How to Choose The Right Business Structure When Starting Up
By Alex, Updated: 2023-01-18 (published on 2016-07-08)
Your choice of business structure has an immediate impact on your business’ operational efficiency, personal liability, paperwork, and tax requirements. This is why it is important for you to fully understand the available options in order to determine what’s right for your business.
When approaching the subject, consider the following elements:
- What are the characteristics of each business structure? What are the pros and cons of each?
- What is your long-term business plan, and the underlying business objectives?
- What filing and documentation is required for each type of business structure?
You will commonly find these business structures in most countries:
1. The Sole Proprietorship
You, the ‘solopreneur’, come up with the idea, set up the business, procure all assets, raise capital, and are solely responsible for business growth. Because you do all the work, you can expect to reap all the benefits too. However, not all is rosy because your personal property can be at risk if the business funds are not enough to cover losses. This is a high-risk option that can pose as a huge deterrent to startups.
2. The Partnership
You, along with your partner, set up and own the business together; pooling together resources and skills. The two main types of partnerships based on liability are the unlimited/general partnership, and the limited liability partnership. The latter allows the partners to be actively involved in the working of the business while liable only to the extent of the capital contributed by them. The profit-sharing ratio is determined by the partnership agreement.
3. The Company
This is, first and foremost, a separate legal entity from its owners – the assets and machinery are in their own name. The two main types of companies based on limitation by shares are the public company with more than 50 shareholders, and the private company with no more than 50 shareholders.
Most entrepreneurs opt for the private limited company (Pte. Ltd.) where your shareholders will own the company and your liability will be limited to the original value of the shares you hold. The profits, after paying off the creditors, are distributed among them as dividends.
Pros and cons
Knowledge about the benefits and drawbacks of each type of organisational structure is essential in making an informed decision about the ideal structure for your business.
The most common for businesses in Singapore is to opt for incorporation as a limited company. This setup has several benefits, such as the ease of raising capital (or seeking investment), limited liability for owners, and separating management from ownership. Moreover, the taxation scheme implemented by the Singapore government for companies is the third lowest in the world.
Are you incorporated as a private limited company? Do you know what legal documents you will need? Read more:
Related reading: Free eBook download: Incorporating in Singapore
Related reading: Free eBook download: Incorporating in Hong Kong