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Tips and Information
What are the pros and cons to a sole proprietorship?
The reason why sole proprietorship is a viable option to most people who are keen in setting up their own business is because of the simplicity and ease of setting up. There is minimal post-registration compliance and this is advantageous to small business owners. Also, as it is a one person business, the owner is the key decision maker and does not need to worry about any external party exercising any influence. As such, it is suitable for low-risk service providers.
Although this type of business proprietorship has its pros, there are disadvantages to it as well:
- The liability of the business is unlimited to the owner. Thus, the personal assets of the owner might have to be liquidated in the event of claims against loss, liability or debt incurred by the business.
- The business can sue or be sued in the owner’s name as it is not a separate legal identity from the owner.
- This setup is difficult to expand as it is difficult to attract investors or creditors. The owner must be prepared to put up personal assets as collateral to secure bank loans.
- As it is not a separate legal entity, the owner is also unable to raise funds through selling a stake of the business.
What are the pros and cons to a partnership?
There are many advantages to partnerships as follows:
- Partners are able to share costs which would enable them to expand the business easier. The person may be able to inject a large amount of capital in the business or have more strategic connections to be able to attract potential investors. This would save you a substantial amount of money compared to going alone in a sole proprietorship.
- Being able to share the responsibility is also better as compared to a sole proprietorship where all the duties fall on a single person. The internal structure of a partnership is more flexible as there are fewer people compared to a company and rules are able to be overridden on mutual agreement.
- Partnerships would allow you to get access to a wider range of knowledge and expertise. Good partners may bring complementary skills and a new perspective to the table and enable the business to grow faster. This would mean more productivity and would give you more time to focus your time and talent on more business opportunities.
- The setting up costs are low as there are less ongoing compliance requirements. In addition, partnerships face fewer statutory controls than companies. This would save considerable time and resources.
Similar to a sole proprietorship, the business is not a separate legal entity from the business owners. Chargeable profits are subjected to personal income tax rates as it is treated as personal incomes. The partners are personally liable for all the debts and losses of the partnership. The liabilities of the partners are unlimited and personal assets can be claimed in the event of debts, losses or liabilities in the course of business. Disputes over the course of partnerships are common as consensus is needed in decisions. Partnership agreements can be written up and should be reviewed constantly for mutual agreement. All partners should be aware of their rights and responsibilities especially on which specific partners are able to make key decisions or override consensus. It can sue or be sued in the partners’ names.
What are the pros and cons to a limited liability partnership?
The advantages and disadvantages to a limited liability partnership (LLP) are as follows:
- Separate legal identity from its partners
- Partners have limited liability. Personal assets of shareholders would not be affected in times of financial crisis.
- Can sue or be sued in LLP’s name
- Can own property in LLP’s name
- Partners personally liable for debts and losses resulting from their own wrongful actions
- Partners not personally liable for debts and losses of LLP incurred by other partners
- Administrative costs are also slightly higher and accounts are slightly more complicated compared to a sole proprietorship.
Annual declaration of solvency/insolvency must be lodged by one of the managers stating whether the LLP is able or not able to pay its debts during the normal course of business. No statutory requirement for general meetings, directors, company secretary, share allotments etc.
For registration, there must be at least 2 partners who are at least 18 years old or it can also be a body corporate (company or LLP). There has to be at least one manager ordinarily resident in Singapore and at least 18 years old. Undischarged bankrupts cannot manage the business without approval from the Court or the Official Assignee. Profits are taxed at partners’ personal income tax rates (if individual) or corporate tax rate (if corporation). An LLP has perpetual succession until it has wound up or is being struck off.
More information on company and the different types of companies
A company may be limited or unlimited. In an unlimited company, members are liable for the debts of the company without any limit. In a limited company, the liabilities of its members for the debts of the company is limited. A company may also be limited by shares or by guarantee.
The owners of a company limited by shares are called “shareholders”. In the event the company is wound up and owes creditors money, members of the company are obliged to contribute only up to the unpaid value of their shares. If they have fully paid up for their shares, they have no further liability.
The owners of a company limited by guarantee are not called “shareholders” but “members”. There are no shares in a company limited by guarantee. In a company limited by guarantee, each member promises to contribute an amount stated in a company’s Memorandum of Association.
A company may be private or public.
- There is a restriction on the right to transfer its shares
- Maximum number of members is 50
- Cannot invite public to subscribe for shares or take up debentures
- Cannot invite public to deposit money
A private company may be exempt or non-exempt. These are the characteristics of an exempt private company:
- No shares in the company are held by corporations
- Not more than 20 members
- Or is a private company owned by government and gazetted as an exempt private company
An exempt private company is exempted from filing a balance sheet and profit & loss account though it must still prepare them. It must still file an annual return (for tax purposes)
A public company may have more than 50 members. A public company may be listed or unlisted. This refers to whether the shares of the company are traded on any stock exchange. If they are, we say that the company is a “public listed” company. If they are not, it is called a “public” company.
All companies have certain characteristics – section 19(5) Companies Act:
- Has separate legal identity
- May sue and be sued in its own name
- Has perpetual succession
- Has the power to hold property
- May limit the liability of its members
What are the advantages of setting up a Private Limited Company?
There are many advantages to setting up a Private Limited Company which are as follows:
A Private Limited Company allows for a separate legal entity which means the company’s form of organization has wide legal capacity and can own property under the company’s name. The company may also incur debts at the same time. However, the positive aspect of the company is that its members (Shareholders/Directors) of the company have no liability to the creditors of a company for such debts. Hence, a private limited company is a legal entity separate from that of its members.
A Private Limited Company has ‘perpetual succession’ until it is legally dissolved. A company, being a separate legal person, is unaffected by the death or other departure of any member but continues to be in existence irrespective of the changes in membership.
The members in a Private Limited Company have limited liability which means the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability company, the liability of the members in respect of the company’s debts is limited. In other words, the liability of the members of a company is limited only to the extent of the face value of shares taken up by them. Therefore, where a company is limited by shares, the liability of the members on a winding-up is limited to the amount unpaid on their shares.
A Private Limited Company enables free and easy transferability of shares. The shares of a company limited by shares are transferable by a shareholder to any other person. The transfer is easy as compared to the transfer of interest in a business run as a proprietary concern or a partnership as filing and signing a share transfer form as well as handing over the buyer of the shares along with share certificate can easily be done.
A Private Limited Company can own properties. With this being said, the company can acquire, own, enjoy and alienate property in its own name. No shareholder can make any claim upon the property of the company so long as the company is a going concern as the shareholders are not the owners of the company’s property.
A Private Limited Company has the capacity to sue and be sued. Any one person, which can be a shareholder of the company, can bring a legal action in his/her own name against another in that person’s name as the company being an independent legal entity can sue and also be sued in its own name.
A Private Limited Company allows for dual relationships for any member in the company. In the company’s form of organization it is possible for a company to make a valid and effective contract with any of its members. It is also possible for a person to be in control of a company and at the same time be in its employment. Thus, a person can at the same time be a shareholder, creditor, director and also an employee of the company.
A Private Limited Company can raise funds more easily and enjoy greater borrowing capacity from local banks. It can issue debentures, secured as well as unsecured assets and can also raise funds in the form of deposits from investors and the public.