When incorporating your startup in Singapore, one of the key things you’ll need to work out is what sort of business structure you’ll be adopting: sole proprietorship, partnership, or company.
Partnerships are businesses owned by two or more partners (partners can be individuals or corporations), and are legally referred to as “firms”.
What Is A Legal Business Partnership In Singapore?
A partnership in Singapore is a business owned by at least two partners. These partners can be individuals, companies, or even a limited liability partnership (LLP).
Under Singapore law, a general partnership can have a maximum of 20 partners, although professional partnerships, such as those for lawyers, engineers, or architects, may have more than 20 partners.
These professional firms must comply with specific laws like the Professional Engineers Act or Legal Profession Act, but they also have the option to register as a Limited Liability Partnership under the Limited Liability Partnerships Act.
In a business partnership, the business is not a separate legal entity from its owners, meaning the partners are personally liable for the business’s debts and obligations. This lack of separation means the business can sue or be sued in the names of the partners.
It is important to note that this structure places personal assets at risk in the event of financial difficulties, which is why some businesses prefer other structures that offer more protection.
A partnership is a step up from a sole proprietorship, as it involves more than one registered owner working together for profit.
9 Key Considerations When Forming A Business Partnership
When incorporating a business partnership, it’s important that all partners agree on the following points:
#1. Types Of Legal Partnerships In Business
There are three main types of legal partnerships in Singapore, each with its own set of rules and liabilities:
Limited Partnership (LP)
An LP consists of two or more partners, with a mix of general and limited partners. The general partner manages the business and bears unlimited liability for the debts of the business, while the limited partner is only liable up to the amount they have invested.
- Owners: At least two partners, with no maximum limit. An individual or corporation can be either a general or a limited partner.
- Formation: To set up an LP in Singapore, it must be registered with the Accounting and Corporate Regulatory Authority (ACRA). This process is similar to forming other partnerships.
- Liability Protection: Limited partners are protected from personal liability beyond their investment, making this type of legal business partner arrangement appealing for investors who wish to limit their risk.
Limited Liability Partnership (LLP)
An LLP provides the flexibility of a partnership with the added benefit of limited liability protection for all partners. This is commonly used in professional services like law firms or accounting practices.
- Owners: At least two partners, with no maximum limit.
- Formation: Interested parties can choose to register an LLP instead of forming a traditional business partnership. The registration is done through ACRA, and the LLP becomes a separate legal entity from its partners.
- Liability Protection: In an LLP, each partner’s liability is limited to the extent of their contributions, offering personal asset protection from business debts or losses, except in cases of personal misconduct.
General Partnership (GP)
A GP is the most straightforward form of partnership, but it comes with significant personal risk. All partners are personally responsible for the debts and liabilities of the business, and their liability is unlimited.
- Owners: A minimum of two partners, with a maximum of 20. If the number of partners exceeds 20, the business must be incorporated as a company.
- Formation: GPs are registered under the Business Name Registration Act with ACRA.
- Liability Risk: In a general partnership, each partner is liable for the actions and debts incurred by the other partners. This lack of liability protection makes it a riskier option compared to an LLP or LP.
#2. Knowing More About Partnership Agreements In Singapore
In Singapore, partnerships are regulated by the Partnership Act, and while a Partnership Agreement is not mandatory, it is highly recommended.
A Partnership Agreement acts as a formal contract that outlines the rights, responsibilities, and profit-sharing arrangements between business partners.
Although verbal agreements can hold legal weight, they often lead to conflicts due to a lack of clear evidence. A written agreement provides a solid foundation for resolving disputes and establishing clear rules for how the partnership in business will operate.
This document is essential for defining the framework of a legal partnership. It addresses issues that the Partnership Act may not cover, such as capital contributions, profit distribution, and partner exit strategies.
What To Include In A Partnership Agreement?
A well-drafted Partnership Agreement should include several key elements to protect the interests of all parties involved. Here are the essential aspects to cover:
- Basic Company Information: Include the partnership’s name, location, names of the partners, the effective date of the agreement, and any other details required for tax and legal purposes.
This ensures the legal partnership is properly recognized by authorities like the Inland Revenue Authority of Singapore (IRAS). - Partnership Rules and Structure: Define how decisions will be made, membership criteria, and rules for admitting or removing partners. Include dispute resolution procedures, as conflicts are inevitable in any business partnership. Having clear guidelines helps in resolving issues before they escalate.
