Sole Proprietorship vs Pte Ltd: The Best Choice in Singapore
- Modified: 22 January 2024
- 7 min read
- Starting a Company
Gabi Bellairs-Lombard
Business Writer
Gabi's passionate about creating content that inspires. Her work history lies in writing compelling website copy and content, and now specialises in product marketing copy. When writing content, Gabi's priority is ensuring that the words impact the readers. As the voice of Osome's products and features, Gabi makes complex business finance and accounting topics easy to understand for small business owners.
Entering the world of entrepreneurship in Singapore? The first stepping stone is choosing the right business structure. It’s like selecting the right vehicle for a long journey. The choice between a sole proprietorship vs Pte Ltd could steer the course of your business voyage, dictating its pace and how bumpy the ride might be.
Key Takeaways
- A Sole Proprietorship and a Private Limited Company differ in legal structure, ownership, liability, citizenship requirements, registration and compliance and capital raising options.
- Converting a Sole Proprietorship to Pte Ltd requires obtaining a no-objection letter from the authorities before constituting the company.
- Business income tax liabilities for sole proprietorships range from 2-22%, while Pte Ltds have access to tax exemptions and rebates with a 17% corporate income tax rate.
What Is a Sole Proprietorship?
Consider a lone sailor guiding his small boat across an expansive ocean. This comparison encapsulates the nature of a sole proprietorship business and is a common choice when incorporating a company in Singapore. It is a business structure where the owner, also known as the sole proprietor, and the business are not a separate legal entity from each other, with the business owner having full control and responsibility for all liabilities, including managing business operations. The captain and the ship are unified, steering through the turbulent business environment. Sole proprietors stand out for their simplicity and directness among various business structures.
However, the journey of owning this type of business isn’t always smooth sailing. The owner’s assets may be liquidated to compensate for any losses incurred, reflecting the unlimited liability nature. If the vessel capsizes, the captain shares its fate. Yet, for those willing to brave the risks, this option offers simplicity with minimal compliance requirements.
What Is a Private Limited Company?
Next, imagine a robust, big ship manned by a full crew. This mirrors a Private Limited Company (Pte Ltd), which is distinct from its owners, offering legal liability and a formalised private limited business structure. The ship and the crew are separate entities. If the ship faces challenges, the crew is protected.
Setting up a private limited company can be advantageous in terms of capitalisation by increasing the number of owners, and it also benefits from grants and rebates, similar to a ship that can transport more cargo and is fitted with sophisticated navigational tools. However, this structure comes with more stringent compliance requirements, underscoring the need for a competent crew to navigate the regulatory seas.
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Unsure which company structure is best for your business? Our team of experienced advisors in Singapore is here to guide you through the decision-making process.
Main Differences Between a Sole Proprietorship and Pte Ltd
Deciding between a lone sailor’s boat (sole proprietorship) and a sizable, crewed ship (private limited company) involves complexity. The choice hinges on key differences in:
- Legal business structure
- Ownership
- Liability
- Citizenship requirements
- Business registration and compliance
- Capital raising options
Legal Structure
Within the scope of legal structure, a sole proprietorship vs Pte Ltd company comparison showcases significant differences, much like comparing a boat and a ship. A sole proprietorship and its owner constitute a single legal business entity, whereas a Pte Ltd company stands apart as a separate legal identity from its owners. It’s like comparing a small boat that’s indistinguishable from its sailor to a ship that exists independently of its crew.
The private limited company framework provides legal advantages like
- Legal liability protection
- The ability to form contracts
- Continuity
- The capacity to draw external investors
These benefits are akin to the safety measures and advanced navigational tools on a ship that a small boat lacks.
Ownership
The aspect of ownership is another point of difference between a sole proprietorship and a Pte Ltd. The first one is like a boat owned and operated by a single sailor, whereas a private limited company is like a ship with multiple crew members or shareholders — a separate legal entity from its personal assets and resources.
The presence of multiple shareholders in a private limited company, comparable to a ship manned by several crew members, allows for enhanced capital flexibility. The company can gain additional capital by issuing shares or borrowing from banks and financial institutions.
