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?
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. A private limited company is a separate legal entity from its shareholders and board members.
That said, it’s worth noting that the shares here come with limited liabilities. In other words, all the responsibilities, risks, and debts arising from the business cannot be transferred from the private limited company, to the individual members as a separate legal entity.
To register as a private limited company in Singapore, you must have the following requirements:
- At least one shareholder of the company.
- At least one corporate secretary.
- At least one resident director with Singapore citizenship.
- A physical office address within Singapore.
- A capital of at least SGD1.
What is a Sole Proprietorship?
On the other hand, a sole proprietorship is a business owned and managed 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. A sole proprietorship business is not a separate legal entity from its owner, and takes on its owner's assets, as well as liabilities.
The business structure of a sole proprietorship is not governed by shares or boards of directors, unlike private limited companies. Whereas a private limited company is considered a separate legal identity from its stakeholders, a sole proprietorship shares the same legal responsibilities as the business owner, and often includes personal assets and liabilities.
What Are the Required Taxes for Private Limited Companies, and Sole Proprietorships?
A private limited company or a Singapore Pte Ltd must pay taxes, reflected by the company's income tax computation. ACRA and the Inland Revenue Authority of Singapore (IRAS) expect companies to file corporate taxes based on the company’s annual income. The cap for corporate tax rates is 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 will not require you to submit corporate income tax. Instead, your business profits will be counted and taxed as part of your personal assets and income.
While that makes the compliance process much easier, the personal income tax rate in Singapore is generally higher than the corresponding corporate tax rates. Because the sole proprietor is personally liable for the business operations within a sole proprietorship, their tax filing requirements differ from that of a private limited company.
Sole Proprietorship vs. Pte Ltd
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.
ACRA allows you to fully register a Pte Ltd company as a shareholder and director. The only requirement is that your application should include a local 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.
Pte Ltd corporations have considerably more requirements. You’ll be required to submit various documents, 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.
The post-incorporation procedures are equally cumbersome, as you’ll be required to file your annual returns, corporate taxes, AGM minutes, etc. The work can be done through a third-party firm who will assist in filing these documents to expedite the process, and to avoid legal repercussions on mishandled corporate documents.
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 are particularly fortunate when it comes to this, as Singapore happens to offer favorable tax cuts.
The Start-Up Tax Exemption (SUTE) program considerably reduces the tax rates within the first 3 years of company incorporation. 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.
You’ll also notice that private limited liability companies in Singapore get a lot of support from the government, through business structures, government 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 can assist you with registration, accounting, payroll management, and tax filing. Contact us today for a free consultation.