Forms of Business Ownership · Chapter 1

Key Concepts

Sole Proprietorship — G2 and G3

Feature	Detail
Ownership	Owned by one person (the sole proprietor), who contributes capital to set up the business
Access to funds	Limited to the owner's personal funds and bank loans
Extent of liability	Unlimited — if the business incurs debts or losses, the owner is obliged to pay them using personal assets
Management	Owner has absolute control over the running of the business May hire professionals to help
Lifespan	Exists as long as the owner is alive and wishes to continue
Advantages	Full control of the business All profits belong to the owner Minimal administrative duties Easy transfer of ownership
Disadvantages	Unlimited personal liability Limited access to funds Owner alone bears all losses

G3 Limited Liability Partnership (LLP)

Feature	Detail
Ownership	Owned by two or more partners, each contributing capital to set up the business
Access to funds	Bank loans Additional partners can contribute capital
Extent of liability	Limited (partial) — if debts or losses arise from the wrongful actions of one partner, only that partner is personally liable. Other partners are not affected.
Management	Control is shared among partners May hire professionals to help
Lifespan	Exists until wound up or struck off
Advantages	Limited liability — partners are protected from debts arising from other partners' wrongful actions More access to funds than sole proprietorship Responsibilities and losses are shared among partners
Disadvantages	Profits must be shared among partners More administrative duties than sole proprietorship The partner whose wrongful actions caused the debt is still personally responsible for repaying it

G3 Private Limited Company (Pte Ltd)

Feature	Detail
Ownership	Owned by 1 to 50 shareholders, each buying shares to contribute capital
Access to funds	Can issue more shares to raise capital from up to 50 shareholders Bank loans
Extent of liability	Limited (full protection) — shareholders are not obliged to pay company debts using personal assets. Worst case: they lose only the amount they invested in shares.
Management	Shareholders have no control over daily operations Professionals are hired to manage on their behalf
Lifespan	Exists until wound up or struck off
Advantages	Full limited liability — shareholders are not personally liable for company debts Greatest access to funds (can issue shares to up to 50 shareholders)
Disadvantages	Shareholders have no control over daily operations Greatest administrative duties of all three forms Profits are distributed as dividends (a share of profits paid to shareholders) only if the company is profitable

Definitions:

Wound up: All assets are sold to pay off liabilities (debts the business owes) and expenses; any remaining funds are distributed to partners or shareholders.
Struck off: The business ceases operations with no remaining assets, liabilities, or legal proceedings, and is removed from the register.

How to Remember

The key distinction across all three forms is extent of liability:

Form	Liability
Sole Proprietorship	Unlimited — owner personally responsible for all debts
LLP	Limited, partial — only the at-fault partner bears personal liability
Pte Ltd	Limited, full — no shareholder bears personal liability; they lose only their investment

Worked Example

Scenario: Odd Lot Trading is a sole proprietorship. The business is unable to repay a $40,000 bank loan.

Explain the extent of liability for the owner of Odd Lot Trading.

The owner of Odd Lot Trading is a sole proprietor. A sole proprietor has unlimited liability — when the business incurs debts or losses, the owner is personally obliged to pay them using his or her personal assets, such as personal savings or property. The owner must therefore repay the $40,000 loan using personal funds.

G3 How would the answer differ if Odd Lot Trading were a private limited company?

If Odd Lot Trading were a Pte Ltd, the shareholders would have limited liability. They would not be personally obliged to repay the $40,000 loan. The worst outcome for shareholders is that they lose the amount they invested in the company's shares. Their personal assets are protected.

Common Mistakes

Saying sole proprietors are "not liable" because they registered the business. Registration does not limit liability for a sole proprietorship. A sole proprietor always has unlimited personal liability for all business debts.

G3Confusing LLP liability with Pte Ltd liability.

In an LLP, the specific partner whose wrongful actions caused the debt bears personal liability.
In a Pte Ltd, shareholders bear no personal liability for company debts — they only lose their investment.

G3Saying a Pte Ltd has "no liability." Shareholders still lose their investment if the company fails — they are simply not personally liable for any additional debts beyond what they invested.

Check Your Understanding

Kaya & Whisk Bakery is a sole proprietorship that incurs a loss of $25,000. What is the owner obliged to do?

Reveal answerHide answer

The owner must pay the $25,000 loss using personal assets, as a sole proprietor has unlimited liability for all business debts and losses.

State one advantage and one disadvantage of a sole proprietorship.

Reveal answerHide answer

Advantage: The owner has full control of the business (or: all profits belong to the owner).
Disadvantage: The owner has unlimited liability and must repay all business debts using personal assets.

G3 True or false: If a private limited company is unable to repay its debts, shareholders must use their personal assets to repay them.

Reveal answerHide answer

False. Shareholders have limited liability and are not personally obliged to repay company debts. The worst outcome is that they lose the amount they invested in shares.