Liability
The liability structure of a sole proprietorship business structure, including business liabilities, is akin to a sailor’s personal risk in a storm. The owner's personal assets are at risk if the business cannot fulfil its debts incurred. It’s like a sailor who must pay for repairs from his own pocket if the boat is damaged.
On the other hand, private limited companies, which is a type of limited liability company, offer limited liability to their shareholders, similar to a limited liability partnership. The individual assets of the company’s proprietors are protected from the company’s debts and liabilities, like a ship’s crew, who are not personally responsible for damage to the ship.
Citizenship
Regarding citizenship requirements, sole proprietorships are akin to a nation’s local fishing boat - only local citizens, permanent residents, or EntrePass holders are eligible to register a sole proprietorship.
Conversely, private limited companies can be compared to an international cruise ship. Foreigners are allowed to own shares in a Pte Ltd, thus expanding the range of potential investors.
Registration and compliance
Like the ease of sailing a small boat, sole proprietors in Singapore have fewer compliance requirements than private limited companies. It’s like a small boat that can set sail with minimal preparations.
Conversely, a private limited company, like a large ship, requires more preparations before it can set sail. It must appoint a Company Secretary and submit annual returns to the Accounting and Corporate Regulatory Authority.
Capital raising
Securing capital, similar to a lone sailor attempting to finance a voyage, can pose challenges due to limited credibility. It’s a voyage that largely depends on the sailor’s own resources.
However, a private company, like a grand ship with a reputable flag, has easier access to bank loans and investors as it has a separate legal identity from its other attributes. With its solid reputation and structure, it can attract more resources for its voyage.
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How To Convert Sole Proprietorship to a Pte Ltd
So, what transpires when a sailor opts to swap his small boat for a ship? The transformation from a sole proprietorship to a Pte Ltd necessitates several steps. First, you’ll need a no-objection letter to keep the business name and verify that the proprietor is allowing the usage of the name for the new private limited company. It’s like the sailor seeking permission to rename a new, larger boat.
Following that, you must constitute the private limited company, shift all business assets, and discontinue the sole proprietorship. It’s akin to building a new ship, moving all the equipment from the old boat to the new ship, and finally, retiring the old boat. From there you start ticking the boxes that constitute a private limited company structure.
What Are the Tax Liabilities for Sole Proprietorships and Private Limited Companies?
While steering through the business waters, another aspect to ponder is tax liabilities. The tax rate for a sole proprietorship in Singapore can range from 2% to 22%, much like a sailor who must ration his provisions according to the length and demands of the voyage.
Conversely, private limited companies are liable to a 17% corporate income tax rate. However, it comes with available tax exemptions and rebates, much like a ship with access to more abundant resources.
Summary
Choosing the right vessel — either a sole proprietorship or a private company — is crucial in navigating the business seas. Each has its merits and drawbacks, and the choice largely depends on the size of your venture, risk tolerance, and future plans. Whether you are a lone sailor or the captain of a grand ship, the choice depends on your needs and goals. At Osome, our business experts can help you choose the best business structure so you're incorporated for success and compliance.
FAQ
What is the difference between a sole proprietorship and a limited company?
A sole proprietorship in Singapore is owned and managed by a single individual who is liable for the business's profits and losses, while shareholders own a limited company, and their liability is limited to the amount they invested in it.
Can I change a sole proprietorship to Pte Ltd in Singapore?
In order to change from a sole proprietorship to Pte Ltd Singapore, you must submit a 'No Objection Letter' to the Company Registrar. This is due to the Singapore law preventing two entities from having the same business name.
Which is better, sole proprietorship or private limited company?
A private limited company offers greater stability and continuity than a sole proprietorship due to its perpetual succession as a separate legal entity. This makes it the better option when considering long-term business goals.
How do you distinguish between a sole proprietorship, partnership and a private limited company?
A sole proprietorship owner in Singapore is an individual with unlimited liability, a partnership consists of two or more people who share profits and losses, and a private limited company is a legally separate entity from its shareholders with the ability to pay taxes.
Can foreigners own a Pte Ltd?
Yes, foreigners can own a Private Limited Company in Singapore. They can be the sole owners or shareholders of a Pte Ltd, with no restrictions on nationality or residency. However, at least one director, called a Nominee Director, must be a Singapore resident and a registered office address within Singapore is required.
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