

A partnership is owned by two or more people with at least one general partner and one limited partner. There is no maximum limit.

General partners have unlimited liability and can be personally liable for debts and losses of the company. Limited partners, as the name suggested have limited liability and are not liable for the debts or obligations of the company beyond the amount of his/her agreed contribution.

What is Limited Liability Partnership (LLP)?

A partnership is owned by at least 2 partners, no maximum limit. The individual partners own liability is generally limited. Partners are liable for debts and losses resulting from their own wrongful actions but not personally liable when it is incurred by other partners in the LLP.

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 traders 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 for you.

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 trader.

Chapter 9: Registering a business

There is some paperwork to file before you can launch your business. Here’s how to register a business with the right authorities and keep out of trouble.

Read chapter 9

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