The Comparisons of Sole Proprietorship and Private Limited Company in Singapore
Thinking of running a business is the easiest part of the journey. There are several things to consider down the road before anything is established. After all, how should one decide which business model works best for them if they haven’t dabbled in starting one beforehand? Between running a sole proprietorship or a private limited company, we’re here to help you identify the pros and cons of both models to help you decide on the type of business you want to build here in Singapore.
What Is A Sole Proprietorship and Company?
Sole Proprietorship
A sole proprietorship is a business structure owned and operated by a single individual, company, or limited liability partnership with no other parties affiliated with the business. The owner of a sole proprietorship is personally responsible for all of the debts and obligations of the business. If the business were to incur any debts, the owner’s assets, such as their bank account and personal property, may be seized to pay off those debts, leaving them exposed to unlimited liabilities.
However, a sole proprietor has complete control over the business and its operations, meaning they get to keep all the profits after taxes. Sole proprietorships are easy to set up and require minimal paperwork, making them a popular choice for small businesses.
Private Limited Company
A private limited company is a separate legal entity from its shareholders and registered with the Accounting and Corporate Regulatory Authority (ACRA). A company is owned by its shareholders, who hold shares and have limited liability for the debts and obligations. In contrast to sole proprietorship, shareholders of a company are not at risk of any severe liabilities, and personal assets are protected in the event that the business cannot pay its debts. Instead, the company itself bears the burdens.
In Singapore, companies are governed by the Companies Act and must comply with various legal and regulatory requirements, such as maintaining proper accounting records and filing annual returns with ACRA.
But that’s not all. There are still other aspects to take into account before you make any further decisions.
Citizenship
As a Singaporean, there shouldn’t be an issue with setting up a sole proprietorship or business with no requirements or hidden strings attached. However, the case of a foreigner looking to set up a business differs quite a bit.
For foreigners who are in Singapore on work passes, they will not be permitted to set up a partnership or a sole proprietorship. They are allowed to own shares in a company in Singapore so long as they are not working or registered as a director at the company.
For foreigners who have attained an Entrepreneur Pass (EntrePass), they are excluded and are permitted to set up a sole proprietorship or private limited company here in Singapore.
That said, It is important for foreign individuals to carefully research the requirements for setting up a business in Singapore and to seek professional advice if necessary.
Ease Of Registering The Business
It is much easier to set up a sole proprietorship than a private limited company. Nonetheless, setting up both business structures is still relatively straightforward and can be done online through the ACRA website. To start, you will need to choose a business name and check its availability using BizFile+. Thereafter, you can register the business’s name. The entire application procedure will cost you $15. For foreign individuals, it’s important to note that the company should have at least one local director who is a citizen or permanent resident of Singapore.
Following the approval of the application, the business name will be under reservation for 120 days which will leave you with a four months’ timeline to set up a sole proprietorship or company. Should the business not be registered past the timeline, the business’s name will be made available for others to register.
For sole proprietorship, there will be a $100 registration fee and once you have registered your business name, you can then proceed to register your sole proprietorship business with BizFile+ using your SingPass account details. Alternatively, you can also engage the services of a registered filing agent (such as a corporate secretarial firm or a law firm) to submit the application on your behalf.
On the other hand, a company has more requirements before incorporation. Before registering, you must appoint at least one of each position: a shareholder, a director, and a company secretary. Aside from that, you are also obligated to prepare a company’s constitution and determine when the company’s financial year end will be. Once all information has been settled, registration can be done through BizFile+ where all parties must approve their endorsement to set up the company. Alternatively, you can also engage the services of a registered filing agent (such as a corporate secretarial firm or a law firm) to submit the application on your behalf and no endorsement will be required.
A company’s registration fee is more costly than a sole proprietorship at $300.
Compliance Requirements
For sole proprietorships, the business registration will be valid for between one to three years, depending on the duration chosen during registration. If there’s any intention to carry on the business after this period, there is a need to have the registration renewed before it expires. The renewal application can be applied two months before the expiration of the registration.
The cost of renewing will be $30 for one year and $90 for three years. However, the application for three years can only be made should any of the conditions below be fulfilled:
– Your Medisave has been fully paid off using the CPF Board.
– You are on a continuous instalment plan contributing to Medisave while still maintaining an upstanding record.
– You have never registered as a self-employed person with the CPR Board.
In a company’s case, there isn’t a need for renewal as it would last until it has either been closed or struck off the register. Despite so, there are still requirements that have to be met:
– All required documents should have the company’s name and UEN stated clearly.
– Annual returns with ACRA are to be filed annually.
