Consider setting up a sole proprietorship or a private limited company?
Here are the five main differences between the business structures to help you select the best option for your business.
Starting a sole proprietorship is easy and is considered the least expensive form of business. The fees payable to the Accounting and Corporate Regulatory Authority (ACRA) include S$15 for name application and S$100 for registration. Upon registration, an annual renewal of the sole proprietorship at S$30 is required. Once the sole proprietorship is registered, there are no annual filing requirements nor is it necessary for the entity to hold an Annual General Meeting (AGM).
To incorporate a company, registration fees payable to ACRA are much higher at S$300. Name application fee remains at S$15 with no annual renewal required. However, the company must comply with several statutory obligations under the Companies Act. These include Annual Return filing, holding an AGM, and filing Corporate Tax Returns. There is also a requirement to appoint a company secretary within 6 months from the date of company incorporation. Unless exempted, companies must have their accounts audited. Such regulatory requirements will certainly incur additional costs.
As a sole proprietorship is not a separate legal entity from the business owner, the business owner has unlimited liability for all debts and obligations of the entity. The business can only sue or be sued in the owner’s name. In extreme cases where the business cannot pay its debts, personal assets of the business owner will not be protected, and he/she may be forced into bankruptcy.
In contrast, members of a private limited company have limited liability and are only liable for their investments in the company. They will not be held personally liable for debts and losses incurred by the company as it is deemed a separate legal entity from its members. With this, the business can sue or be sued, and engage in acts and things in its name.
In our earlier article (Read: Why set up your business in Singapore?), we shared that companies in Singapore are taxed at 17% while progressive personal tax rates range from 0-22%.
Owners of sole proprietorships are considered self-employed by the Inland Revenue Authority of Singapore (IRAS) and must report income earned from business operations as part of their total personal income. Personal tax rates will apply to business owners of sole proprietorships and tax deductions may only be claimed if qualifying conditions are met. The maximum amount of tax reliefs claimable is capped at $80,000 per year of assessment (YA).
Though corporate tax is at 17%, actual tax rates could amount to much lower as companies can tap on significant tax reliefs. For example, the tax exemption for start-ups provides new companies with tax exemptions for their first three consecutive YAs. All companies can also enjoy Partial Tax Exemption (PTE) unless they have claimed the Tax Exemption Scheme for New Start-Up Companies in the same year.
Effectively, tax rates for business owners of sole proprietorships will only be lower than corporate tax rates when earnings are modest.
Ease of Expansion
Central to the expansion and growth of every business is access to capital. In general, it is easier for companies to obtain funding from lending institutions and investors.
Sole proprietorships face limitations in financing their business, as several initiatives require entities to incorporate as a company to qualify for prevailing grants. In addition, banks and investors may be less willing to loan capital to individual business owners as there is no clear division between their personal and business assets. Companies are legally seen as corporate bodies separate from their owners and thus, may appear to be more credible. Companies also have an advantage with the option of adding equity partners or the sale of shares.
Typically, sole proprietorships have lower public perceptions, which may lead to difficulties in acquiring financial support or attracting skilled employees and workers. Such factors may impede the rate of growth of the business and likely bring more challenges and obstacles.
Perpetuity / Succession / Cessation
While a lot of focus is placed on starting and operating a business, it is crucial for business owners to look at business perpetuity and succession.
The continuation of a sole proprietorship is solely determined by the business owner’s intention to operate. Business owners who wish to close the sole proprietorship may simply file for a cessation of business online and the business will cease immediately after the application is submitted. In other circumstances, a sole proprietorship may naturally cease due to the passing of the business owner. As a sole proprietorship does not have a separate identity from the owner, the sale or transfer of the business is not permitted. Instead, the sale and transfer of assets, licenses and permits may be done individually.
Companies have perpetual succession as they can be transferred or sold to other individuals or entities without disrupting operations. Hence, a company can continue to operate indefinitely and will only cease when it is wound up or struck off. However, terminating a company is much more complex as there are certain statutory requirements to be fulfilled. The process can also take anywhere between 3 to 12 months, depending on the complexities involved.
Now that we have explored the key characteristics of sole proprietorships and companies, we hope to have provided useful insights for aspiring business owners who are undecided on the type of business structure to adopt. Nonetheless, the process of incorporating an entity can still be challenging to navigate.
Advenz is experienced in assisting with new entity incorporation and provides a full range of business solutions. Let us take on the time-intensive tasks while you plan and strategise your business.