This is a report that shows a comparison between both Partnership and Limited Liability Partnership organization and to advise Mr. Tan on the business organization that is more likely to fit his needs for setting up a new consulting business.
For this particular project, our group assumed that Mr. Tan used to be an accountant working for a big accounting firm and is now looking to set up a small accounting consultancy business.
1Process Required to Setup Business Organization
Below are the processes to setting up a partnership and a limited liability partnership business organization respectively:
Firstly, the partners have to fill with the Registrar an application for approval and reservation of partnership name. After the application is being approved, a partnership is required to be registered online via BizFile with ACRA through a professional business registration firm if both of the partners are not local citizen.
The partnership must have at least two partners for registration. Following are the information needed:
1) Proposed name of the Partnership
2) Particulars of the partners/managers (foreign passport or Singapore ID)
3) Residential address of the partners/managers
4) Consent to Act as Manager and Statement of Non Disqualification to Act as Manager
5) If partner is a company: Registration details of the company
6) Singaporean or PR must pay Medisave
7) Declaration of compliance
ACRA will then send an email of notification confirming the registration. A business profile containing the registration details can be obtained as a softcopy via email from ACRA upon successful registration. Softcopies are usually sufficient to all purposes in Singapore. (enterAsia Information Services Pte Ltd, 2010)
1.2Limited Liability Partnership
Firstly, the partners have to fill with the Registrar an application for approval and reservation of LLP name. After the application is being approved, an LLP is required to be registered online via BizFile with ACRA through a professional business registration.
Following are the information needed:
1) Proposed name of the Limited Liability Partnership
2) Particulars of the LLP partners/managers (foreign passport or Singapore ID)
3) Residential address of the LLP partners/managers
4) Consent to Act as Manager and Statement of Non Disqualification to Act as Manager
5) If partner is a company: Registration details of the company
6) Declaration of compliance
ACRA will then send an email of notification confirming the Singapore LLP registration. A business profile containing the registration details can be obtained as a softcopy via email from ACRA upon successful registration of the LLP. Softcopies are usually sufficient to all purposes in Singapore. (enterAsia Information Services Pte Ltd, 2010)
2Legal Characteristics of Each of the Business Organizations
2.1The Characteristics of Partnership (ASSAR, 2011)
Two or more persons: Partnership involves business by a group of persons. There must be at least two persons to bring partnership into existence. Although there is no maximum number required in the Partnership Act, the Companies Act has placed a maximum limit 20 people in a business. A company must be registered if there are more than 20 people in the business.
Contractual Relation: A partnership is a contractual relationship arising out of an agreement among the partners, a person does not become a partner out of his status as is the case in joint family. Persons entering in partnership must be competent to enter into a contract as it is essential, and the agreement among partners may be oral or in writing. A written agreement or deed is preferred because it helps in resolving some disputes among partners later on.
Lawful Business: A partnership agreement only exists in a lawful business.
Sharing of profits: An agreement among partners must include the sharing of profits and losses. A charitable trust cannot be called partnership because there is no sharing of profits. Profit sharing is only a superficial evidence of partnership but not a conclusive proof. The employees of a business may also share profits but they are not the partners.
No Separate Legal Existence: A partnership firm is not a legal entity of its own. This means that the firm and the partners are one and the same. A firm is only a name to the collective name of partners and no firm can exist without partners. The rights and liabilities of the partners are the rights and liabilities of the firm. Management of the firm vests in partners who are its owners also.
Unlimited Liability: Every individual partner is liable jointly and severally for the obligations of the partnership firm. Therefore, if assets of the business are not sufficient to meet the liabilities of creditors then private property of partners can be used to meet them. The creditors can claim their dues from anyone or all the partners. If these liabilities are met by one partner then he is entitled to receive rateable contributions from other partners.
Restriction on Transfer of Shares: No partner can transfer his shares to an outsider without the unanimous consent of all other partners. It is based on the principle that a partner being an agent of the firm cannot delegate his
authority unilaterally to outsiders.
Utmost Good Faith: The very basis of partnership business is good faith and mutual trust. Each and every partner should act honestly and fairly in the conduct of business. A firm cannot be run if there is suspicion among partners. Partners must have faith in each other for running the business smoothly.
2.2The Characteristics of Limited Liability Partnership (LLP)
A limited liability partnership is a business structures that operates similar to a partnership organizational structure. The difference is the limited personal liability afforded to each member of the company. Each partner is responsible for their own actions while conducting business. LLPs are tailored for professionals, such as doctors, lawyers and accountants. (Howell, 2012)
Every Partner Equal: Each partner is an equal member in a LLP company. They decide together on various company issues, such as the name of the business, where it is located and how it is going to be operated. Partners also share equally in the profits and losses of the business. The number of people in LLP must not exceed 20.
Limited Liability Protection: Each partner in this type of company is protected against the actions of the other partners which results in a lawsuit. For example, if one partner is subject of a malpractice claim and loses in court and have to pay damages, the other partners are not held financially responsible. However, partners in a LLP are liable for the obligations of the company such as loans used to purchase equipment and utility expenses.
Pass Through Taxation of Profits: A limited liability partnership company is taxed similar to a business formed under the partnership and sole proprietorship organizational structures by a process called pass-through taxation. The company profits are not taxed at the company level but instead are “passed through” to the partners to be reported on their individual tax returns. This prevents the double taxation that occurs in corporations where profits are taxed at the company and shareholder levels.
3Advantages and Disadvantages of Partnership and LLP
Advantages of Partnership
1. Capital: Due to the nature of the business, the partners would contribute their share of capital to start up the business. Hence, the more partners there are, the higher the amount they could put into the business. This would give the partners better flexibility and greater potential for growth. It also means more potential profit, which would be equally shared between the partners.
