As mentioned in the various articles in the series, the three most common forms of business structures are Sole Proprietorship, Partnership and Private Limited Company. Here, we shall delve into the details of Partnership, including its characteristics, pros and cons and compliance requirements.
What Is A Partnership?
A Partnership is a firm that is formed by two or more partners. There are three types of Partnerships to choose from – General Partnership, Limited Partnership (LP) and Limited Liability Partnership (LLP). Amongst them, the LLP is the most attractive form of Partnership. To understand why, let’s first look at the difference between them.
General Partnership works like a Sole Proprietorship, except that instead of “flying solo”, you form the business with one or more partners. Like Sole Proprietorship, a General Partnership does not have a separate entity from the owners. This means running the business with the disadvantage of unlimited liability. As owners/partners, you are personally liable for debts and lawsuits of the business and your personal assets can be used to pay off business debts and liabilities. So, if you are unfortunate enough to form the Partnership with an irresponsible partner, you’re about done.
How are General Partnerships taxed? Since there is no separate entity, the partners are taxed on their share of income from the Partnership according to their personal income tax rate. If a partner happens to be a Private Limited Company – which is allowed and possible – its share of income from the Partnership will be taxed at the corporate tax rate.
General Partnerships have their benefits, including the following:
- Ease of setting up – It’s straightforward to set up a General Partnership. The Partnership can commence as soon as it is registered with ACRA.
- Low operational cost – As there are minimal or no annual filings required, you don’t need to hire additional help for the administrative or accounting work. Nor do you need to incur any filing fees.
- Minimal ongoing requirements – Unlike Private Limited Company, you don’t need to hold AGMs, issue shares or keep your personal assets separate from your business assets (you can outline the roles and responsibilities, the percentage of partnership, etc. through your own partnership agreements).
Final Thought on GP: Use it with caution and only with partners whom you can trust your life with, for example, spouse, parents or siblings.
Limited Partnership (LP)
An LP consists of at least one general partner and at least one limited partner. A general partner works like a partner in a General Partnership (see above). A limited partner is one who enjoys limited liability (meaning their personal assets cannot be used to pay off the LP’s debts and liabilities). As with other types of Partnerships, an LP is taxed on a personal income tax level rather than an entity level according to the partners’ share of the income from the LP.
Okay, this sounds like the general partner is getting himself a bad deal. Why would anyone choose to be a general partner in an LP? Here’s a scenario where it makes sense: A person who operates a business entirely on his own is looking for a silent investor for his business. Since the silent investor is not involved in the day-to-day matters, he invests with the caveat that his liability for the business is limited only to his investment amount. This way, his personal assets are well protected.
Limited Liability Partnership (LLP)
If you’ve been reading this article, by now, you’d know where LLP is heading. LLP offers partners the flexibility of a Partnership and the benefit of a separate legal identity like a Private Limited Company. This means that the LLP is regarded under the law as “bodies corporate” with a separate legal entity from its partners, and all its partners get to enjoy limited liability. However, although it has a separate entity, partners’ share of income from the LLP is still taxed at their personal income tax rate. The filing procedure is hence similar to other types of Partnership.
An LLP can be formed with at least two partners, with no maximum number of partners. The LLP also has perpetual succession, thus allowing changing of partners without affecting its existence, rights or liabilities. LLP can sue or be sued as well as own property in its name.
The LLP structure is commonly used by professionals such as lawyers, architects, dentists, doctors and accountants.
Pros And Cons Of Limited Liability Partnership
- Because partners enjoy limited liability, they cannot be held personally liable for any wrongful act of other partners in an LLP.
- Compared to a Private Limited Company, LLPs are cheaper to register with minimal regulatory obligations.
- There is also no statutory requirements for AGMs, share allotments, etc.
- Compared to a Private Limited Company, it is probably harder to attract capital investment or obtain loans from financial institutions.
- Since partners are not obligated to consult with one another in business dealings, potential disagreement may form. To protect business interest, a partnership agreement should always be created to outline the authority and responsibility of each partner.
As LLPs are the most complex amongst the types of Partnerships, we’ll look at their compliance requirements.
- A partner can either be a person (at least 18 years old), a local company, a foreign company, or another LLP. In Singapore, full local or foreign ownership is permitted.
- The LLP needs at least one manager who is a resident in Singapore (at least 18 years old and not disqualified under the LLP Act).
- The LLP’s company name (in English) must not be the same or similar to another business name or existing trademark or contain any offensive or vulgar words. Approval by the Accounting and Corporate Regulatory Authority’s (ACRA) is required before you can use your desired name (this can be done during the registration of the business).
- You also need a registered office address. While it cannot be a PO Box, you can use a virtual office for registration. For certain trades, residential homes (including HDB flats) can be used as offices. Find out more about the types of business you can operate from an HDB flat here.
For more information, please read our article How To Register A Business In Singapore.