Sole Proprietorship vs. Private Limited (Pte. Ltd.) Company: The Differences

What is a Sole Proprietorship?

A sole proprietorship is a business entity that is owned by only one person. The owner can be an individual, a company or a limited liability partnership, known as the sole proprietor. Only local citizens, permanent residents of Singapore, or EntrePass holders can register a sole proprietorship in Singapore.

The defining feature of a sole proprietorship is that it does not create a separate legal entity from the business owner. This means that the sole proprietor is completely liable for the business activities and its liabilities. In other words, the sole proprietor will be held personally liable for all debts that the company owes. Moreover, as a sole proprietor, you can also sue or be sued on behalf of the company. 

What is a Private Limited Company?

A private limited company, also called a Pte Ltd company or Pvt Ltd company is a business structure that has multiple shareholders. It is set up as a business entity whose shareholders could be individuals, corporate entities or both. The liabilities of a Pte Ltd company in Singapore are limited to the number of shares that stakeholders have in the company. 

For instance, if 100 shareholders have 1,000 shares each in the company, their liabilities will be limited to the shares they own. A shareholder’s personal assets cannot be taken over in case of failure or losses of the company. A Pte Ltd structure is one of the most popular and common types of business structure in Singapore. 

What is the Difference Between Sole Proprietorship and Private Limited Company?

Before you decide on which company structure to adopt, you need to understand sole proprietorship vs Pte Ltd in Singapore. Below, we outline the most common differences between a sole proprietorship and a private limited company. 

Ease of Setting Up

Setting up a sole proprietorship in Singapore is a rather straightforward and relatively cheap process. You will need to identify a business name, register it on BizFile+, and wait for the approval. Once you have received approval, you can register your business and start operations. 

Setting up a private limited company is a more complicated process. You will need to appoint at least one shareholder and a director. You will also need a company secretary to draft a company constitution and declare the financial year. After finalizing these details, you can register the company on BizFile+. The fee involved in setting up a Pte Ltd company is also higher compared to a sole proprietorship. 

Ownership

A sole proprietorship is run by one person and one person alone and has no separate legal entity of its own. If the current business owner wants to run the business with at least two or more people, their business structure may fall under a partnership.

On the other hand, a Private Limited Company is a separate legal entity altogether and has a clear distinction between its directors and shareholders. Typically, the number of shareholders in private companies ranges anywhere from 1 to 50 and can either be individuals or corporate identities or even both.

Liability

Since a sole proprietorship has no separate legal identity, the owner has unlimited liability. What this essentially means is that owners will be held legally responsible for any debts and losses that the business may incur. This will not just affect the finances of your business but could be accounted for through your personal assets as well.

Conversely, a shareholder’s liability in a private limited company is limited to their investment in the business. In unforeseen circumstances, this can be a great advantage as it ensures that you are protected financially and your personal assets will not be affected whatsoever.

Funding

In general, sole proprietorships have lower public perceptions, which may lead to difficulties in acquiring bank loans and other forms of financial support or funding. Small businesses that wish to apply for government grants need to be registered as a Public Limited Company (PLC) in order to be eligible.

For private companies, obtaining funding through bank loans or from external investors is generally much easier as it is legally seen as a corporate body, which makes them appear more credible in the corporate world.

Business Succession 

Since a sole proprietorship is owned by a single person, if this individual were to die, the business would cease to exist unless he/she has appointed a successor. 

A private limited entity has perpetual succession. It is stable and continuous since it is a separate legal entity. Even if a shareholder were to die, it would not affect the regular course of business. 

Tax Filing Requirements

For potential business owners who are seeking minimal filing requirements, a sole proprietorship is the way to go. For this specific business entity, you don’t have to audit accounts or file returns annually, as your tax will only be assessed in the owner’s individual tax return.

Unfortunately, business owners of Private Limited Companies don’t have the same fate and have more requirements to comply with under the Singapore Companies Act. You will need to hold annual general meetings, file corporate tax and annual returns, and hire an auditor and corporate secretary for the company.

Ease of Closing the Business

Closing down a sole proprietorship is easier compared to closing a Private Limited (Pvt Ltd) company. All you have to do is not renew your business permit. This will automatically lead to the closure of the sole proprietorship. You can also go to the BizFile+ portal and file for a “cessation of business”. Once the application is filed, your business will shut down. 

To close a company, you must first apply to ACRA to strike off the company from its register. ACRA has to consider the reason relevant. If your business does not meet the criteria for striking off, ACRA will reject the application. You can then resort to a member’s voluntary winding up the process or a compulsory winding process. This is usually a long and tedious process that can sometimes take more than 12 months. 

