In Singapore, several options are available for entrepreneurs looking to set up a business, with two of the most popular being a sole proprietorship and a private limited company (Pte Ltd).
While both structures allow individuals to operate a business, they differ significantly in terms of ownership, liability, and regulatory requirements.
Understanding the differences between these two structures is crucial for entrepreneurs, as it can affect their legal status, tax obligations, and ability to raise capital.
What Is A Sole Proprietorship?
A sole proprietorship is a business structure in Singapore owned and operated by a single individual. This is one of the simplest and most common forms of business entities in Singapore. It is popular among small business owners looking for a straightforward way to start their businesses.
In a sole proprietorship, the individual owner has complete control over the business’s operations and profits. They are not required to register their business with the Accounting and Corporate Regulatory Authority (ACRA) but must register for a Business Registration Number (BRN) with the Inland Revenue Authority of Singapore (IRAS) for tax purposes.
What Is A Private Limited Company?
Meanwhile, a private limited company is a separate legal entity from its owners. This means shareholders are not personally liable for the company’s debts or legal liabilities beyond their shareholdings. And companies in Singapore are required to add the suffix “Pte Ltd” when referring to their business.
Unlike a sole proprietorship, owners who want to set up a private limited company must register with the Accounting and Corporate Regulatory Authority (ACRA) and comply with various legal and regulatory requirements.
These include appointing at least one director who is a resident of Singapore, filing annual returns, holding annual general meetings, and appointing a company secretary.
Now we’ve laid out the key difference between a sole proprietorship and a company, we’ll cover the pros and cons of each business structure based on the following:
- Ease of business registration
- Regulatory compliance
- Capital funding
- Tax filing requirements
- Business credibility
- Perpetuity & succession
- Business closure
In a sole proprietorship, the business is owned by a single individual who has complete control over the company’s operations and profits. The owner is not required to share ownership or decision-making power with anyone else.
In contrast, a private limited company is owned by its shareholders, who each hold a certain percentage of its ownership through shares.
The shareholders elect a board of directors to make strategic decisions and oversee the company’s operations. The board of directors then appoints senior management to run the company’s day-to-day operations.
The shareholders are not personally liable for the company’s debts or legal issues beyond their shareholdings. This means that the shareholders’ personal assets are protected from the company’s liabilities.
Additionally, a private limited company can have multiple shareholders, meaning ownership can be divided among individuals or entities.
This allows for greater capital flexibility, as the company can issue shares to investors or borrow money from banks or financial institutions. This can be especially important for companies with high growth potential or ambitious expansion plans.
Singapore citizens face little resistance when setting up either a sole proprietorship or a private limited company. However, the case is entirely different for a foreign business owner.
Foreigners in Singapore who are on a Work Permit, S Pass, or Visit Pass work visa are not allowed to establish a sole proprietorship in Singapore.
However, they can issue or own shares in a company if they’re not registered as the director or don’t directly work in the company.
If a foreigner wants to register a sole proprietorship, they should appoint a local resident (Singapore citizens, EntrePass/Employment Pass holders, or permanent residents).
There are further exceptions to the rule:
- If you’re a Dependant Pass or Long-Term Visit Pass holder, you can directly work for a private limited company once you’ve secured a Letter of Consent from the Ministry of Manpower.
- If you’ve recently obtained an EntrePass, you will be permitted to establish either a private limited company or sole proprietorship in Singapore.
3. Ease Of Business Registration
Setting up and registering a sole proprietorship in Singapore is far more straightforward than setting up a company. Here’s the process for registering a sole proprietorship:
- Step 1: See if your preferred business name is available for registration through BizFile+. After confirming its availability, register the business name and pay the $15 fee.
- Step 2: Once your application has been approved, the business name, you will have the right to reserve the business name for 120 days. You should have decided whether to set up a company or sole proprietorship by this time.
- Step 3: If you’re setting up a sole proprietorship, you can register your business. Log onto BizFile+ using your SingPass. You can also engage a filing agent (law firm or secretarial firm) to file the application on your behalf.
- Step 4: Pay the $100 registration fee (for a sole proprietorship).
