Find out how to select the structure that suits your business best

Many SME owners neglect the importance of choosing the right structure, not realising that it will impact many aspects of their business: personal liability, intellectual property protection, borrowing ability and more.

Whether you’re just starting out or deliberating over the right structure for your existing company, understanding the law involving business organisation is essential.

It is also important to consider the unique aspects of your business when deciding which structure to choose. Consult a lawyer before finalising your decision to make sure that you made a sound choice, and that the process is completed properly.

3 Common Business Structures In Singapore

1. Sole Proprietorship

A sole proprietorship is the most basic business structure where one person or one company owns the business. There are no partners, and the sole-proprietor will receive all profits and has the absolute say in the running of the business.

Self-employed individuals and freelancers usually favour this structure, as it is easy to set up without a huge amount of money and paperwork. Sole proprietorships have fewer compliance requirements than incorporated companies, so you do not have to adhere to formalities such as annual reporting. The owners also do not have to pay corporate tax.

The biggest drawback of choosing this structure is that it treats the business and its owner as a single legal entity. This means you personally assume responsibility for any debts or legal actions against the business. You could face personal lawsuits, unlimited liability, and have your personal assets seized to repay debts.

Raising money for a sole proprietorship can be difficult, as most banks may be reluctant to approve business loans to sole proprietors. In most cases, you’ll have to depend on your own financing sources, like savings, home equity or family loans.

2. Partnership

If your business is owned and operated by several individuals, you may want to consider structuring your business as a partnership. A partnership is a business formed by two to twenty partners (once there are more than twenty partners, the partnership must be registered as a company under the Companies Act, Cap. 50).

In a general partnership, the business and all its partners form a single legal entity. This means that each partner takes on personal liability for any debts or legal actions against the business. Partners may also be personally liable for the actions of other partners in the business.

In a limited partnership (LP), there are both general and limited partners. The general partners own and operate the business and assume liability for the LP, while the limited partners serve as passive investors and are not subject to the same liabilities as the general partners.

LPs are generally not ideal for new or small businesses because of their required filings and administrative complexities. LPs suit businesses with many passive investors. If two or more partners want to be actively involved, they should consider forming a general partnership instead.

A limited liability partnership (LLP) is a business structure that allows businesses to operate and function as a partnership while giving it the status of a separate legal person. There has to be at least two partners in a LLP, and the partners can be individuals or companies.

In an LLP, partners enjoy limited liability and will not be personally responsible for the actions of other partners.

If your business involves providing services based on your profession, such as accounting, architecture, or law, consider setting up an LLP if you have partners in a similar field. This structure may be suitable for building a joint practice.