- Capital Contributions: Outline the contributions each partner brings to the business, whether in the form of money, property, or services. This ensures clarity on the value each legal business partner is contributing and how these contributions will affect profit-sharing.
- Profit and Loss Distribution: Specify how profits and losses will be divided among the partners. This can be done based on equal shares, proportional to contributions, or a pre-agreed percentage. Clear definitions help avoid potential disputes over money.
- Tax Matters: Address the tax implications of the partnership in business, particularly if the partnership qualifies for pass-through taxation. Clarifying tax responsibilities can help partners comply with IRAS regulations and prepare for potential audits.
- Responsibilities and Remuneration: Detail the roles and responsibilities of each partner, including performance expectations and compensation. This ensures accountability and sets clear expectations for managing the business.
- Withdrawal and Admission: Specify the procedures for admitting new partners or dealing with the withdrawal of existing ones. Include conditions for a buy-out, valuation of the partnership, and any other necessary terms for a smooth transition.
- Dispute Resolution: A well-thought-out dispute resolution strategy is key to avoiding prolonged conflicts. Having mediation or arbitration processes in place will help partners resolve issues without resorting to litigation.
#3. 8 Features Of A Partnerships
A partnership in business has several important characteristics that differentiate it from other business structures in Singapore. Here are the eight key features that define a legal partnership:
- Lacks Legal Identity: Unlike companies, partnerships are not separate legal entities from their owners. This means that neither a General Partnership (GP) nor a Limited Partnership (LP) can own property in the business’s name.
A GP can sue or be sued in its own name, but an LP cannot. This limits the partnership in law and its legal capacity in certain transactions. - Validity/Renewal: The registration of a partnership is valid for either one or three years. It must be renewed within 60 days of expiry.
Partnerships are only eligible for three-year renewals if Medisave contributions are up to date. Renewal fees are non-refundable and must be paid online through BizFile. - Eligibility: To register a business partnership in Singapore, individuals must be 18 years or older and either a citizen, permanent resident, or eligible FIN holder.
Foreigners must appoint a local authorised representative to manage the business. Additionally, those who are self-employed need to ensure their Medisave accounts are topped up before registering. - Officer: Each legal partnership must appoint an officer who is at least 18 years old and a resident of Singapore. If all the partners reside outside Singapore, a local manager or authorised representative must be appointed to oversee the business.
- Registered Address: Every partnership, whether a GP or an LP, must have a local registered address in Singapore. This is necessary not only for registration but also for the day-to-day operation of the partnership in business.
- Taxation: Partnerships do not pay tax as separate entities. Instead, the profits from the business are taxed at the individual partner level.
Each partner is responsible for reporting their share of the profits on their personal tax return. In the case of a corporate partner, the profit share will be taxed according to the corporate tax rate. - Continuity: Partnerships do not have guaranteed continuity. If the registration expires, or if all partners agree to close the business, the partnership will cease to exist.
Similarly, unexpected events like the death of a partner can lead to the dissolution of the business. A cessation notice must be submitted to ACRA when the business stops trading. - Limitation: Since a partnership is not a separate legal entity, it cannot own or register another business entity. This limitation restricts a partnership’s capacity to expand into ownership agreements or other legal commitments typically available to companies.
#4. Individual Liability Of Partners
In a general partnership, there is no legal distinction between the partners and the business entity. This means that partners are personally liable for the debts, losses, or obligations incurred by the partnership. Their personal assets can be at risk if the business faces claims or financial difficulties.
The unlimited liability in a general partnership is a significant concern, as each partner can be held responsible for the actions or losses caused by other partners.
This often leads to disagreements and strains within the partnership. To avoid potential issues, it’s crucial to clarify the extent of liability in advance, either as limited or unlimited, through a well-drafted Partnership Agreement.
#5. How Profits Will Be Divided
To avoid any potential conflict, partners should agree on profit-sharing and remuneration. This will prevent any one party from demanding more down the road without the consensus of all other partners.
#6. How To Enact Changes In Business Structure
Because of the flexible nature of partnerships, partners can easily be removed or added with minimal administrative procedures. However, partners should agree beforehand on what these procedures are.
