Sole Proprietorship Vs Pte Ltd In Singapore: 11 Differences

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).

When considering the sole proprietorship vs Pte Ltd, it’s important to note that 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, known as the sole proprietor. This individual can be a local citizen, permanent resident, or EntrePass holder.

It is one of the simplest and most common forms of business entity in Singapore, and it is popular among small business owners who want a straightforward way to start their businesses.

The defining characteristic of a sole proprietorship is that it does not create a separate legal entity from the business owner.

This means the sole proprietor is personally liable for all the business’s debts and legal obligations. In other words, if the business cannot pay its debts, the owner’s personal assets may be used to satisfy those obligations.

Despite unlimited liability, the sole proprietorship remains an attractive option for many due to its simplicity. Compared to other business structures, it requires minimal setup and ongoing compliance.

The sole proprietor has complete control over the business’s operations and profits, and all income is taxed as the owner’s personal income.

While not required to register with the Accounting and Corporate Regulatory Authority (ACRA), sole proprietors 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?

A private limited company (Pte Ltd) is a business structure in Singapore that is legally distinct from its owners, meaning it is considered a separate legal entity.

This separation ensures that the shareholders are not personally liable for the company’s debts or legal liabilities beyond their shareholdings. This protection is a key reason many entrepreneurs prefer establishing private limited companies.

Unlike a sole proprietorship, a Pte Ltd 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 and at least 18 years of age, filing annual returns, holding annual general meetings, and appointing a company secretary.

Private limited companies in Singapore can have up to 50 shareholders, who may be individuals, corporate entities, or both. The shareholders’ personal assets are protected, as their liabilities are limited to the number of shares they hold in the company.

This structure is particularly advantageous for businesses looking to scale, as it allows for raising capital through issuing shares. However, Pte Ltd companies cannot sell shares to the public.

A Pte Ltd is similar to a Limited Liability Company (LLC) in the US and is one of the most popular business structures in Singapore due to its flexibility and scalability.

While it offers significant protection and growth potential, it also requires adherence to stricter compliance measures, which can be more complex than those for a sole proprietorship.

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:

1. Legal Structure
2. Ownership
3. Citizenship
4. Ease of business registration
5. Liabilities
6. Regulatory compliance
7. Capital funding
8. Tax filing requirements
9. Business credibility
10. Perpetuity & succession
11. Business closure

1. Legal Structure

When comparing a sole proprietorship vs Pte Ltd company, the differences in legal structure are stark, much like the difference between a boat and a ship. In a sole proprietorship business, the sole proprietor and the business are considered a single legal entity.

This means the sole proprietorship owner is personally liable for all the business’s debts and obligations. In other words, the owner’s personal assets are at risk if the business incurs liabilities.

Conversely, a Pte Ltd company (Private Limited) is a separate legal entity distinct from its shareholders. This business structure provides significant legal advantages, including legal liability protection for the owners.

The shareholder’s personal assets are shielded from the company’s debts and liabilities, limiting their exposure to only the amount they have invested in the company.

This separation is akin to a ship that remains afloat regardless of the individual actions of its crew members.

The Pte Ltd company framework also allows the business to:

• Form contracts independently of its owners.
• Ensure continuity of business operations despite changes in ownership.
• Attract external investors due to its structured business entity and legal stability.

2. Ownership

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.

This structure gives the owner complete control over the company’s operations and profits, but it also means that the owner has no separate legal entity from the business.

As a result, the owner is personally liable for all the business’s debts and liabilities, which means their personal assets are at risk if the business faces financial difficulties.

In contrast, a private limited company is owned by its shareholders, who each hold a certain percentage of its ownership through shares. This structure allows for multiple shareholders, ranging from 1 to 50, who hold ownership through shares in the company.

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.

Because the company is a separate legal entity, the shareholders’ personal assets are protected, as they are only liable up to the extent of their shareholdings.

The presence of multiple shareholders in a private limited company allows for greater capital flexibility. The company can raise additional capital by issuing shares or borrowing from financial institutions, making it an attractive option for businesses with high growth potential or ambitious expansion plans.

In contrast, a sole proprietorship limits its ability to attract significant investment, as ownership cannot be shared with others without changing the business structure.

