When starting any type of business in Singapore, it is important to establish your chosen business structure and know its ins and outs. In this article, we’ll take you through what sole proprietorship and private limited companies are all about and how to decide which of these are the right entity for you.
Sole proprietorship is a business solely owned by one person, while private limited companies have various directors and shareholders that make up the entire company. Business owners looking to scale up their company in the future would usually register as a Private Limited Company due to the ease of expansion, while sole proprietorship is more suited for those who want to keep their business small.
While both entities are one of the most common business structures in Singapore and are both suitable for entrepreneurs, they are still quite different in nature.
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 from its directors and shareholders. Typically, the number of shareholders in private companies range anywhere from 1 to 50 and can either be individuals or corporate identities, or even both.
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 through your personal assets as well.
Conversely, a shareholder’s liability in a private limited company is limited to his 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.
For potential business owners who are seeking minimal filing requirements, 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.
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.
Now that you know the distinct difference between both business structures, how do you go about choosing which is the right one for you? First, you need to weigh out the benefits and drawbacks of both entities and settle for whichever suits you more as a business owner.
When it comes to starting your own business, there is no one size fits all. But what you do need to know is which business structure to establish. At the end of the day, it’s all about making sure to decide wisely and choosing the structure that is most suitable for your business needs as well as your future aspirations.
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