Sole Proprietorship vs Private Limited Company - Which One Is Better?
Are you planning to incorporate a company in Singapore? You are probably aware of the different company structures available to business owners. But which one's better for you if you're the sole owner of a company?
Should you automatically sign up for sole proprietorship, or will a private limited company structure benefit you more even if you're the only registered owner?
This article will go through the differences between a sole proprietorship and a private limited structure and the factors that will affect your choice during company incorporation.
What Is a Sole Proprietorship?
A sole proprietorship is a business that is owned by a single entity. This entity can be
A natural person who is a local citizen, permanent resident or EntrePass (EP) holder of Singapore, and 18 years old or older, or
A company from Singapore.
As the owner of a sole proprietorship, you are personally responsible for any risks and liabilities associated with the business. This means that your personal assets can be liquidated to pay off any debts or lawsuits the business may incur. In other words, the owner of a sole proprietorship is exposed to unlimited liability, and personal assets are not safeguarded.
What Is a Private Limited Company?
A private limited company, commonly known as Pte Ltd in Singapore, is the most popular choice of company structure.
This structure is flexible and scalable because an individual or a corporation can incorporate it.
Unlike a sole proprietorship, liabilities of a Pte Ltd company are only limited to its members' shares (and by members, we refer to the shareholders, owners, and co-owners of the business). Their personal assets will not be affected in case liquidation needs to be done.
Local and foreign business owners can incorporate a private limited company structure with just a few regulatory requirements.
What Are the Key Differences Between Sole Proprietorship and Private Limited Company?
Now that we've defined what a sole proprietorship is and what a private limited company is, it's time we settle the debate.
Here are the critical differences between the sole proprietorship vs private limited company in Singapore:
Ownership
A sole proprietorship is owned by one person and one person alone, and the business has no separate legal identity. The owner and business are treated the same, so the owner can be named in the suit if the Singapore company is sued. Adding two or more people into this structure will convert this into a partnership structure.
Private limited companies can be owned by more persons, up to 50 shareholders. A private limited company is also a separate legal entity, which affects its liability, funding, and other traits.
Decision-Making
The owner of the sole proprietorship business will make all the decisions. In contrast, a private company's decision-making process is carried out by the board of directors. These are elected by the shareholders.
What this means is that there are conflicts that will possibly arise within these meetings, which could hinder the company from moving forward. This is all avoided in a sole proprietorship business structure.
Liability
A sole proprietorship has no separate legal identity, so the business owner may be held liable for a debt, lawsuits, and other causes for concern. This means that if a business cannot pay its debts, the owner's assets may be used to help pay off the debt. If the company gets into legal trouble, the owner cannot separate themselves from the lawsuit. They are just as liable as the business.
In contrast, private limited company owners' and shareholders' liability is limited only to their investments in the business. This means that if a Pte Ltd company gets sued or cannot pay its debt, owners and shareholders won't have to worry about their personal assets getting dragged into the mess. As a business owner or shareholder, the business structure ensures that you are protected financially and legally.
Tax Filing Requirements
Sole proprietors have minimal filing requirements because the owner will only have to file personal income tax returns. You don't need to file returns annually as a business because you're a sole proprietor.
On the other hand, private limited companies need to file corporate tax and annual returns and hold general meetings annually. They also have to comply with various requirements under the Singapore Companies Act.
Funding
Sole proprietors may find it difficult to acquire more capital for the business because of their liability. They can't apply for grants unless they register as a Public Limited Company (PLC).
In contrast, private limited companies can quickly obtain funding due to their separate legal identity. It's easier for them to acquire loans from the bank or external investors even because they're seen as corporate bodies.
In addition, private limited companies can quickly obtain grants, including the Startup SG Equity, Startup SG Founder, and Market Readiness Assistance (MRA) Grant.
You can read more about Singapore government grants in this article.
Financial Record Privacy
Sole proprietors have more private financial records compared to private limited companies. The owner of a sole proprietorship is the only one who can access financial records.
In a private limited company, all shareholders have access to the company financial information. Worst-case scenario, someone might end up leaking these financial documents to competitors.
