Limited Liability Company vs Partnership: Which is the Right Choice for Your Business?
Singapore has multiple business types to choose from when incorporating, but two of the most common business types are:
- Limited liability company
- A partnership
Limited liability companies are also considered a private limited company or PLC. But, for the purpose of this article, we’ll be using “limited liability company,” or “LLC.”
Legal Identity Differences Between an LLC and a Partnership
Legal identities are very important because if a company has its own legal identity, it is separate from its shareholders and directors. An LLC is advantageous because a separate legal identity is given to these businesses.
What this means is that the entity can:
- Enter into legal relationships
- Sue or be sued
- Hold property
- Enter into contracts
All of these points will occur in the name of the company. In most cases, an LLC will have up to 50 persons that have shares. A partnership often occurs between 2 and 20 members. Partnerships are a concern because they’re not a legal entity.
What does this mean?
Partners have unlimited liability. If a business fails to pay its debts, the partners may be held liable to satisfy the debts. But, even in a partnership, the firm can sue or be sued in the firm’s name. The main difference is that liability will fall on the partners rather than the separate legal entity that is the limited liability company.
Shareholders in an LLC are only liable for the investment in the company – not for the company’s debts.
Note: A partnership is different from a limited liability partnership, or LLIP, which limits the partner’s liability to his or her investment into the business.
Continuity and Transferability of an LLC and a Partnership
Business continuity and transferability is another question of concern. Partnerships are allowed to continue and transfer as long as the partners agree that it will. Paperwork should be in place that allows for the partnership to exist even if a partner drops out of the venture or dies.
Perpetuity and succession of an LLC is irrespective of the partners, shareholders or directors of the business.
If a shareholder, partner or director die in an LLC, the continuance of the business is not an issue. Transferring of shares is also very straightforward, and the transfer will not impact the daily operations of the LLC.
Raising Capital Questions and Concerns
LLCs have the benefit of being a legal entity, and these businesses will be viewed favorably by banks when it comes to lending and raising capital. An LLC comes with credibility. Partnerships will have a harder time receiving financing for their operations.
Partnerships are often limited to the contributions of their partners.
So, if the partners have already exhausted all of their personal contributions, it will be very difficult to raise capital.
Private finances are often needed, especially in the initial stages of the partnership’s operation.
Taxation of an LLC vs a Partnership
Taxation of an LLC will be imposed on profits, and a tax rate of below 9% is imposed up to SGD 300,000. Tax rates are capped at 17% for all profits above the SGD 300,000 threshold. Partnerships will be taxed differently.
Partnerships will be taxed on the profits that are distributed among partners.
Tier-based, the income from partnerships will be taxed based on the personal income tax rate.
Responsibilities and Expenses of an LLC vs a Partnership
A partnership has a low cost of registration, and it’s an easy entity to setup. Two or more persons with an idea may start with a partnership because they’re:
- Easy to manage
- Easy to administer
- Quick to set up
- Less administrative duty intensive
Annual filing requirements are required for an LLC, and there’s also a higher registration fee. You'll find that there are also requirements for:
- Annual accounts
- Annual general meetings
- Tax returns
Partnerships may be formed without the use of an accountant or law firm, but it’s ill-advised to form an LLC without professional assistance. The initial set-up of an LLC is vital to the business’ ongoing operation.
Professionals, such as accountants, will be able to manage all of the complex responsibilities of an LLC.
An LLC may be a complex structure, especially compared to a partnership in terms of responsibility and maintenance, but they also offer flexibility and power. Limiting the liability of the shareholders is a major benefit, and this is often one that leads to a new business being formed as an LLC.
The flexibility and advantages of the LLC are often enough for owners to deal with more complex maintenance of the business.
Partnerships also have to worry about a discontent partner giving notice for the dissolution of the partnership. This is a major concern for all partners because it can cause substantial losses and concerns for all partners involved. Partnerships are often only chosen in a limited number of situations.
Oftentimes, partnerships are not recommended, although they do have their place in limited scenarios.