3. Citizenship

Citizenship is crucial in determining who can establish a sole proprietorship or a private limited company in Singapore. For a sole proprietorship in Singapore, only local citizens, permanent residents, or EntrePass holders are eligible to register the business.

This restriction makes sole proprietorships akin to a local fishing boat reserved for those who are permanent members of the community.

Conversely, private limited companies offer more flexibility in terms of ownership for foreigners. Foreign individuals are allowed to own shares in Pte Ltd, expanding the range of potential investors and making this business structure comparable to an international cruise ship.

However, foreigners on certain passes, such as a Work Permit, S Pass, or Visit Pass, cannot establish a sole proprietorship in Singapore. Instead, they are allowed to own shares in a private limited company, provided they do not register themselves as a director or work directly in the company.

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.

4. 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
  • Objectives
  • 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.

5. Legal Identity And Business Liabilities

The legal identity and business liabilities of a business significantly differ between a sole proprietorship and a private limited company. In a sole proprietorship business structure, the owner and the business are considered one and the same, meaning there is no separate legal entity.

This results in unlimited liability, where the owner is personally responsible for all debts incurred by the business.

If a sole proprietorship faces financial difficulties, the owner’s personal assets—such as their home or savings—are at risk. It’s akin to a sailor bearing full responsibility for a storm-damaged boat.

For instance, if a sole proprietorship incurs a debt of $2 million, the owner must cover the entire amount, potentially leading to personal bankruptcy if unable to repay. This lack of a separate legal identity exposes sole proprietors to significant financial risk.

In contrast, a private limited company (Pte Ltd) operates as a separate legal entity from its shareholders and directors, offering limited liability protection.

This means that the liability of shareholders is limited to the amount of capital they have invested in the business. The Courts won’t allow creditors to pursue the shareholders or directors for debt obligations.

However, there are exceptions to this protection under certain circumstances, such as when:

• The director is a co-borrower or co-guarantor of the company’s loan;
• The Court decides to “pierce the corporate veil” and hold a director personally liable for the company’s debts, particularly if there has been misconduct or fraud;
• The company is found to be non-compliant with the Companies Act.

These exceptions emphasise the importance of understanding the legal obligations and responsibilities when operating a private limited business.

6. 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.

7. Capital Funding

When it comes to capital funding, the options available to a sole proprietorship are generally more limited compared to a private limited company. 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.

Banks may view sole proprietors as a higher risk due to the absence of a separate legal entity and the unlimited liability borne by the business owner. This often necessitates the use of personal assets as collateral for bank loans.

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.

8. Tax Filing Requirements

Tax filing requirements differ significantly between a sole proprietorship and a private limited company. For sole proprietorships, the business owner is taxed on the business income at personal income tax rates.

The tax filing requirements for sole proprietorships are limited, but the government will still assess the business income tax, personal assets tax, and personal income tax returns. They are exempt from filing annual returns.

The business income is considered part of the owner’s personal assets, and there is no need to pay corporate tax since a sole proprietorship is not regarded as a separate legal entity.

This results in tax rates ranging from 2% to 22% based on total earnings, with no available tax exemptions for sole proprietor income.

On the other hand, private limited companies in Singapore are subject to corporate income tax on their chargeable income at the prevailing corporate tax rate of 17%.

Directors’ salaries and other benefits are taxed at personal income tax rates, but dividends received by shareholders are generally exempt from tax due to Singapore’s one-tier corporate tax system.

The Companies Act imposes additional tax filing requirements on private limited companies. These businesses must hire a third-party auditor to assess their financial statements and manage annual returns and corporate income tax filings.

A company secretary must also be appointed, and the company is required to 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

9. 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.

10. Perpetuity And Succession

The concepts of perpetuity and succession in a business differ greatly between sole proprietorships and private limited companies. A sole proprietorship is closely tied to the life of the business owner.

If the owner passes away or decides to retire, the business cannot continue unless a successor is appointed. Moreover, the registration of a sole proprietorship is only valid for 1 to 3 years, and the business must cease operations if the owner does not renew the registration or if the owner dies.

Transferring a sole proprietorship to another individual can be disruptive and time-consuming, as all business assets and licences need to be individually transferred to the new owner. This lack of continuity can make sole proprietorships less attractive to potential business owners seeking stability.

In contrast, a private limited company benefits from perpetual succession. This means that the company’s existence is not affected by changes in ownership, such as the death or retirement of shareholders.

