LLC, LLP, Sole Proprietorship: What are the differences?

Selecting the right business entity type can save you a lot of headaches in the future. Find out what are the differences between each entity type and which one suits your business best.

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Setting up a business is often a massive investment and requires large amounts of commitment. That is why selecting the right company type will go a long way when it comes to settling financial disputes, rights and ownership. In Singapore, the three main categories of companies are the Limited Liability Company (LLC), Limited Liability Partnership (LLP) and sole proprietorship.

Limited Liability Company

The Limited Liability Company (LLC) is the most common out of the three types of companies. Also referred to as Private Limited (Pte Ltd) companies, the LLC is by far the largest business formation, with shareholders and directors taking part in the maintenance and expansion of the business.

Additionally, the LLC has the highest potential for success in a country like Singapore due to its business-friendly policies, as well as the reputation and connectivity it offers. It is no wonder that 55.1% of Singapore companies formed in 2016 were LLCs. In contrast, 38.3% were Sole Proprietorships, and a meagre 3.8% were LLPs. The remaining companies were either foreign companies, partnerships or public companies limited by shares.

So why set up an LLC? Apart from the aforementioned statistics and data, LLCs are not tied to individuals. LLCs are similar to LLPs in a way that these companies are separate legal entities from the people running the business, which means that if a company is sued, the company will be legally liable, not the individuals comprising it.

It also means that the company will survive even if the founders are no longer with the company. Therefore, the LLC structure has the potential to be the most resilient out of the bunch, ensuring that a long-lasting business empire or dynasty can be sustained. LLCs are also at an advantage when it comes to expanding their business or finding financial investment, as they will have an easier time getting funding from venture capitalists, equity partners and investors.

Rounding up the benefits of setting up an LLC is the added ease of transfer of ownership. As the company is a distinct entity, transferring ownership is as easy as selling stocks. There is very little to fault with the LLC model as it is the most advanced and easily scalable model to use.

The only problem is that it can be tough to keep track of LLC’s paperwork and records, especially when the company starts expanding.

However, as LLCs tend to be larger and more profitable, their upkeep and maintenance costs tend to be higher than the LLP and Sole Proprietorship. This downside becomes insignificant, however, once an LLC starts doing well, as the profits gained often offset this cost. Couple that with the tax subsidies and exemption that certain types of LLC companies enjoy, it becomes a profitable business model for years to come. It is no wonder that many successful companies utilise this model to maximise their profits.

Getting Started With LLC

A one-time administrative fee of $315 is required for registration, along with the expenses incurred to appoint a company secretary within six months from incorporation and, unless you’re exempted, an auditor within three months.

On top of that, the amount of administrative work needed to maintain an LLC can be mind-boggling. Some of the statutory requirements that have to be met include conducting annual general meetings and filing annual reports and tax returns. Hiring an accountant to help you with the paperwork can save you time to focus on other areas of your business.

Limited Liability Partnership

The Limited Liability Partnership (LLP) seems to suffer from the middle child syndrome, making up only 3.8% of local companies set up in 2016, as it is often shunned in favour of LLCs or Sole Proprietorship.

Containing a hybrid of several characteristics of LLCs and Sole Proprietorships, the LLP functions as a useful model for SMEs and start-ups, due to the smaller scale that most LLPs operate on. In an LLP business model, partners own a share of the company and are only liable to the extent that they have invested in the company. Therefore, each member is responsible for their own role in the company, and misdeeds committed by one partner does not affect any of the other uninvolved partners.

LLPs generally receive less funding than LLCs, as LLPs are not as heavily regulated (there are fewer criteria to meet) as LLCs and hence seen as a higher risk. This means that most of the funding is either from partners’ investments or private investors.

In general, transfer of ownership is less convenient as each of the company assets has to be transferred individually due to the nature of the LLP agreement.

LLPs, if done right, can succeed in a specific niche area in its industry and even dominate it. It is potentially good as an entry-level business model for small businesses, who thrive on exploiting niches and small customer bases.

Due to the more troublesome and limited nature of the LLP, serious entrepreneurs often choose to opt for the classic LLC model instead.

Getting Started With LLP

As LLPs require the existence of at least two partners, the first step to forming an LLP is finding a like-minded individual who wants to be your business partner.

Administrative fees will amount to $115 for registration, and due to the complex nature of the agreement between partners, professional help in drafting agreements is advised. Overall, the main idea behind starting an LLP is to leverage partners’ relevant skills and networks to expand influence and maximise profits.

Sole Proprietorship

A WeChat store mockup.
A WeChat store mockup.
Source: https://walkthechat.com/ Image Credits: https://walkthechat.com/

Sole Proprietorship is the riskiest out of the three main types of business due to the extremely limited and restrictive nature of the model. First, ownership can only belong to one person as the name suggests, meaning responsibility for the company is completely in the hands of the owner.

As the business entity and the owner are inexplicably linked in a sole proprietorship, suing the business is equivalent to suing the owner, and all debts and losses are the owner’s burden to bear. Additionally, funds are hard to come by as people hardly see a sole proprietorship as a business entity, which it isn’t anyway, therefore investment usually comes in the form of private investment or personal finances.

This results in a model which is virtually unscalable unless the owner starts off with a significant amount of capital. Of course, sole proprietorships are often taken up by skilled freelancers, whose main objective might not be to maximise their earnings as a multinational corporation would.

Sole proprietorships may seem unprofitable from a hierarchical viewpoint, but from a personal perspective, sole proprietorships can be very fulfilling. The simplicity of this business model means fewer administrative issues and little management of resources since the only resource a sole proprietor is likely to manage is themselves.

A massive advantage that sole proprietorships gain over LLCs or LLPs is a complete freedom and control the owner has over the business. This allows more unorthodox business ideas to be implemented, which risk-seeking entrepreneurs can enjoy. Examples of sole proprietorship would be solo musicians, freelancers, solo entrepreneurs or anyone who offers any form of personal services.

Getting Started With Sole Proprietorship

The administrative process of registering a Sole Proprietorship is easy. Registration fees amount to around $60, the paperwork is minimal, and the process is swift. Setting this style of company up will be a piece of cake, but maintaining it will be less of a breeze.

Business Consultancy

It is generally understood that paperwork can be difficult to manage, especially when you’re unfamiliar with it and still have to juggle the demands of running a business. Things get complicated when legal issues, policies and legislation get muddied up in the midst of company operations.

However, there are professional battle-tested entities with years of expertise and wealth of knowledge available to help you ease your burden.

There are a few companies that functions as an advisor, provide corporate services that assist you in developing your company, as well as always placing your company’s interest as the priority.

Sometimes, less (burden) is more.

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