What are the differences between Sole Proprietor and Private Limited and what would be the ideal structure for a new business?
Before discussing the pros and cons of both structures, let’s recap our understanding of a Sole Proprietor and Private Limited or a Company (we will use the term “Company” as a Private Limited is a subset of Company in general.)
A Sole Proprietor is a business being operated by one person. It:
- not a separate legal entity from the business owner
- cannot own assets nor properties
- cannot enter into agreements nor contracts
- ceases operations upon the natural operator’s demise
- can sue or be sued only in the owner’s name i.e. a lawsuit against the Sole Proprietor is one against the owner
The business owner has unlimited liability (i.e. the business owner is personally liable for all the debts and losses of the sole proprietorship). A Company, on the other hand is a legal person/ entity incorporated by law. It:
- is a body corporate capable of exercising the functions of an incorporated company
- can own assets, properties in its name
- can enter into agreements or contracts
- can sue and be sued in its own name
- it has perpetual succession
- members of the Company enjoy limited liability i.e.
In Singapore, the Companies Act (Chapter 50) governs all legal matters concerning a Company. The Accounting and Corporate Regulatory Authority (“ACRA”) is the Singapore government regulator of business entities. It deals with all matters relating to business entities from formation, maintenance and advising the business entities’ compliance to the Singapore law.
What are your considerations?
Your aspiration: If you are a tuition teacher or a freelancer and happy being a sole proprietor, it’s fine to continue as it is.
If you are thinking of scaling your venture, it is advisable to start early and incorporate a Company so as to get everything right from the Get go.
Access to external capital: Do you envision requiring capital to grow your business? Capital can be in the forms of loans or capital investment into your business.
If the answer is yes, incorporating a Company is the preferred route as it offers an easy way to raise funds. The bank will be able to assess the Company’s business plan and ability to repay the loan based on available financial information for the Company. There are also numerous loans that the banks are introducing to assist startups and most will require the borrower to be Company and not a Sole Proprietorship.
As owner of a Company, it is also easy if you want to invite investors into your Company by allotting shares to them in return for funds to chase your ideas.
For potential lenders and investors, a Company confers in them the rights to share in the Company’s success which is easily identifiable and is not ambiguous. For lenders and investors, this gives them greater legal protection for their investment.
Partners: Do you foresee having stakeholders/ partners in your business?
Incorporating a Company will allow you to invite them as shareholders in your business. Besides that, a Company helps to formalize the arrangement between partners so everyone knows their roles and responsibilities and share in the running of the Company.
Liabilities: Running up debts as you bootstrap your way to success?
While we agree with the approach that the founders will likely be taking some form of borrowings to get the business running in the early days, it is not such a great idea as the Company grows.
One of the reasons is personal liabilities. Under a Sole Proprietorship arrangement, the Sole Proprietor is responsible fully for the debts and losses incurred under him. In the extreme case, failure to repay debts may force a person into bankruptcy. A bankrupt faces consequences like requiring permission for oversea travel, having his/her income and assets seized by creditors to satisfy the debts.
When banks assess the creditworthiness of a Sole Proprietor, it takes into consideration all the above. This will severely disadvantage the Sole Proprietor if say, he needs to take a housing mortgage or car loan and affects the amount he/she can borrow.
On the other hand, a liability of the Company stays with the Company unless there is a personal guarantee being issued to satisfy certain lenders. The liabilities of the shareholders are limited to their investments into the Company and nothing else. They do not need to be responsible personally to pay off the debts.
Tax: This is one of the main factors to consider.
The profit of a Sole Proprietor is assessed as if it is the owner’s own earnings at the personal income tax rate. The profit of a Company, on the other hand, is taxed based on the Corporate income tax rate. The highest tax rate for Personal Income Tax and Corporate Income Tax for Year of Assessment (“YA”) 2019 is at 22% and 17% respectively.
An incorporated startup is eligible for tax breaks where they get up to $200,000 of tax exemption for YA2019 and $125,000 of their first $200,000 of chargeable income from YA2020 onwards.
Companies are also regularly being showered with tax exemptions and Income Tax rebates. Assuming a chargeable income of $300,000 filed in YA2019, a newly incorporated Company filing their Corporate Income Tax can expect to pay $20,060 compared to $40, 350 for a Sole Proprietor, a sizeable savings of more than 50%!
In addition, dividends being declared to the shareholders will not be subject to further Singapore tax. For sole proprietor, this is a real incentive to take advantage of.
Succession and Transfer: A Company, being a person in the eyes of the law, will be deemed independent of its shareholders and treated on a standalone basis like an asset. It continues in perpetuality and can be handed down from one shareholder to his successor. Talking about, “You merely look after it for the next generation.’
Compliance: As a sole proprietor, you are answerable only to yourself.
A Company will require a little more structure. You will generally need to report your financial results to your shareholders annually at a minimum and also to keep registers of your Company that can be inspected by your shareholders or the regulatory authorities.
There is not a one-size fits all approach to deciding the appropriate structure for your venture. We hope the above offers food for thoughts.
Sole Proprietor or Private Limited? We love to hear your views!
Ready to incorporate your company?
We can register your business entity within the next few hours, or reach out for a complementary consultation for your specific needs
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