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Sole Proprietorship or Private Limited Company: Which is Better?

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In our numerous interactions with entrepreneurs over the years, one particular question has stood out- which is better between a sole proprietorship and a private limited company?

Although Singapore is flexible enough to accommodate a broad range of corporate structures, it just so happens that business owners overwhelmingly settle for either a sole proprietorship or a Pte Ltd. So much so that the Accounting and Corporate Regulatory Authority (ACRA) is now registering about 140,000 sole proprietorships and 360,000 companies per month.

Their incorporation procedures, however, are very different, and the same applies to the subsequent compliance processes. What you end up choosing here will have a huge impact on not only your administration framework, but also your taxes, statutory processes, and business liabilities.

What is a Private Limited Company?

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A private limited company (or Pte Ltd in short) is a limited liability corporation whose equity is managed in the form of privately-held shares. The company’s stakeholders are known as shareholders, while board members are called directors. Both of these positions can be held by multiple individuals and companies at the same time.

That said, it’s worth noting that the shares here come with limited liabilities. In other words, a private limited company or Pte Ltd is a distinct entity that exists separately from its stakeholders. All the responsibilities, risks, and debts arising from the business cannot be transferred to the individual members.

What is a Sole Proprietorship?

person sitting down with laptop in front and book and coffee at the sides

From a private limited company, we now move on to another popular business structure. A sole proprietorship is basically a business that’s owned and administered by one individual. Although it might operate under its own distinct name, the business and its founder are legally considered to be one and the same. That means the business and everything it comes with (including liabilities) will always be attached to you.

What’s more, a sole proprietorship business is not governed by shares or boards of directors. Everything is centered on a single individual.

What Are the Required Taxes for Pte Ltd and Sole Proprietorship?

A private limited company or a Singapore Pte Ltd pays taxes just like any other company. ACRA and the Inland Revenue Authority of Singapore (IRAS) expect you to file your corporate taxes based on the company’s annual corporate income. Thankfully though, at least Singapore is generous enough to cap its corporate tax rates at 17%, with various tax exemptions for different Pte Ltd companies.

If you choose to register a sole proprietorship, on the other hand, Singapore’s statutory bodies won’t bother you with corporate tax filings. Instead, your business profits will be counted and taxed as part of your personal income.

But, while that makes the compliance process much easier, the personal income tax rates in Singapore are generally higher than the corresponding corporate tax rates. And to make matters worse, it turns out you also won’t be getting any corporate tax exemptions.

Sole Proprietorship vs. Pte Ltd

woman writing a graph of future profit projection

Which Favors a Foreigner In Singapore?

By now, you’re probably aware that Singapore is open to hosting foreign-owned corporations. But, get this — as a foreigner, your incorporation options are pretty limited. You can’t, for instance, set up a sole proprietorship in Singapore.

That’s not such a bad thing though. At least ACRA allows you to fully register a Pte Ltd company as a shareholder and director. The only kicker is, your application should include a resident director. 

Incorporation and Statutory Requirements

One of the best things about setting up a sole proprietorship is its simple incorporation process. It doesn’t take much to register one, as you won’t need legal documents like Memorandum and Articles of Association. ACRA only reviews basic credentials like personal details and residential addresses.

Sadly, Pte Ltd corporations are not that lucky. You’ll be required to submit a lot more, including the company’s constitution, as well as the particulars of not only its shareholders and directors, but also the nominated company secretary and auditor.

Although that’s challenging enough, it doesn’t get any better. The post-incorporation procedures are equally cumbersome, as you’ll be required to file your annual returns, corporate taxes, AGM minutes, etc.

Tax Exemptions and Government Support Schemes

Each Pte Ltd company in Singapore is subject to the standard corporate tax laws. You can expect a corporate tax rate of not more than 17% on your declared business income.

Private limited startups, in fact, are particularly fortunate when it comes to that, as Singapore happens to offer favorable tax cuts. The Start-Up Tax Exemption (SUTE) program, for example, considerably reduces the tax rates within the first 3 years of company incorporation.

But, the benefits don’t end there. Your Pte Ltd company will still be eligible for other tax exemption programs- Singapore offers a vast array of them across different company categories and revenue classes.

While you’re at it, you’ll also notice that private limited liability companies in Singapore get a lot of support from the government, through business schemes, grants, and financing. You can, for instance, enroll for the Enterprise Development Grant (EDG) or Productivity Solutions Grant (PSG).

However, none of that stretches to accommodate sole proprietorships. The best you could hope for with a sole proprietorship is a personal income tax cut. But, even then, your combined personal tax rate will still be higher than the corresponding corporate tax rates.

Where To Start

After choosing between a sole proprietorship and a private limited company (Pte Ltd), you might want to leave the incorporation intricacies to the professionals. WealthBridge, for example, can assist you with registration, accounting, payroll management, and tax filing. Contact us today for a free consultation.

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