Here's a quick recap: 

Now, that you know the difference between sole proprietorship and private limited company, let's look at how you can choose between the two. 

How to Choose Between Sole Proprietorship vs Pte Ltd in Singapore? 

When it comes to starting your own business, there is no one size fits all. What you must do is compare the advantages and disadvantages of sole proprietorship vs Pte Ltd and then make a decision.

For starters, setting up and closing a sole proprietorship in Singapore is relatively easy. There are fewer regulatory obligations to comply with. On the flip side, since you and the business are considered a single entity, in case of losses, you may end up losing your personal assets. Some of the other disadvantages of a sole proprietorship are informal decision-making and the difficulty of getting funding. 

On the other hand, a Pte Ltd company in Singapore has advantages such as ease of funding, a separate legal entity, and higher level of checks and balances because of the higher number of owners and directors. However, it is much harder to set up and requires adherence to more legal compliances. 

Clearly, both have their own advantages and disadvantages. However, apart from these, you also need to consider your residential status in Singapore. To register a sole proprietorship in Singapore, you must be at least 18 years old. Additionally, you must be a Singapore citizen, a Singapore Permanent Resident or an eligible FIN holder. As a FIN holder, you must check with the relevant pass issuing authority (e.g. MOM/ICA) on your eligibility  before registering the business. 

Foreigners who live overseas and want to register either a sole proprietorship have to appoint at least one local resident authorised representative (e.g. Singapore citizens, Permanent residents or holders of EntrePass/Employment Pass).  You must also engage a registered filing agent (e.g. a law firm, accounting firm, or corporate secretarial form) to submit the application via BizFile⁺.

On the other hand, a Pte Ltd company in Singapore may be a better structure for foreigners as it limits the extent of liabilities, availability of funds, taxation, and other aspects.

How Do the Registration Processes Differ for Setting up a Sole Proprietorship vs Incorporating a Private Limited Company in Singapore?

When it comes to registering a sole proprietorship vs incorporating a private limited company (Pte Ltd) in Singapore, the processes are quite different.

For a Sole Proprietorship:

• Business Name: First, you pick a business name and check if it follows the rules set by ACRA.
• No-Objection Letter: If you want to use a name that’s already registered, you’ll need a no-objection letter from ACRA.
• Registration: You register your business through the BizFile+ portal. It’s pretty straightforward.
• Owner Details: You provide information about yourself since you're the only owner of the business.
• Business Activity: You’ll need to specify what kind of business you’re running and choose the correct activity code.
• Fees: The cost for setting up a sole proprietorship is quite low, usually around S$115.

For a Private Limited Company:

• Business Name: Similar to a sole proprietorship, you need to pick a business name. It has to be unique, and ACRA will approve it.
• Incorporation Documents: You’ll need to prepare documents like the Memorandum and Articles of Association (M&AA).
• Shareholders and Directors: You need at least one shareholder and one director. The director must be a resident of Singapore (either a citizen, PR, or Employment Pass holder).
• Company Secretary: You’ll also need to appoint a company secretary who meets the qualifications under Singapore’s Companies Act.
• Registered Address: Your company needs a registered office address in Singapore.
• Capital: The company must have a minimum share capital of S$1.
• Registration: Once everything is in place, you submit your documents through BizFile+.
• Fees: Setting up a private limited company costs more, typically around S$300.

Key Differences:

• Ownership: A sole proprietorship has one owner, but a private limited company can have up to 50 shareholders.
• Documentation: A private limited company requires more paperwork, like the M&AA and details about shareholders and directors. A sole proprietorship has fewer requirements.
• Complexity: Setting up a private limited company is more complicated, with ongoing compliance like appointing a company secretary, holding meetings, and filing returns. A sole proprietorship is much simpler and doesn’t have as many ongoing requirements.
• Fees: The cost of setting up a private limited company is higher than a sole proprietorship, and there are more fees later on for things like audits and secretary services.

In short, a sole proprietorship is quick and easy to set up with minimal requirements, while a private limited company involves more paperwork, regulations, and higher fees.