Corporate Income Tax (CIT) Rebate & SME Cash Grant
Sole proprietorship can't enjoy a Corporate Income Tax (CIT) rebate or SME Cash Grant. But they can enjoy a personal tax income rebate when granted by the government.
Once the government announces them, private limited companies are eligible for the rebates mentioned above (CIT and SME Cash Grant). During YA 2020, CIT Rebate was 25% and capped at S$15,000. For YA 2019, CIT Rebate was 20% and capped at S$10,000. This rebate will reflect in your company's income tax computation and assessment.
Side note: there was no CIT Rebate proposed for YA 2021.
Ease of Formation
The sole proprietorship is easier to form compared to a private limited company structure. For one thing, sole proprietors require less financial resources to get started compared to private limited companies, who require a lot more.
Secondly, there’s a lot more paperwork behind forming a private limited company compared to a sole proprietorship.
Tax Rates
Sole proprietors pay less tax compared to a private limited company. Sole proprietors only need to file individual income tax, compared to a private limited company.
Sole proprietors are subject to personal income tax and only need to pay between 0% and 22% for tax residents. The higher your income is, the higher your tax rate is. For tax residents, the tax rate is capped at 22%. Meanwhile, non-tax residents pay a flat 15%.
Private limited companies are subject to corporate income tax and pay a flat 17% (by the end of 2021). It’s projected to remain at 17% still for 2022.
Profit Distribution
Sole proprietors enjoy the profits of the business alone when it’s doing well or suffer losses in contrast. Private limited companies share their profits in the form of dividends based on shares owned by shareholders.
For private limited companies, directors may decide to defer dividend payments in case the business does not make a profit (or does not meet income expectations).
Further Reading: Advantages of setting up a private limited company in Singapore
What Are the Other Corporate Structures in Singapore?
Accounting and Regulatory Authority (ACRA) makes other company structures available to business owners.
Partnership
A partnership partly relieves the sole proprietor's limited ability to expand the business. This structure comprises two or more business owners whose partners have no separate legal existence. This means that ownership of the company through partnership cannot be separated from either partner. Partnerships can only be dissolved through death, insolvency, retirement, or incapacity of a partner.
Like a sole proprietorship structure, a partnership is ideal for specific needs.
There are three types of partnerships in Singapore:
1 - General partnership
The general partnership is formed by two persons, up to 20 persons. Partners will pay their tax as personal income based on the share of the revenue from the partnership.
2 - Limited Partnership
A limited partnership is an alternative to the general partnership structure. The difference is partner liabilities are limited to their initial investment in the partnership, regardless of whether it's capital or property. Limited partners can't participate in the business management process, so it's difficult for corporate service providers like us to recommend this structure to clients.
3 - Limited Liability Partnership
Also known as an LLP, a limited liability partnership is more recent and slightly more advanced than the two mentioned above.
Owners are more flexible in operating as a partnership and enjoy the benefits of a Pte Ltd corporate structure.
Accountants commonly use this and law firms, architects, and other professional service providers who want to create a joint practice in their industry.
Public Limited Company
Public Limited Company is another form of LLC (Limited Liability Company). Still, they have the option of offering their shares to the public (as opposed to a private limited company that can't). The structure will need at least 50 shareholders as a requirement for incorporation and are subject to scrutiny by the Singapore government because they raise funds from the public.
PLCs are also listed on the stock exchange when they meet the financial requirements and if they choose to get listed.
Closing
More often than not, corporate service providers like us often end up recommending private limited company structures to our clients because of their robust legal identity and overall flexibility. They enjoy many benefits other company structures don't have access to, such as grants and rebates.
It all boils down to what our clients need from us and how they want to proceed with their Singapore company registration.
If you want to know more about the different company structures, or about the company formation process in general, feel free to get in touch with us. Our dedicated account managers will respond to any queries within 1 to 2 working days.
Frequently Asked Questions
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A private limited company is preferred for an investment holding company in Singapore due to its limited liability protection, professional credibility, scalability for managing investments, and favorable tax treatments. In contrast, a sole proprietorship's unlimited liability and less formal structure are less suitable for the complexities of a holding company.