Since a private limited entity is a separate legal entity, it can continue its operations indefinitely unless it is formally wound up or struck off the register by the Accounting and Corporate Regulatory Authority (ACRA).

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.

11. Business Closure

The process of business closure varies significantly between a sole proprietorship and a Pte Ltd company. Closing a sole proprietorship business is relatively straightforward.

The sole proprietor can either let the business permit lapse by not renewing it or file for a “cessation of business” through the BizFile+ portal.

Once the application is successfully filed, the sole proprietorship will be terminated. This simplicity in closure reflects the less complex business entity and fewer legal obligations tied to a sole proprietorship. In contrast, winding up a Pte Ltd company is more complex and time-consuming.

The business owner must first apply to ACRA to strike off the company from its register. ACRA will only approve the application if the private company meets specific criteria, such as:

• No outstanding debts are owed to IRAS.
• No involvement in ongoing legal proceedings.
• No existing assets or liabilities at the time of application.
• No outstanding charges on the charge register.
• No ongoing or pending regulatory actions.
• Consent from a majority of the board of directors.

If these criteria are not met, the business may need to undergo a member’s voluntary winding-up process or, in some cases, a compulsory winding-up process.

These procedures can take 3 to 12 months or more, depending on their complexity and whether there are challenges to the winding-up process.

The financial implications of closing a Pte Ltd company are also more significant due to the need for liquidation, distribution of assets, and settlement of debts.

For business owners, understanding these differences in the business closure process between a sole proprietorship vs Pte Ltd is crucial in making informed decisions about their business operations and exit strategy.

How To Convert Sole Proprietorship To A Pte Ltd

Transitioning from a sole proprietorship to a Pte Ltd company is a significant step for any business owner seeking to enhance their business operations and protect their personal assets.

Much like a sailor upgrading from a small boat to a larger ship, this conversion involves several essential steps. Here’s a detailed guide on how to make this transition:

1. Obtain a No-Objection Letter: Before you begin, secure a no-objection letter to ensure you can retain your business name for the new private limited company. This is akin to the sailor getting permission to rename their new vessel.
2. Incorporation of the Private Limited Company: Prepare the necessary incorporation documents, such as the Memorandum and Articles of Association, and submit them to the Accounting and Corporate Regulatory Authority (ACRA).
3. Appoint Shareholders and Directors: As part of the incorporation process, appoint shareholders and directors for the company. Often, the sole proprietor will become both the director and shareholder of the new Pte Ltd company.
4. Transfer of Assets and Liabilities: Move all assets and liabilities from the sole proprietorship business to the new company. This includes property, contracts, and existing business agreements, ensuring your business entity operates smoothly without disruption.
5. Register for Taxes: Register the new private limited company for taxes, including Goods and Services Tax (GST), if applicable. This step is crucial for compliance with Singapore’s progressive tax system.
6. Closure of Sole Proprietorship: Notify ACRA and other relevant authorities about the closure of the sole proprietorship. This formal closure is necessary to ensure that you are no longer personally liable for any debts associated with the old business structure.
7. Compliance Requirements: Fulfil all compliance obligations for private limited companies, which include holding annual general meetings and filing annual returns with ACRA. Adhering to these requirements is vital for maintaining your company’s good standing.
8. Open New Bank Accounts and Transfer Licences: Set up a new bank account for the Pte Ltd company and transfer any necessary licences or permits to the new entity. This ensures that all financial transactions are conducted through the private company.

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.

When deciding between either a sole proprietor or a Pte Ltd, consider your business goals, risk tolerance, and long-term plans. If you’re looking for a straightforward and low-cost entry into entrepreneurship, a sole proprietorship may be suitable.

However, if you anticipate growth, want to attract investors, or seek to limit personal liability, the private limited company structure is likely the better choice.

For expert advice tailored to your unique situation, reach out to Tembusu Law. Our team of corporate and commercial lawyers in Singapore specialises in assisting start-ups, small and medium enterprises, and established corporations across various sectors.

We can guide you through the complexities of incorporation, regulatory requirements, and strategic business planning.

Schedule a free 30-minute consultation with us now. to ensure your legal matters are handled with the expertise of one of Singapore’s leading law firms. Let us help you build and grow your business with confidence!

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.