Private Limited Company vs Sole Proprietorship: Which One is Superior?
When starting a business in Singapore, you must be absolutely certain that the legal structure you chose is the right one. Your choice will have an impact on several factors, including the amount of tax you pay, your responsibility, and more.
It is important to establish your chosen business structure and understand its ins and outs before launching any form of business in Singapore. Here's a quick guide to the two major business structures in Singapore for small business owners: a private limited company and a sole proprietorship.
What is a sole proprietorship?
A Sole Proprietorship is a form of business in which there is only a sole owner doing business with the aim of earning profits. Moreover, it only requires a small amount of capital to start with compared with other forms of business entities.
This type of enterprise structure does not have a separate legal entity, and the owner is responsible for all the liabilities that will come along while running it.
Also, a sole proprietorship means that the personal assets of the owner are not protected from the possible risks and liabilities of the business. If it runs into a lean patch and cannot pay its debts, the personal assets of the owner may get liquidated.
What if I’m a foreigner?
A foreigner who is not residing in Singapore can also register for a sole proprietorship, but he/she must appoint an authorised representative who is residing in Singapore. This authorised representative will then have full legal capacity to ensure the business is staying compliant with regulatory requirements.
Do you know what a separate legal entity is?
Separate legal entity is an entity which is separate from its members that make up the company and as a “person” by law. Due to this separation between the company and an individual, the members’ liability is also limited.
Private Limited Company (PTE LTD)
What is a Private Limited Company?
Private Limited Company (Pte Ltd) is a privately held corporation and is the most common type of business structure in Singapore.
A Pte Ltd is the most flexible and scalable company structure in the country. For such a legal entity, the shareholders could either be corporate entities, individuals or both.
This is because a private limited company is a legal entity, and its identity is separate from the identity of the company’s members.
When you create a private limited company, you are creating a separate legal entity from yourself. It limits your liabilities as an individual – meaning that if your company has a huge downfall (e.g., debts or losses) in your business, it will not impact any personal assets that you own.
What is the characteristic for a Private Limited Company?
A private limited company can be 100% foreign or locally owned. There are no limits on foreign ownership of shares. At least one resident director must be appointed by a private limited company. He or she must be a Singapore citizen, a permanent resident of Singapore, or an EntrePass holder with a Singapore address. They must be at least 18 years old to participate.
Now, let’s move on to the next part
Now that we've covered the fundamental characteristics of both types of businesses, let's look at why forming a private limited company is a better option. Because of their less strict compliance requirements, sole proprietorships have a modest advantage over other businesses. The advantages of a private limited corporation, on the other hand, much outweigh the simplicity with which compliance standards must be met.
Is Sole proprietorship a better option?
Depending on your circumstances, a sole proprietorship may be a great starting point, but it may also be a stepping stone you can skip in order to start a company instead. Here are some benefits to proceeding the sole proprietorship route:
Ease of setting up - A sole proprietorship is one of the easiest and inexpensive business entities to set up in Singapore. This is one of the reasons why most local entrepreneurs start off as sole business owners before upgrading to a private limited company
Minimal compliance requirements - Once you register as a sole proprietor, you only need to renew your business licensing annually, and you are not obligated to file tax returns every year separately under the business name.
There is no profit sharing - Since you are the sole owner of the company, there are no shareholders, all profits or income accrued is yours. All business profits will be filed to the tax office under your name as an individual person.
You can easily terminate your sole proprietorship - Since you are the sole decision maker in the business, terminating it is easy, less time consuming and inexpensive as compared to private and public companies that have shareholders and directors.
What are the consequences that we must bear?
No separate legal entity – which means the owner solely must fully be liable for all debts and legal actions filed against the business. Your liability is unlimited, and creditors can legally sue you or obtain court orders to claim your property and personal assets to recover the money owed.
The business will terminate when the owner passes on – The life span of the business depends upon the age of the owner and how efficiently he manages the business. The business will be dissolved if the owner passes away. If someone wishes to continue the business, it will have to be re-registered. Business and financial track records will disrupted or loss due to this too.
No corporate tax incentives and benefits – Singapore's government provides generous incentives to companies in order to encourage their growth and sustainability. You are may not be eligible for tax breaks or benefits as a sole proprietor. Taxes are calculated based on your personal income, and you do not benefit from the special tax breaks enjoyed by private limited companies.
