Sole Proprietorship or Private Limited in Singapore- A Comparative Guide

Entrepreneurs often find themselves at crossroads when establishing their business, contemplating the decision between a sole proprietorship and a company. This crucial choice leads to a back-and-forth consideration of the advantages and implications associated with each option.

While a sole proprietorship offers simplicity and fewer legal obligations, starting a company is commonly considered more professional, given its formal structure and legal separateness.

This article will mull over the nuances that differentiate these two business structures, highlighting the benefits and essential factors that Singapore’s entrepreneurs can consider before deciding the best business structure.

What is a Sole Proprietorship in Singapore?

A sole proprietorship is a business structure where a single individual operates and bears complete responsibility for the company, with no separate legal entity. This ownership entitles the individual to 100% of the business’s profits. 

Only citizens, permanent residents, or EntrePass holders aged 18 years or older can apply to establish a sole proprietorship in Singapore.

As Singapore’s most accessible and most cost-effective business structure, a sole proprietorship entails a government registration fee of $100, and minimal paperwork is required for setup. There are no ongoing filing obligations except for the annual renewal of the sole proprietorship, making it ideal for those seeking a hassle-free entrepreneurial journey with minimal paperwork.

The sole proprietor’s income is subject to individual taxation, differing from private limited companies that fall under corporate tax regulations. 

However, it’s essential to note that a sole proprietorship exposes its owner to unlimited liability. Consequently, personal assets are at risk if the business incurs debts or legal disputes, as the business and the owner are legally inseparable.

What is a Private Limited Company (Pte Ltd) in Singapore?

A Private Limited Company, commonly known as Pte Ltd in Singapore, is the most preferred business structure. It offers flexibility and scalability, allowing individuals or corporations to incorporate it. Unlike a sole proprietorship, a Private Limited company’s liabilities are limited to its members’ shares, protecting their personal assets during liquidation. 

Local and foreign entrepreneurs can easily set up a Private Limited Company with minimal regulatory requirements. The company has a separate legal status from its shareholders and directors, ensuring limited liability for debts and losses.

While there are additional obligations, such as holding an Annual General Meeting and filing Annual Returns, the benefits and credibility of this structure make it a top choice for businesses in Singapore.

Comparison in Tabular Format: Sole Proprietorship vs Private Limited Company

Below is a tabular comparison between a Sole Proprietorship and a Private Limited Company in Singapore:

Comparison in Detail: Sole Proprietorship vs Private Limited Company

Here is a detailed overview of all the above-tabulated criteria:

1. Ownership: In a sole proprietorship, a single owner retains complete control over the business operations. The proprietor enjoys all profits but also bears all risks and liabilities personally. On the other hand, a private limited company can have multiple shareholders who own shares in the company. Ownership can be divided among individuals or entities, allowing for a more diversified and scalable ownership structure.
2. Legal Status and Liability: A sole proprietorship is not a separate legal entity from its owner, which means the proprietor and the business are considered the same. Consequently, the proprietor has unlimited liability for any debts or legal issues the business may encounter, risking personal assets. On the other hand, a private limited company is a separate legal entity, meaning its liabilities are limited to its assets. Shareholders are not personally liable for the company’s debts, providing them with limited liability protection.
3. Registration Requirements: For a sole proprietorship, the individual must be 18 years or above and either a Singapore citizen, a permanent resident, or an EntrePass holder. If the owner is not a Singapore resident, they must appoint an authorised representative who is ordinarily resident in Singapore. Setting up a private limited company requires a minimum of one shareholder and one director, both of whom can be individuals or corporations. At least one of the directors must ordinarily reside in Singapore, and foreigners can apply for an EntrePass to act as a local director.
4. Continuity in Law: A sole proprietorship exists as long as the owner is alive and desires to continue the business. If the owner ceases the business, the sole proprietorship will be closed. In contrast, a private limited company has perpetual succession independent of its shareholders. The company can continue to operate even if there are changes in its ownership or management, providing more stability and longevity.
5. Yearly Statutory Obligations: For a sole proprietorship, the yearly obligations include renewing the registration, which can be done for one year or three years. Additionally, self-employed persons must top up their Medisave account with the CPF Board before registration or renewal. For a private limited company, there are more extensive compliance requirements, such as filing annual returns, holding general meetings, appointing a company secretary within six months of incorporation, and appointing an auditor within three months after incorporation (unless exempt from audit requirements).
6. Taxes: In a sole proprietorship, the owner’s profits are taxed at their income tax rates. On the other hand, a private limited company is taxed at corporate tax rates, which may be more advantageous depending on the company’s profits and financial situation.
7. Setup Fee: To register a sole proprietorship, ACRA charges a fee of $115 for a 1-year registration and $175 for a 3-year registration. For a private limited company, ACRA charges a setup fee of $15 for the name application and $300 for the incorporation fee.
8. Closing the Business: For a sole proprietorship, the business can be closed by the owner through a cessation of business. The Registrar can also cancel the registration if not renewed or if the business is deemed defunct. On the other hand, a private limited company can be wound up voluntarily by its members or creditors or compulsorily by the High Court. Alternatively, the Registrar can strike it off if it fails to meet statutory requirements.

