Single Member Company vs Partnership

Definition

- Single Member Company (SMC): A private limited liability company with only one shareholder. The shareholder enjoys limited liability protection, meaning their personal assets are protected from the company's debts and obligations.

- Partnership: A business structure where two or more individuals or entities come together to conduct business. Partnerships can be of two main types:

- General Partnership (GP): All partners share equal responsibility for managing the business and are personally liable for the business’s debts.

- Limited Partnership (LP): Comprises at least one general partner with unlimited liability and one or more limited partners whose liability is restricted to their investment in the partnership.

Legal Entity

- SMC: A Single Member Company is a separate legal entity from its owner. This means the company can own property, enter into contracts, and sue or be sued in its own name.

- Partnership: A partnership is not a separate legal entity. Instead, it is an association of individuals or entities who share the business’s profits and liabilities.

Liability

- SMC: The shareholder’s liability is limited to their investment in the company. Personal assets are generally protected from business creditors.

- Partnership:

- GP: Partners have unlimited liability, meaning their personal assets can be used to cover business debts.

- LP: Limited partners have liability limited to their investment, while general partners have unlimited liability.

Formation

- SMC: Requires formal incorporation with the Malta Business Registry (MBR). This involves submitting the Memorandum and Articles of Association, shareholder information, and paying a registration fee.

- Partnership: Formation is simpler and usually involves drafting a partnership agreement that outlines the roles, responsibilities, and profit-sharing arrangements among partners. Registration with the MBR is required for legal recognition.

Management and Control

- SMC: Managed by a board of directors appointed by the shareholder. The sole shareholder can also be the director and manage the company.

Partnership:

- GP: All partners typically have an equal say in the management and decision-making process, unless otherwise agreed in the partnership agreement.

- LP: General partners manage the business, while limited partners do not participate in day-to-day management.

Taxation

- SMC: Subject to corporate tax at a rate of 35%. However, Malta’s full imputation system and tax refund mechanisms can effectively reduce the tax burden.

- Partnership: Taxed on a transparent basis. Profits are allocated to partners according to their share and taxed at their personal income tax rates.

Compliance and Reporting

- SMC: Must file annual returns, prepare and submit audited financial statements, and comply with various regulatory requirements, including tax filings and corporate governance rules.

- Partnership: Generally faces fewer regulatory requirements. Partnerships must file an annual return and maintain financial records but are not typically required to have their accounts audited unless stipulated in the partnership agreement.

Continuity and Transferability

- SMC: Has perpetual succession, meaning its existence is not affected by changes in ownership or management. Shares can be transferred subject to any restrictions in the Articles of Association.

- Partnership: Typically dissolves upon the death or withdrawal of a partner, unless otherwise agreed in the partnership agreement. Transfer of partnership interests may require the consent of all partners.

Advantages and Disadvantages

Advantages:

- Limited liability protection.

- Separate legal entity status.

- Potential tax benefits and refunds.

- Continuity and ease of ownership transfer.

Disadvantages:

- More complex and costly to set up and maintain.

- Subject to stricter regulatory and compliance requirements.

Advantages:

- Simpler and less expensive to form and operate.

- Flexible management structure.

- Direct taxation of profits.

Disadvantages:

- Unlimited liability for general partners.

- Lack of separate legal entity status.

- Potential for conflicts among partners.

- Limited continuity and transferability.

Summary

The choice between a Single Member Company and a Partnership in Malta depends on various factors, including the level of liability protection desired, the complexity of the business, tax considerations, and the need for formal structure and compliance. An SMC offers limited liability and a formal structure but comes with more stringent compliance requirements. On the other hand, a partnership provides flexibility and simplicity but involves unlimited liability for general partners. Working with our experts can help providing valuable insights and tailored strategies to ensure successful outcome.

While Malta certainly has some attractive taxation, there are also some drawbacks. Opening bank accounts can be complex, and you may wait years to receive tax refunds, such as the 30% tax rebate. Additionally, establishing a foundation, residency or business often requires navigating a complicated structure. Living in Malta might not be ideal for everyone due to its small size, high population density, and very warm and humid climate.

Why not consider a simpler alternative, like setting up a company in Bulgaria? Bulgaria has maintained a flat tax rate of 10% for decades. The 10% tax rate can only be changed by a two-thirds majority in the parliament, ensuring stability. In some cases, the tax rate can even be 0%. Notably, Bulgaria boasts the lowest personal tax rate in the EU at just 10%, which is unique.

Even Montenegro with a Corporate Tax Rate of 9% is a good alternative. Montenegro's tax system is straightforward, with a low corporate tax rate designed to attract foreign investment. The country also offers incentives for businesses investing in specific sectors like tourism, energy, and agriculture. Additionally, Montenegro is working towards EU membership, which may further enhance its attractiveness as a business destination.