How To Convert Sole Proprietorship To A Pte Ltd

To convert a Sole Proprietorship to a Private Limited (Pte Ltd) company in Singapore, follow these steps:

1. Obtain a No-Objection Letter: Before proceeding, you need a no-objection letter from ACRA to confirm that you can retain the business name for the new company.
2. Incorporate the Pte Ltd: Prepare the necessary incorporation documents, including the Memorandum and Articles of Association, and submit them to the Accounting and Corporate Regulatory Authority (ACRA).
3. Appoint Shareholders and Directors: Appoint at least one shareholder and one director for the new company. In many cases, the sole proprietor becomes both the director and shareholder.
4. Transfer Assets and Liabilities: Transfer assets, contracts, and liabilities from the sole proprietorship to the new company, ensuring a smooth transition of operations.
5. Tax Registration: Register the new company for taxes, including Goods and Services Tax (GST) if applicable.
6. Close the Sole Proprietorship: Notify ACRA and other relevant authorities of the closure of the sole proprietorship.
7. Compliance Requirements: Ensure the new company meets compliance requirements, such as holding annual general meetings and filing annual returns with ACRA.
8. Open Bank Accounts and Transfer Licenses: Open a new business bank account for the company and transfer any necessary licenses or permits to the new company.

 What Are the Tax Considerations?

The government of Singapore has put in place a progressive tax system for enterprises. This means that whether you are a sole proprietorship in Singapore or a Pte Ltd company in Singapore, your taxes will depend on your total earnings.

For sole proprietorships in Singapore, the tax rate is between 2 per cent and 22 per cent.  There are no exemptions for sole proprietor income tax in Singapore.

A Pte Ltd company in Singapore has to pay a corporate tax at the rate of 17 per cent. Additionally, you will be eligible for two partial exemptions: 

• 75% tax exemption on the first S$100,000  of regular income;
• 50% tax exemption on the next S$100,000 of regular income.

Are There Any Other Business Structure in Singapore? 

Apart from sole proprietorship and Pte Ltd in Singapore, you can also choose to set up a partnership. A partnership structure occurs when two or more people co-own a business. Like a sole proprietorship, a partnership does not have a separate legal entity from its owners. However, you can eliminate the risk of liabilities in this form of business. 

You can also increase your chances of funding because of the support received from more owners. Once again, a partnership may cease to exist with a partner’s death, bankruptcy, incapacity, or retirement.

Some of the other business structures in Singapore you can choose from are limited liability company, subsidiary company, branch office, representative office and variable capital company. 

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Frequently Asked Questions

1. What Are Some Disadvantages of a Sole Proprietorship in Singapore?

A sole proprietorship has a few key disadvantages. The biggest one is unlimited liability, which means if your business faces financial trouble or gets into legal issues, your personal assets could be at risk. Also, it can be harder to grow a sole proprietorship. It’s tough to raise capital or expand without bringing in partners or changing your structure. Selling the business is also trickier, and the business can’t continue if the owner dies or decides to close up shop.

2. How Do I Decide Which Business Structure Is Best Suited for My Business Goals and Needs?

The best business structure for you depends on your goals. If you want to run your business solo with minimal hassle and cost, a sole proprietorship might be the way to go. But if you plan to grow, seek investments, or protect your personal assets, a private limited company (Pte Ltd) might be more suitable. Think about things like your growth plans, how much risk you’re comfortable with, how much capital you need, and whether you’ll bring in investors or partners. Tax obligations and the long-term stability of your business also play a role.

3. Am I Considered Self-Employed If I Own A Pte Ltd?

Yes, even though a private limited company (Pte Ltd) is its own legal entity, you’re still considered self-employed if you own one. You’ll be responsible for managing the business, and you earn income from the company, which is taxable. However, the legal structure of the company protects your personal assets from the company’s liabilities.

4. Can Foreigners Be Self-Employed In Singapore?

Yes, foreigners can be self-employed in Singapore, but there are specific rules. They can set up a private limited company and become a director, but they need to appoint a local resident director (like a Singaporean citizen, permanent resident, or someone with an Employment Pass). If a foreigner wants to work for the company, they’ll need to apply for the appropriate employment pass, such as an Employment Pass or S Pass.

5. Are Private Limited Companies Able to Get Tax Exemptions?

Yes, private limited companies in Singapore may qualify for tax exemptions. Newly incorporated companies meeting certain conditions can get a 75% tax reduction on the first S$100,000 of taxable income for their first three tax filing years. This helps startups and small businesses during the early stages of operation. However, you need to check if you meet the criteria, so it’s a good idea to consult a tax professional or corporate service provider.

6. Is Sole Proprietorship a Company?

No, a sole proprietorship is not a company. It’s a business structure where one individual owns and runs the business. There’s no legal distinction between the owner and the business, so if the business gets into debt or legal trouble, the owner’s personal assets are at risk. Unlike a private limited company (Pte Ltd), which is a separate legal entity, a sole proprietorship doesn’t have its own legal identity and doesn’t offer limited liability protection.