For example, are new partners required to contribute cash capital or sweat capital to join? How many signatures are required before a partner is removed? What is the buyout procedure? These should be laid out in black and white in the Partnership Agreement.
#7. What Follows Should The Partnership Be Dissolved
What follows should the partnership be dissolved
To end a partnership, there are two stages: dissolution followed by winding up. This is important to note because dissolution is not the end of legal obligations – partners still owe each other fiduciary duties during the winding-up process.
It’s important that partners agree on how to proceed after dissolution, for example, how to settle unfinished transactions, complete creditor payments, or liquidate remaining assets.
#8. Disagreements In Partnerships
Disagreements are common in any business partnership, even when a partnership agreement is in place. Disputes often arise over management decisions, profit distribution, or differences in business vision.
If left unresolved, these disagreements can negatively affect the business and even lead to its dissolution. In some cases, personal relationships between partners may suffer as well.
To prevent these issues from escalating, it is important to regularly review the partnership agreement and make revisions where necessary, with mutual consent from all partners.
This helps ensure that each legal business partner remains aware of their rights, responsibilities, and the agreed-upon dispute resolution methods.
Common resolution strategies include mediation, where a neutral third party helps the partners negotiate an agreement, and arbitration, which offers a binding decision to resolve the conflict. Having these processes clearly outlined in the partnership in law can save time, money, and stress in the long run.
#9. Consideration For Foreigners
Foreigners who wish to enter into a partnership in business in Singapore have additional legal considerations.
If a foreign partner does not intend to relocate to Singapore, they must appoint a local manager or an authorised representative to manage the business. However, this may limit their control over the day-to-day operations of the legal partnership.
For those who plan to relocate to Singapore, it is advisable to consult the Ministry of Manpower (MOM) before proceeding with registration. Foreign partners will typically need to apply for an Employment Pass, but there is a chance that their application may be rejected.
It is crucial for foreign partners to be aware of these potential restrictions and ensure they meet the necessary legal requirements to operate a business partnership smoothly in Singapore.
Is It Important To Have A Partnership Agreement?
Yes, it is highly recommended to have a written agreement in place before forming your business partnership.
This ensures minimal grey area for miscommunication or misunderstandings about the partnership arrangement, which is especially crucial in the event of disputes such as an alleged breach of contract by one of the partners.
Oral agreements are considered legally binding, but relying solely on them may leave room for discrepancies.
Should there be no Partnership Agreement or if the agreement is not exhaustive enough, the relationship between partners will be governed by the Partnership Act.
Conclusion About Partnership In Business
For a partnership to work successfully, it is crucial to ensure that everyone is on the same page. Beyond being about legal clarity, the process of drafting the agreement also forces all partners to consider these very important aspects of entering into business together before moving forward.
Our team of highly experienced and professional corporate lawyers can help you draft a comprehensive Partnership Agreement before conducting business in Singapore.
In case of any disputes or criminal implications, our criminal lawyer in Singapore can provide essential guidance. Additionally, for those considering a partnership dissolution, consulting a divorce lawyer in Singapore may also be advisable to navigate complex legal issues.
Contact our law firm today with any questions.
Frequently Asked Questions About Partnership In Business
How Do Business Partnerships Differ From Sole Proprietorships?
A sole proprietorship is owned by one individual, while a business partnership involves two or more people. In a partnership, the responsibility and profits are shared between partners, but so are the liabilities.
Can A Business Partnership Be Formed Without A Written Agreement?
While it’s possible to form a business partnership without a formal agreement, it is highly recommended to have one in place. A legal partnership agreement outlines the roles, responsibilities, and profit-sharing terms to avoid disputes.
What Happens If A Partner Decides To Leave The Partnership?
If a partner exits the business, the partnership agreement should specify the exit procedure, including how their shares will be managed. The remaining partners may buy out the leaving partner’s share or dissolve the partnership.
What Legal Advice Should I Seek When Forming A Business Partnership?
It’s important to seek legal advice for business partnerships to ensure that the agreement is comprehensive and protects the interests of all parties. A lawyer can help outline responsibilities, liability, and dispute resolution methods.
What Happens To A Business Partnership If One Partner Dies?
If a partner dies, the partnership may dissolve unless there is an agreement in place that specifies how the deceased partner’s share will be distributed or managed by the remaining partners.