– Hold an annual general meetings (AGM) within six months of the company’s financial year end.
Aside from that, other requirements such as business registration, tax registration, employment laws, health & safety regulations, and data protection laws should be kept in mind and abide by to keep the business in compliance with the legal and regulatory requirements in Singapore. Overall, while both sole proprietorships and private limited companies must comply with a similar set of legal and regulatory requirements in Singapore, there may be some differences depending on the specific business and the nature of its operations.
Ease Of Raising Funds
In Singapore, the ease of raising funds for a business can vary depending on the business structure and specific circumstances. Here are some of the main factors that may affect the ease of raising funds for a sole proprietorship and a private limited company in Singapore:
Business Structure
It may be easier to raise funds for a private limited company than a sole proprietorship, as a company can issue stocks or bonds to raise money. A sole proprietorship has limited options for raising capital as only one owner exists. For sole proprietorship, most of the capital will derive from the owner, which can be quite a significant worry for banks in the case of disbursing loans due to insufficient-security.
Creditworthiness
The creditworthiness of a business will be a significant factor in its ability to raise funds, whether through loans or investments. A business with a strong credit score and financial track record will be more likely to secure funding than one with a weaker credit score. The nature of having more collateral assets within the company system further assures a higher chance of a loan granted by the bank.
Taxation
A sole proprietorship’s profits are taxed at the individual income tax rate. The business owner must file a personal income tax return and pay tax on the business’s profits.
The profits of a private limited company are taxed at the corporate tax rate, which is currently a flat 17%. The company must file a corporate income tax return and pay tax on its profits.
Not to fret, however, as tax exemption schemes are made available for new start-up companies. For new companies incorporated from 2019 and onwards, they will be able to enjoy a tax exemption on its first $200,000 of its chargeable income for its first 3 years.
The newly incorporated company will receive a 75% tax exemption on the first $100,000 of their normal chargeable income. After which, another 50% tax exemption on the next $100,000 of the normal chargeable income.
Succession
In Singapore, the succession of a sole proprietorship or business refers to transferring ownership or control of the business to another person or entity. The continuity of a business is an important consideration, especially for sole proprietorships, as the business would end after the owner retires or deceased.
For a sole proprietorship, transferring ownership to another can be quite a complicated process. All assets and licenses should be handed over to the next business owner, which can often cause disruptions to the flow of operations.
For companies, they do not need to be renewed and it can last in perpetuity unless it is wound up or struck off from the register. Ownership of the company can be easily transferred through transferring shares from one party to another.
Easing of Closing The Business
Sole Proprietorship
Closing a sole proprietorship is generally straightforward and can be done relatively quickly. You will need to:
- Settle all debts and obligations of the business.
- Cancel any licenses or permits that were issued to the business.
- Notify the relevant government agencies, IRAS, that you are closing the business and submit a final tax clearance.
As we’ve previously mentioned, due to the nature of having to renew a sole proprietorship business, you could have it lapse over its expiration, and it will come to its end. Another alternative could be applying for a cessation of business through BizFile+. Should the application be approved, the business will be terminated soon after.
Company
As with most of what we’ve brought up so far, the process of closing a private limited company is generally more complex and time-consuming than closing a sole proprietorship. It may take several months to complete the process, depending on the size and complexity of the company.
Firstly, you can apply to ACRA to strike off the company from the register. The company needs to fulfill certain relevant criteria for striking off such as:
- Settle all debts and obligations of the company.
- Cancel any licenses or permits that were issued to the company.
- Notify the relevant government agencies, IRAS, that you are closing the company and submit a final tax clearance.
- Ensure that the company has no existing assets and liabilities as at the date of application of striking off application.
- Ensure that the company does not have any outstanding charges on the charge register.
- Ensure that the company is not involved in any legal proceedings.
- Ensure that the majority of the company’s directors and shareholders have authorised the company to be struck off the register.
In the event that the company does not meet the above criteria for striking off, then the company may choose to adopt member’s voluntary winding up process, or a compulsory winding up process, to wind the company up. The entire procedure can take up to a few months or a full year, depending on what needs to be settled and the court’s approval on the winding up.
To conclude, there are multiple aspects and factors to consider when deciding the business structure. Between both sole proprietorship and private limited company, they have their fair share of advantages and disadvantages that you are now well-informed of. Building a business is no easy feat, but by knowing the type of business you wish to establish and incorporate in the future, you are just decisions away from starting your business journey of a lifetime. All this information can only provide a guideline for what you envision. Between the lesser compliance requirements that comes with a sole proprietorship or the more costly and complex compliance of a company, it’s a step you’ll have to take from here.