Partnership or Private Limited Company: Choosing the Best Business Structure

In Singapore, partnerships offer a flexible alternative. The most common types of partnerships include:

• Limited partnerships: limited partnerships include general and limited partners.
• Limited liability partnerships (LLPs): LLPs combine the benefits of a partnership and a limited liability company, acting as a separate business entity while allowing the flexibility of partnerships.

The main differences between a partnership and a private limited company span several crucial aspects, including ownership and management, legal identity and liability protection, capital raising capabilities, taxation, continuity, legal formalities, and profit sharing

Ownership and management differences

A limited liability company separates ownership and management. In a private limited company, directors appointed by the shareholders are in charge of management, ensuring the company's undisrupted operations even with changes in shareholders. Ownership transfer in a Pte Ltd is easily done by selling shares. A Pte Ltd can have 50 shareholders maximum.

Partners are both owners and managers in a partnership, fostering a more hands-on approach when directing business operations. This can be advantageous for small businesses but can also lead to disruptions if a partner leaves or passes away. Transfer of ownership requires a ubiquitous agreement of all partners, making the process cumbersome. This structure allows an unlimited number of partners.

Legal identity and liability protection

One of the most critical distinctions lies in the legal identity and liability protection offered by each structure. A private limited company can own assets, sue, and be sued in its own name. This separation provides significant protection to shareholders, limiting their liability to the amount they have invested and shielding their assets from the company’s debts, similar to a limited liability company. Additionally, these structures operate as separate legal entities, further enhancing the protection afforded to their owners.

In contrast, partnerships do not provide the same level of protection. Partners in a traditional partnership are held personally liable for the business’s debts and obligations. This can pose significant risks, especially in high-stakes business environments.

Raising capital and financial position

Raising capital is often easier for private limited companies due to their ability to issue shares. This structure attracts external investors by offering equity in the company, providing a straightforward method for securing funding. The structured governance and limited liability protection further enhance investor confidence.

Partnerships, particularly LLPs, face more challenges in raising capital. They primarily rely on contributions from partners, which limits their ability to attract significant outside investment. This can affect their financial position and growth potential compared to private limited companies.

Taxation and accounting records

Taxation is another area where private limited companies and partnerships differ significantly. Private limited companies in Singapore are subject to a corporate tax rate, which can go up to 17%, and they benefit from tax exemptions on their profits/chargeable income. These companies also face stricter annual compliance obligations, including detailed accounting records and filing annual returns.

Partnerships, on the other hand, are taxed on the personal income tax slab, and the amount of chargeable income depends on their share of the partnership. Since partners include personal income from jobs and other income sources, high-earning partners may end up with higher overall tax liabilities than other partners. The differences in taxation and accounting requirements can significantly impact business financial operations.

Continuity and succession planning

Continuity and succession planning are crucial for long-term business stability. Private limited companies benefit from perpetual succession, meaning the company continues to exist regardless of management disruptions. This provides stability and ensures ongoing operations even if shareholders leave or pass away.

However, partnerships may dissolve upon the departure or death of partners unless specific provisions are made in the partnership agreement. Effective succession planning in partnerships requires detailed agreements to manage such transitions smoothly.

Legal formalities and costs

Legal formalities and associated costs are essential considerations when choosing a business structure. Private limited companies face more extensive annual compliance requirements, such as holding AGMs and filing annual returns, which can be costly and time-consuming. Additionally, transferring through selling shares involves specific procedures and documentation, adding to the complexity.

Selecting the right business structure depends on several factors, including management responsibilities, personal liabilities, and long-term business goals. Understanding the implications of each structure is crucial for making an informed decision. For instance, if limiting personal liability is a priority, a private limited company might be the better choice.

Consulting with legal professionals can provide further clarity on the ramifications of each structure. They can help you navigate the complexities of legal requirements and tax implications, ensuring that your choice aligns with your own legal identity, business objectives, and personal circumstances.

Ultimately, the decision should be based on a thorough evaluation of your business needs, growth plans, and risk tolerance. By considering these factors carefully, a business owner can choose the structure that best supports your entrepreneurial journey.