We can’t overemphasise the importance of choosing the right type of legal structure when starting a business in Singapore. The choice you make will affect several things, including liability, tax rate, and more. This guide will talk about the two major business structures for small business owners in Singapore: a private limited company and a sole proprietorship.
What is a Private Limited Company?
Private Limited Company is a scalable, flexible, and advanced business structure in Singapore. A private limited company is more common than a sole proprietorship. The number of business entities established as private limited companies is more than those established as sole proprietorships. Both individuals and corporate entities can become shareholders of a private limited company.
When you establish a private limited company, the company will stand as a separate legal entity, relieving you of some liabilities as an individual. Consequently, none of your personal assets will be impacted even if your company is faced with a huge setback such as losses or debts.
A private limited company can either be entirely foreign or locally owned. No form of restriction is associated with foreign shareholding. However, a limited liability company must appoint a minimum of one resident director who can either be a Singaporean permanent resident, Singapore citizen, or an EntrePass holder.
The director must not be younger than 18 years. If you don’t qualify to be appointed as a local director and no one is available to be the local director of your company, you can opt for a nominee director service.
You will enjoy various benefits when you own a private limited company, especially tax benefits. Here are some of the advantages:
- Profit will be taxed at corporate tax rates of 17%.
- Company’s owner is not personally liable for losses or debts.
- New companies can benefit from tax incentives and tax exemptions.
- Ownership is transferable.
- The company stands as a separate legal entity from its directors and shareholders.
- Attractive to outside investors.
- Ease of raising capital.
A private limited company may not really favour some. Here are some of the disadvantages of a private limited company:
- Company’s information (e.g. interest in company shares) must be declared.
- Operating costs are higher.
- Private limited companies have more compliance requirements that they must satisfy.
What is a Sole Proprietorship?
Sole Proprietorship is the simplest way a local resident can do business in Singapore. When you establish a sole proprietorship business, you will be accountable for every liability your business is faced with since the company isn’t a separate entity.
This means that your personal assets can be impacted when you face serious challenges. For instance, if your business is unable to pay a creditor at the appropriate time, the creditor can take over your personal assets or company’s asset.
A sole proprietorship is required to renew annually through ACRA. Those who can apply for a sole proprietorship include Singapore permanent residents, Singapore citizens, and EntrePass holders. The owner must be at least 18 years old.
A foreigner residing outside Singapore also has the privilege to register for a sole proprietorship. However, they must appoint an authorised representative who lives in Singapore. The primary duty of the authorised representative is to ensure the company stays compliant with the regulatory requirements at all times.
A sole proprietorship has its own advantages too. Here are some of the benefits of a sole proprietorship:
- It is the cheapest business structure.
- It is straightforward to set up.
- All the profits belong to the owner since shareholders are not involved.
- The compliance requirements are not many.
- Sole proprietorship is very easy to terminate.
Sometimes the sole proprietorship can be unfavourable to a business owner. Here are some of the disadvantages of a sole proprietorship:
- The liabilities are unlimited.
- It is not a separate legal entity.
- Outside investors usually don’t have any interest in the business.
- Limited capital.
- The company can’t enjoy any tax benefits.
- Profits are subjected to a tax rate of 0% to 22% (personal tax rate) since they are treated as the owner’s income.
- Low public perception.
As both the structures have their own advantages and disadvantages, no one business structure can be declared better than the other. The form that would be best suited for you totally depends on your business needs. So make sure to evaluate all the parameters before you incorporate your company. Also, you can always change it later on based on your company’s growth or changing requirements.
If you need an expert to discuss your concerns regarding the appropriate business structure that suits your kind of business, you can contact HeySara. We will be glad to guide you and even help you incorporate your company after choosing a business structure.