Sole Proprietorship vs Pte Ltd: What’s best for your business?
There are a lot of questions you need to answer before putting up a business. Choosing the proper business structure is a fundamental factor you need to consider. Does it fit your needs and preferences? Will it match with the nature of your business and suffice the demands? Can you go solo, or do you need more capital? These questions can help you develop a good decision and business plan.
For most startups, sole proprietorships, partnerships, and private limited companies (Pte. Ltd. ) are the most common options. It is logical since most of these are still small to medium-scale businesses. Knowing your business structure will help you determine its jurisdiction requirements and ownership. It will give you an idea about its potential costing and tax. This article will discuss the similarities and differences between the two business structures.
What is a Sole Proprietorship?
The sole proprietorship is the simplest business structure. It has a single owner who oversees everything. Only the local citizens, permanent residents, or EntrePass holders can set it up.
The business and the owners are the same legal and tax-paying business entity with this structure, and no line separates the company from its owner. The entrepreneur may not file formation documents for his business with the state. As such, it is automatically considered a sole proprietorship business.
While it appears a simple business, it still has a lot of factors for consideration. For instance, the owner is solely responsible for its liabilities because he owns all its assets and profits. As previously mentioned, he and the business are not separate entities. For this reason, his assets are affected by all the business’ potential risks. Hence, if the company can’t pay its liabilities, the owner’s assets are subject to liquidation.
What is a Private Limited Company or Pte Ltd?
A Primary Limited Company (Pte. Ltd.) is similar to a Limited Liability Company (LLC) in the US. For most owners who wish to scale up their businesses, switching to a private limited company (Pte. Ltd.) is a favourable choice. Starting a Pte. Ltd. company can help with capitalisation by increasing the number of owners, and it can be useful in the long run when you decide to expand your business.
But unlike a public company, a Pte. Ltd. can only have as many as 50 members or owners. The shareholders can be corporate entities, individuals, or both. A Pte. Ltd. company cannot sell shares to the public but can go public or have its initial public offering (IPO) to increase its capital. More often than not, they have to borrow to capitalise on its growth and expansion.
Moreover, liabilities are limited to the owners’ shares. Hence, if the company can’t cover its borrowings, the shareholders’ assets are protected. Local or foreign owners are allowed in a Pte. Ltd company, but the appointed director must be a country resident and at least 18 years of age.
In Singapore, private limited companies are the most flexible and scalable businesses. As such, most incorporated companies choose this type of business structure.
Critical Differences Between Sole Proprietorship vs Pte Ltd
In Singapore, it is imperative to identify and establish your preferred business structure. Doing so will help you understand your business more and know its ins and outs. A sole proprietorship and a private limited company can fit the needs of business owners. While both are common forms of business organisation, they have considerable differences. We list them down below:
A sole proprietorship is owned by one person only. The owner has greater autonomy and can decide for his business or impose change whenever he wants to. Yet, he has no separate legal entity from his business. If he wants to add more owners, it will be considered a partnership or a company.
Meanwhile, a Private Limited Company can have as many as 50 owners or shareholders. They can be individual, corporate entities, or both. Moreover, they have a separate legal entity and a clear distinction from the directors.
Since no line separates the owner from the business, his liabilities are unlimited, and the owner may be held responsible for the business’ liabilities and losses. In the unlikely event that the company would close, the company may liquidate the owner’s assets to cover the losses.
On the other hand, private limited companies limit their liabilities to the owners’ shares. In worst-case scenarios, the business may go bankrupt with unpaid liabilities, but it will not affect or liquidate the owner’s assets.
On the other hand,
Filing requirements for a sole proprietorship are minimal. However, it’s important to note that the government will assess the business income tax and the personal income tax return together because the owner and the business are within the same legal entities.
Meanwhile, a private limited company must meet more compliance requirements, including a director’s residency and a company secretary’s appointment. It also has to hold its Annual General Meeting (AGM) and file the Annual Returns (AR) with ACRA. A private limited company no longer considered a small-scale business must appoint an auditor. The income tax assessment is limited to the company’s corporate tax returns.
Tax filing Requirements
A sole proprietorship is perfect for putting up a business with minimal tax filing requirements. In this business structure, the business’ accounts are no longer audited. Instead, the government will evaluate your income tax return, and you don’t have to file annual returns for your company.
There are more requirements for tax filing for private limited companies. According to the Singapore Companies Act, companies need to hire an auditor to assess their financial statements. The auditor will manage the corporate income tax and annual returns (AGM). They also have to appoint a corporate secretary and hold an annual general meeting.
The owner of a sole proprietorship will have to finance his business independently. If his capital cannot cover operations and expansion, he may borrow from banks. However, a sole proprietorship owner has lower public perceptions in general. With that, he may have difficulty getting approval for his loans and other funding requests. He may also have to switch to a partnership or a corporation to ensure adequate capital. If the business is still considered small-scale, the owner may register it as a Public Limited Company (PLC). Through this, the business will be eligible for government grants.
Conversely, a Pte. Ltd gets funds from the shares or investments. Also, the owners appear more credible in the business world. Hence, obtaining approval for bank loans and other funding requests is easier. If more capital is needed, it can sell its shares to the public through Initial Public Offering (IPO).
|Advantages from Sole Proprietorship and Pte Ltd|
|Sole Proprietorship||Pte Ltd|
|Requirements are minimal.||More credible and easier to get approval for bank loans and other fundings.|
|The owner has more autonomy in managing the business.||Owners’ assets are protected.|
|The owner pays lower taxes and may enjoy personal income tax rebates.||The owners may receive corporate income tax rebates and SME cash grants.|
Tax Difference of a Sole Proprietorship vs a Pte Ltd
The sole proprietorship tax rate ranges from 2% to 22% in Singapore, calculated through the owner’s income tax returns. Given this, sole proprietorships have no tax exemptions. But, the owner may enjoy personal tax benefits when the government grants them.
A Pte ltd has a corporate tax rate of 17%. But, they may receive corporate income tax rebates and SME cash grants. For example, corporate income tax rebates in 2018 were 40%, capped at $15,000. In 2019, rebates were 20% capped at $10,000. Corporate income tax rebate depends on the company’s income tax computation and assessment.
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Frequently Asked Questions
Which is better for startups, sole proprietorship or private limited company?
Private limited companies have more advantages than sole proprietorships. The structure of operations is smoother, and the personal assets are separate from business liabilities.
How do I convert a sole proprietorship to Pte Ltd?
Step 1. Write a no objection letter to your current business name can become the name of a Private limited company.
Step 2. Incorporation of a private limited company and filing of the requirements.
Step 3. Transfer the current business assets to the incorporated private limited company.
Step 4. Cessation of Sole Proprietorship
Do I pay more taxes as a sole proprietor or a private limited company?
A private limited company has to pay a higher percentage of taxes. But, it is more tax-efficient than a sole proprietorship.
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