Conversion of a Sole Proprietorship into a Private Limited Company

Steps to convert a sole proprietorship to a private limited company (Pte Ltd) in Singapore:

1. No Objection Letter: Send a letter to the company’s registered agent or address stating that you have no objections to using the business name as the name of the new private limited company.
2. Incorporate a Private Limited Company: Form a new private limited company as the successor to the sole proprietorship, with the requirements:
   • At least one shareholder
   • Singapore resident director
   • Company Secretary
   • Initial paid-up share capital of at least S$1
   • Singapore registered office address.
3. Transfer Business Assets: Assign all business assets, including contractual obligations, to the newly formed private limited company.
4. Close Sole Proprietorship (if applicable): If you incorporate the new private limited company within three months of closing the sole proprietorship, you must complete the sole proprietorship before transferring assets to the new company.
5. Transfer Bank Accounts: Close all sole proprietorship bank accounts and establish new ones under the private limited company’s name.
6. Transfer Assets: Net assets of the sole proprietorship can be converted into paid-up capital for the private limited company, subject to necessary resolutions and contracts. Clear any debts owed to creditors before transferring assets.
7. Renew Contracts and Agreements: Resign any business contracts, service agreements, or leases to reflect the change in legal structure.
8. Reissue Licenses/Permits: Contact the relevant authorities to reissue licenses/permits, as they usually do not accept transfers from other government agencies.
9. Cessation of Sole Proprietorship: Notify ACRA that the sole proprietorship has ceased business operations.

Following these steps, you can convert your sole proprietorship into a private limited company in Singapore.

Advantages and Risks of Transitioning from Sole Proprietorship to Private Limited Company

Benefits of converting from a sole proprietorship to a private limited company:

1. Protection of Personal Assets: As a private limited company, personal assets are safeguarded, and the liability of shareholders is limited to their capital contribution.
2. Lower Tax Rates: Private limited companies often enjoy more tax advantages, potentially reducing tax liabilities compared to sole proprietorships.
3. Access to Government Grants: Private limited companies may have better access to government grants and incentives, promoting business growth and development.
4. Compliance Obligations: While additional compliance obligations exist for a private limited company, adhering to these requirements can enhance the company’s credibility and reputation.
5. Not a Legal Person: Private limited companies are separate legal entities, which may make it easier to manage certain transactions and contracts.

Challenges and Risks in converting to a private limited company:

1. Qualifying Criteria: Meeting the qualifying criteria to establish a private limited company, including having a resident director and shareholder, can be challenging for some business owners.
2. Higher Administrative Costs: Setting up and maintaining a private limited company involves higher administrative costs and additional reporting requirements.
3. Increased Liability: While limited liability benefits, shareholders may still face risks associated with the company’s debts and performance.

Entrepreneurs must weigh the advantages and risks carefully and seek professional advice before deciding whether to convert from a sole proprietorship to a private limited company.

Conclusion

In conclusion, the proper business structure is crucial for success. Throughout this analysis, we have examined the nuances and benefits of both sole proprietorship and private limited company structures in Singapore. 

While a sole proprietorship offers simplicity and fewer administrative burdens, a private limited company is more professional and scalable. Not only does it offer tax advantages through distributed earnings, but it also provides limited liability protection to shareholders, safeguarding personal assets. 

As experienced advisors, we recommend considering various factors, such as growth aspirations, risk tolerance, and long-term objectives, to make an informed decision tailored to each client’s unique needs. Should our clients seek to embark on their entrepreneurial journey or convert their existing business, we stand ready to guide them through the entire process, ensuring a seamless and successful transition to their desired business structure.

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InCorp Content Team

InCorp's content team includes talented copywriters from our regional group and globally. We contribute informative, thought leadership, and market-trending articles to guide aspiring business entrepreneurs to a higher level across the Asia-Pacific region.

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