2. Flexibility: It is generally easier to form, manage and run a Partnership. There are fewer restrictions in a partnership than in companies, in terms of the laws governing the formation. As the partners have the only say in the way the business is run without the interference of shareholders, they are far more flexible in terms of management, as long as all the partners can agree.
3. Shared Responsibility: Partners would be able to share the responsibility of the running of the business. This would allow the partners to make the most of their abilities and potential. Instead of dividing the management and taking equal shares of each business tasks, they would be able to divide the work according to their skills. Thus, if one partner is good with figures, they could deal with the book keeping and accounts, while the other partners might have different niche areas and specialize in different tasks.
4. Decision Making: Partners share the decision making and can help each other out when needed. With more partners means more brainstorming could be in place and the information they came out with could be picked out for business ideas and for the solving of problems that the business may encounter. (Adrain, 2010)
Disadvantages of Partnership
1. Disagreements: One of the most common disadvantages of partnership is the possibility of disagreements between the partners. People often have mixed ideas on how the business should be run, the task arrangements and are picky about what the best interests of the business are. All these might lead to arguments which might not only endanger the business, but also the relationship of those involved. That is why it is always preferred to draft a deed of partnership during the formation period to ensure that all partners are aware of what are in place in case of disputes and prepare for the procedures if a partnership is dissolved.
2. Agreement: As the partnership is jointly run, it is crucial that all the partners agree with decisions that are being made. This means that in some situations there is less freedom with regards to the management of the business. This is especially so compared to sole traders, where the sole trader need not seek agreement from anyone but himself.
3. Liability: Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business equally. This might put of the idea of partnership for some people, as they might not want to take the risk.
4. Profit sharing: As partners share the profits equally, it can lead to inconsistency where one or more partners are not contributing a fair share of effort into the running or management of the business, but still reaping equal rewards.
3.2Limited Liability Partnership
Advantages of Limited Liability Partnership (Janus Corporate Solutions, 2008) 1. Separate Legal Identity: A limited liability partnership has a separate legal identity. They can own properties, at the same time they can enter into contracts, and sue or be sued in its’ own name.
2. Limited personal liability: The partners of the limited liability partnership will not be held personally liable for any business debts incurred by the limited liability partnership or the wrongful acts of their partners. A partner may, however, be held personally liable for claims from losses resulting from his own misconducts or omission.
3. Perpetual succession: Any changes in the limited liability partnership (e.g. resignation or death of its partners) do not affect its existence, rights or liabilities.
4. Ease of compliance: Compliance requirements are more complex than sole proprietorship but simpler than a private limited company.
Disadvantages of Limited Liability Partnership (Janus Corporate Solutions, 2008) 1. Formation of limited liability partnership requires a minimum number of 2 partners at all times.
2. Individual partners can commit the partnership to formal business agreements without the consent of their partners.
3. Limited liability partnership lacks the ease of ownership transfer and investment that a company structure provides.
4. There are no corporate tax benefits: Tax exemptions are available to private limited companies but are not available to limited liability partnerships. A limited liability partnership is treated as tax transparent which means that limited liability partnerships are not taxed as an entity. Instead each partner is taxed on their share of the profits as per the personal income tax rates.
4Analysis on Choosing the Business Organization
Since Mr. Tan is setting up a business for accountancy consulting, he should opt for a Limited Liability Partnership organization instead of a Partnership.
Mr. Tan is currently new to the business world, and might not have found a partner he could fully trust yet; therefore it is also to his advantage if his partner were to act wrongfully or if there is a change in partners, since in LLPs, partners are not liable for losses to outsiders arising from acts of another partner as compared to an unlimited liability if he were to go into a Partnership.
In addition, the LLP is also not subject to full financial reporting and disclosure requirements, such as those on capital contributions and changes to capital (ACRA, 2005). This is an advantage to Mr. Tan’s business. Since the business is small, minor changes to capital will not have to be subjected to full reporting and disclosure. Furthermore, as mentioned earlier, LLPs are tailored for accountants.
With that, our group is certain that Limited Liability Partnership Organization will meet the needs of Mr. Tan’s new consultancy business.
ACRA. (2005, May). Retrieved February 5, 2012, from ACRA Legal Digest Issue 8: http://www.acra.gov.sg/NR/rdonlyres/4B52C6B6-E89B-4DC3-A72C-A9C4BC62AAAB/10278/ACRA_LDI_08.pdf
Adrain. (2010). The company warehouse. Retrieved 2012, from The company warehouse: http://blog.thecompanywarehouse.co.uk/2010/03/01/advantages-and-disadvantages-of-partnership/
ASSAR, R. (2011). Publish Your Articles. Retrieved February 2012, 6, from PublishYourArticles.org: http://www.publishyourarticles.org/knowledge-hub/business-studies/what-are-th
enterAsia Information Services Pte Ltd. (2010). entersingaporebusiness. Retrieved Feb 05, 2012, from LTD Singapore: Setting up a limited liability partnership (LLP) in Singapore: http://www.entersingaporebusiness.info/limited-liability-partnership.php enterAsia Information Services Pte Ltd. (2010). How to set up a partnership in Singapore. Retrieved Feb 05, 2012, from entersingaporebusiness: http://www.entersingaporebusiness.info/partnership.php
Howell, R. (2012). Hearst Communications Inc. Retrieved February 6, 2012, from Hearst Communications Inc.: http://smallbusiness.chron.com/characteristics-limited-liability-partnership-3729.html
Janus Corporate Solutions. (2008). Singapore Limited Liability (LLP) Registration. Retrieved February 4, 2012, from guidemesingapore: http://www.guidemesingapore.com/incorporation/other/singapore-llp-registration-guide