You’ve made the decision to be an entrepreneur. Congratulations! You are at the threshold of an adventure of a lifetime. One of the first decisions that every entrepreneur needs to make before they set up shop is to decide on the structure of the organisation itself.
Generally speaking, there are two types of organisations: incorporated and unincorporated. The decision to incorporate creates a separate legal entity that is distinct from the owners of the enterprise. The most common form of incorporated organisations are: the limited liability partnerships (LLC) and the company. On the flip side, the most common form of unincorporated organisations are: the sole proprietorship and the partnership.
By choosing the right structure for our enterprise, entrepreneurs can set themselves up for success. In this article, we take you through the sole proprietorship and the partnership.
The Sole Proprietorship
ACRA statistics show that in 2020, sole proprietorships (and partnerships) accounted for around 27% of all businesses in Singapore and companies consisted of around 70% of all entities registered in the city-state.
A sole proprietorship refers to a business carried out by one person. Many small business organisations are typically sole proprietors. The individual looking to register the business must–among other things–name the principle place of business (which must not be identical to any other corporation or ‘undesirable’ in some way). Registration is separate from licensing and for certain kinds of businesses–i.e. employment agency, hotel, restaurant, pet shop, spa or childcare centre etc, a license is required and this could take more time and expense.
Once set up, a sole proprietorship is not separate to its owner. The owner is responsible for the debts incurred by the business as well as enjoys the rights of the business. Therefore, if the sole proprietor were to take the money made by the business; it would not cause any problems as the money is his or hers to keep.
The second form of unincorporated business organisation is the partnership. Like the sole proprietorship, the costs of set up are low; however, it is slightly more complicated as it involves more than one person. The Partnership Act defines a partnership as a relation that subsists between persons carrying on business in common with a view of profit. The term ‘person’ includes companies and thus two companies (i.e. legal entities) can form a partnership together.
An important question to be answered here is whether two (or more) persons can be said to be carrying on a business in common with a view of profit. It is important to determine this issue for the rights and obligations between the parties themselves. As to what defines a partnership in a legal sense, The Partnership Act provides the guidelines and much would depend on the actual facts of the case.
The most common perception is that for there to be a partnership, there needs to be a written agreement. However, a partnership agreement can be entered into orally. The minimum number of partners in a partnership is two and the maximum number is 20. Partnerships with more than 20 partners will have to incorporate; however, accountants and lawyers are allowed on carry on partnerships even if the number of persons involved exceeds 20.
Just like a sole proprietorship, a partnership is not a separate legal entity and thus partners are personally liable for the debts of the firm.
Before registering your business, research is required to decide which business entity best suits your business model. Articulating the question–and the possible solution–in mind is imperative in understanding the right decision that needs to made. This article is simply a brief overview of some ideas that the entrepreneur needs to brainstorm before registering their business. It does not provide legal or accounting advice, in large part because the details behind your question and the best possible solution matter a whole lot.