Forms of business ownerships

Welcome to Your Guide on Business Ownership!

Ever wondered why some neighborhood shops are run by a single uncle or auntie, while big brands like Razer or local favorites like BreadTalk have a more complex setup? In this chapter, we are going to explore the different ways a business can be "owned." Understanding this is super important because the form of ownership decides who gets the profit, who pays the bills, and who is responsible if the business runs into trouble. Don't worry if it seems like a lot of facts—we'll break it down step-by-step!

1. The Three Main Forms of Business

In your O-Level syllabus, we focus on three specific types of business entities:

A. Sole Proprietorship

This is a business owned by one person. It is the simplest and most common type of small business.
Example: A small mama shop downstairs or a freelance graphic designer.

B. Limited Liability Partnership (LLP)

This is formed by two or more partners. It combines the flexibility of a partnership with the protection of limited liability.
Example: A firm of two architects working together.

C. Private Limited Company (Pte Ltd)

This is a separate legal entity owned by shareholders (1 to 50 people). The business is treated like a "legal person" separate from its owners.
Example: A successful local bakery that has expanded into many branches.

Quick Review: Think of a Sole Proprietorship as a solo singer, an LLP as a small band, and a Private Limited Company as a large orchestra with a conductor!

2. Comparing the Features (The "Big Six")

To differentiate these businesses, we look at six main areas. Let’s break them down:

1. Capital Structure & Access to Funds

Sole Proprietorship: Usually has small capital. The owner uses their own savings or takes small bank loans. It’s hard to get a lot of money quickly.
LLP: More partners mean more capital can be contributed compared to a sole proprietor.
Private Limited Company: Can raise large amounts of capital by issuing shares to shareholders.

2. Extent of Liability (Very Important!)

Unlimited Liability (Sole Proprietorship): This is a big risk! If the business cannot pay its debts, the owner’s personal assets (like their house or car) can be taken to pay the business's debts.
Limited Liability (LLP & Pte Ltd): The owners' risk is limited to the amount they invested in the business. Their personal belongings are safe if the business goes bankrupt.

3. Level of Control

Sole Proprietorship: The owner has full control. You are the boss and make every decision!
LLP: Control is shared among partners based on their agreement.
Private Limited Company: Control is usually with the Board of Directors (though shareholders own the company).

4. Lifespan (Continuity)

Sole Proprietorship: Lacks continuity. If the owner passes away or closes the shop, the business ends.
LLP & Pte Ltd: Perpetual succession. The business continues to exist even if an owner or partner leaves or passes away.

5. Transferability of Ownership

Sole Proprietorship: Ownership cannot be transferred; you just sell the assets of the business.
LLP: Transferring a partner's interest usually requires the consent of other partners.
Private Limited Company: Shareholders can sell their shares, but in a Private company, there are restrictions (usually you need approval from the other shareholders).

6. Legal Status

Sole Proprietorship: The business and the owner are the same legal entity.
LLP & Pte Ltd: These are separate legal entities. The business can sue or be sued in its own name.

Key Takeaway: If you want full control, go for Sole Proprietorship. If you want to protect your personal house and car, choose an LLP or Private Limited Company!

3. Factors to Consider When Choosing

Imagine you are helping a friend start a business. Which form should they choose? Consider these factors:

1. Owner’s Expertise: Does your friend have all the skills (Sole Prop), or do they need a partner with different skills (LLP)?
2. Nature of the Business: A small tuition service might stay a Sole Prop, but a manufacturing factory might need to be a Pte Ltd.
3. Capital Commitment: How much money is needed to start? High setup costs usually require a Pte Ltd.
4. Risk (Liability): Is the business very risky? If yes, Limited Liability is a must to protect personal assets.
5. Level of Control: Does the owner want to make all decisions alone or are they okay with sharing power?

Did you know? Most people start as a Sole Proprietorship because it is the cheapest and easiest to register with the government!

4. Differences in Financial Statements

The syllabus requires you to know how the Statement of Financial Position (SFP) and Statement of Financial Performance look different for a Sole Proprietorship versus a Private Limited Company.

In the Statement of Financial Position (Equity Section):

Sole Proprietorship: You will see Owner's Equity. It shows the Capital account and Drawings.
\( \text{Ending Capital} = \text{Beginning Capital} + \text{Profit} - \text{Drawings} \)

Private Limited Company: You will see Shareholders' Equity. Instead of just "Capital," it is split into:
1. Share Capital: Money from shareholders buying shares.
2. Retained Earnings: Profits kept in the business from previous years.

In the Statement of Financial Performance:

Sole Proprietorship: We calculate "Profit for the period" which goes entirely to the owner.
Private Limited Company: We also calculate profit, but the company may pay out Dividends (a share of the profit) to the shareholders. The rest is kept as Retained Earnings.

Common Mistake to Avoid: Don't use the term "Drawings" for a Private Limited Company. Owners of a company get Dividends, not Drawings!

5. Memory Aid: The "L-C-C" Check

When comparing forms of ownership, remember L-C-C:
1. Liability (Is it Limited or Unlimited?)
2. Capital (Is it Small or Large?)
3. Control (Is it Full or Shared?)

Final Summary Review

Sole Proprietorship: 1 owner, unlimited liability, easy to start, ends when owner dies.
LLP: 2+ partners, limited liability, separate legal entity, better for professionals.
Pte Ltd: 1-50 shareholders, limited liability, separate legal entity, expensive to start but great for raising lots of money.

Keep practicing! You've got this. The more you relate these to real shops you see every day, the easier it becomes to remember.