Incorporating a company in Singapore is a far longer process that would require you to do the following:
- Appoint at least one shareholder (can either be a Singaporean, a foreigner, or another company.
- Appoint at least one director: They must be at least 18 years of age and residing in Singapore. They cannot be legally bankrupt.
- Appoint a company secretary: A company secretary position must not be vacant for more than six months. If your company has appointed only one director, they cannot also serve as the secretary.
- Draft a company constitution: This legal document outlines the rules and regulations governing your company’s internal management and operations. It should comply with the requirements outlined in the Companies Act of Singapore: Your company constitution must contain the following information:
- Company name
- Share capital
- Shareholder rights and responsibilities
- Board of directors’ powers and duties
- Company’s decision-making processes
- Declare your company’s financial year end: Your private limited company’s financial year end determines your deadline for corporate filing and taxes. It allows your company to keep accurate accounting records crucial for tax compliance, decision-making, and financial reporting.
You can only register a company once you’ve prepared all these documents. Log into BizFile+ and fill out all the necessary information. Your company’s directors, secretary, shareholders, etc., will receive an email notification requiring them to endorse their consent within 60 days of receipt.
Once they have appropriately endorsed your company, you can pay the $315 registration fee.
A sole proprietorship owner generally has no separate legal identity from his business. Therefore, he faces unlimited liability and will be responsible for the business’ losses and debts.
Having unlimited liability puts sole proprietorship owners at financial risk. For instance, say you’ve registered a sole proprietorship which incurs a debt of $2 million.
Since the proprietorship doesn’t exist as a separate legal entity from you, the owner, you must be prepared to shoulder all the debt or risk filing for bankruptcy.
The situation is different when setting up a private limited company. Since it has a separate legal identity from the shareholders, shareholders’ and directors’ liabilities are limited. Creditors won’t be allowed by the Courts to pursue the shareholders or directors for debt obligations.
Shareholders and directors will only be liable for financial losses in these cases:
- The director is a co-borrower of the company loan;
- The Court uses its discretion to hold the director liable for debts incurred by the company
- The company was found to have been non-compliant with the Companies Act regulations.
5. Regulatory Compliance
Sole proprietorship owners must renew their business registration once it expires (usually after 1-3 years, depending on the chosen duration). You can file for a renewal at least two months or 60 days before the registration expiry.
If you want to renew your sole proprietorship for three years, make sure you satisfy these requirements:
- You no longer have MediSave liabilities as they have been fully paid for with the CPF Board.
- You diligently make prompt contributions to your MediSave account (for up to 24 months before renewing your business registration).
- You have never registered yourself as “self-employed” with the CPF Board.
Private limited companies must follow extensive regulatory compliance requirements, which can be inconvenient. Shareholders need not secure a renewal licence, but the company still has to do the following:
- Indicate its name and UEN (Unique Entity Number) on documents like receipts, invoices, order forms, leaflets, brochures, statements of account or invoices, credit letters, etc.
- Keep proper financial records for the last five years.
- File annual returns with ACRA (except for Exempt Private Companies).
- Update shareholders on the company’s financial health and prospects through annual general meetings.
6. Capital Funding
For sole proprietorship, the primary source of funding is usually personal savings or borrowing from family and friends. Some sole proprietors may also use credit cards or personal loans to finance their businesses.
However, it can be challenging for sole proprietors to secure external funding from financial institutions or investors, as they typically have limited assets or collateral to offer as security.
On the other hand, private limited companies have more options for funding. One common funding source is bank loans or lines of credit, which may be secured by the company’s assets or backed by personal guarantees from the company’s directors.
A limited liability company can also raise funds by issuing equity or debt securities to investors, such as through an initial public offering (IPO) or private placement. Crowdfunding and peer-to-peer lending platforms are also increasingly popular sources of funding for private limited companies in Singapore.
Additionally, private limited companies may be eligible for government grants and incentives, which are available through various programs offered by government agencies such as Enterprise Singapore and the Infocomm Media Development Authority (IMDA).
These grants may be used for research and development, productivity improvement, and international expansion.