Why is Private Limited Company a common type of business structure in Singapore?
Owning a private limited company can be worthwhile for one, in terms of tax benefits
Not personally liable for any debts or losses – The company is a separate legal entity from its shareholders and directors
Profits taxed at corporate tax rates – Corporate tax rates are flat (headline tax rate at 17%) compared to individual tax rates which are sliding scale (from 0 – 22%) , so if you are making good profits, it makes sense to be taxed at a flat rate. Once the taxes are paid on company profit, the company can issue dividends which are tax free in the hands of shareholders.
New companies are entitled to tax incentives and tax exemptions – this depends on budgetary reliefs granted each year.
From YA2020 onwards, tax exemptions for newly incorporated companies in the first three consecutive YAs is as the following:
75% exemption on the first $100,000 of normal chargeable income
Newly incorporated companies will be exempted from 75% corporate income tax rate on the first S$100,000 taxable income for each of the first three tax filing years if they meet the following conditions:
- incorporated in Singapore
- a tax resident in Singapore
- has not more than 20 shareholders of which at least one is an individual shareholder holding at least 10% of shares.
Further 50% tax exemption on taxable income of up to S$100,000
Newly incorporated companies are also eligible for a further partial tax exemption, which effectively translates to about 8.5% tax rate on taxable income of up to S$100,000 per annum. The taxable income above S$100,000 will be charged at the normal headline corporate tax rate of 17%.
Ownership can be transferred – additional shareholders can be appointed thus enabling additional capital injection for expansion purposes. In addition, the company will not be affected if the owner or founder died. Shares can easily be transferred between parties at any time too.
Ease of raising capital – Running a private limited company conveys a professional commitment and vision hence maximizes the potential of loans from banks and other financial institutions and establishes a credible image among the business community. On top of the banks and Financial Institutions such as private investors and fundraising companies, it is easier for both to help companies with share capital too as it means they can easily partake in the equity of the company.
What are the consequences that we must bear?
More compliance requirements set out by the Companies Act and enforced by ACRA and IRAS. - Private limited companies are governed by rules and regulations stipulated in the Singapore Companies Act. Violation of rules and regulation will result in penalties such as composition sum of $300 if the Annual General Meeting (AGM) is held late.
Operating costs are higher – A definite area is in administrative cost. This is due to the enhanced perception of TRUST that a company portrays as a company constituted based on the Companies Act which is very comprehensive in its regulations, you can expect administrative and compliance costs to maintain the integrity of the books and accounts to be higher compared to a sole-proprietorship. Companies are also expected to maintain its books of accounts in detail to be fully accountable to its shareholders and the authorities and adhere to labor and other laws to its full extent.
Moreover, it is to uphold this image of trust and to comply with laws, companies must ensure their accounts and legalities are properly done. This is fair game especially when you factor in the point that bank loans, investor funds and government grants are fairly easier to be made available to private limited companies (and in higher quantums too) as compared to sole-proprietorship businesses.
Directors must disclose their company’s information – To always protect the interest of the company and its owners, directors and employees (key executives) of the company are prohibited from any interests in other companies of a similar nature. interest in company shares, contracts etc. This provides a safety net to protect the interests of the owners of the company whose funds have been invested into the company.
What’s our take on it?
Generally, sole proprietorship may be best suited for small businesses with lower risk profiles. This is due to the fact that there is no separate legal entity in a sole-proprietorship business.
In comparison to a sole proprietorship, a private limited company needs to comply more requirements and has more costs of administration and compliance. This, however, offers advantages over a sole proprietorship in terms of tax savings, asset protection, scalability, access to funds and continuity.
All in all, a private limited company (Pte. Ltd.) is preferred over business entities like sole proprietorships with the enforcement of the Companies Act which allows for incorporation by sole director and shareholder and lowered risk profile due to limited liability features. Whilst sole proprietorship is often preferred when just starting out and still carving an interest for your products and services, once business improves, it is clearly a superior choice to transition to a private limited company. For industries where the inherent risks of the business are high, it may be wise to skip the sole proprietorship model altogether and begin as a private limited company from the get-go.
The choice is yours!
Being a sole trader in a proprietorship has several advantages, including the simplified compliances. Private limited corporations, on the other hand, have a well-structured operation and a clear separation of assets and identities. As a result, private limited enterprises are showing to be superior to time.