7. Tax Filing Requirements
Tax filing requirements for sole proprietorships are limited, but the government will still assess the business income tax, personal assets, and personal income tax returns. They are exempt from filing annual returns.
Meanwhile, private limited companies face more tax requirements. The Singapore Companies Act states that companies must hire a third-party auditor to assess their financial statements.
The auditor will be responsible for managing annual returns and corporate income tax. They should also appoint a company secretary and hold general meetings each year.
Companies are also obliged to pay a 17% corporate tax rate, but tax exemptions are available:
- Start-Up Tax Exemption (SUTE)
- Partial Tax Exemption
- Tax Exemption for Foreign-Sourced Income (FSIE)
- Not Ordinarily Resident Scheme
- Group Relief
8. Business Credibility
For several reasons, private limited companies are often perceived as more credible than sole proprietorships in Singapore.
One key reason is that private limited companies have a separate legal entity from their owners, which means that the company is responsible for its debts and obligations rather than the owner.
Private limited companies also have a much more formal structure than sole proprietorships. The presence of directors and shareholders gives the company a sense of stability and longevity. This can be advantageous for businesses seeking long-term partnerships with suppliers, clients, and other stakeholders.
Sole proprietorships are viewed as less credible and stable because the owner’s personal decisions primarily drive the business structure.
Although this setup speeds up the decision-making process, it lacks foresight on whether such decisions benefit the sole proprietorship’s growth and future.
9. Perpetuity And Succession
Sole proprietorships cannot last indefinitely. As previously discussed, the business registration is valid for only 1-3 years. After this, the owner can choose not to renew, effectively closing down the business.
Its existence also ceases when the owner retires or passes away. The succession of this type of business can be disruptive and time-consuming, as the previous owner’s business assets and licences need to be transferred to the incoming owner.
Private limited companies face a different situation. They can last perpetually or indefinitely unless they apply to strike off the company name from the ACRA registry.
ACRA will only approve applications based on these factors:
- The company has outstanding debts to the Inland Revenue Authority of Singapore (IRAS).
- The company is not part of ongoing legal proceedings.
- The company is not holding assets and liabilities on the date of application.
- The company doesn’t have outstanding charges on the charge register.
- The company isn’t facing pending regulatory actions or proceedings.
- A majority of the company’s board of directors have consented to the decision to strike off the company.
If the original business owner passes away, the private limited company survives and resumes operations normally. Transferring shares or assets can also be done without disrupting business operations.
Conclusion About Sole Proprietorship Vs Pte Ltd In Singapore
Ultimately, deciding to set up a sole proprietorship or private limited company in Singapore depends on several factors. Both business structures have pros and cons, and aspiring business owners must carefully evaluate their objectives before deciding.
Need to navigate the legal waters of setting up a business in Singapore? Tembusu Law’s corporate lawyers can help. Schedule a free 30-minute consultation with us now.
Frequently Asked Questions About Sole Proprietorship Vs Pte Ltd In Singapore
What Are Some Disadvantages Of A Sole Proprietorship In Singapore?
Here are some disadvantages of setting up a sole proprietorship in Singapore:
- Unlimited liability
- Limited capital resources
- Lack of continuity
- Difficulty securing funding
- Limited perceived capability
What’s The Difference Between LLC And Pte Ltd?
Private limited companies are usually recognised by the designation “Limited” or “Ltd” after the business name. Meanwhile, an LLC is a hybrid business structure similar to a corporation and a partnership.
Why Is Pte Ltd Important?
The “Pte Ltd” designation allows the Singapore company to secure assets easily, manage and negotiate contracts, avail debts, or even sue or be sued under the company name. The business’ legal identity from the owners and shareholders is perpetually distinct until they dissolve the company.
Am I Considered Self-Employed If I Own A Pte Ltd?
No. As a private limited company owner, you’re considered the firm’s director. You are compensated through director fees (non-CPF) or a monthly salary (CPF). In either case, you aren’t considered self-employed.
Can Foreigners Be Self-Employed In Singapore?
Yes. If a foreigner wants to manage a sole proprietorship or a partnership, they must first get the Ministry of Manpower’s express approval before registering the business.