Sole proprietorship vs Private limited company: Know the differences
Making the best choice for your company
Starting a company is an exciting milestone in one’s career but can be a cumbersome process if you are not aware of the technical and legal aspects of starting a business. The question of whether you should establish as a private limited company or a sole proprietorship in Singapore comes up a lot.
Both types of business structures have their advantages and disadvantages depending on your business goals and future vision.
What is sole proprietorship?
A sole proprietorship is a type of business that is owned by a single person. There is no separate legal entity created for this type of business structure. A sole proprietorship business is usually chosen when you don’t have plans of expanding the business to people other than yourself.
It also takes minimal paperwork and legal requirements to start a sole proprietorship. This type of business is also suitable if you are financing it through your own savings.
What is private limited company?
A private limited business is one that has more than one stakeholder involved in the form of directors and shareholders that make up the entire company.
An entrepreneur who has plans and visions of expanding their business to a broader scale should choose this type of incorporation.
One major difference between a sole proprietorship vs pte. ltd. company is that a private limited organization exists as a separate legal entity from the people who started it or are now the shareholders.
Comparing sole proprietorship with a private limited company
• Legal liability
Sole proprietorship liability refers to the legal responsibility of the sole proprietor to bear all losses and debts the business may have.
The personal assets of a sole proprietor are also at risk when running such type of a business which is also known as having unlimited liability.
On the other hand, the legal liability in a private limited business is restricted only to the amount that has been invested by an individual, or in other words, they have limited liability.
The personal assets of a shareholder or director cannot be used to pay off any debt that the company may have.
• Legal identity
A sole proprietorship’s legal identity is not separate from the owner while a private limited company is a separate legal entity. This can be an advantage or disadvantage depending on your goals and what you need.
• Compliance requirements
Many countries and states don’t have major compliance requirements from a sole proprietor. This makes legal processes such as income tax filing and other requirements much easier to conduct.
A private limited company is a separate legal entity which means they have to abide by separate compliance requirements and guidelines to follow such as filing corporate tax returns, filing annual returns, and having a corporate secretary and auditor.
• Taxable income
The taxable income for a sole proprietor is the same as a normal salaried individual and the profits of the business are taxed at individual rates. The profits of a private company are taxed at a corporate rate of 17%.
Certain startups that qualify for the exemption scheme enjoy the first 3 years and after that, these qualified companies benefit from partial tax exemption.
• Financial credit (loans)
As a sole proprietor, it is very tough to get financial support in the form of loans or investments from banks or financial institutions as they have a low public image.
Although as a sole proprietor you can apply for government grants by registering as a Public Limited Company.
Private limited companies have an easier time getting financial aid in the form of investments or loans thanks to their legal status which makes them more credible in the corporate world.
Private limited companies are also larger in terms of manpower and their scope of expansion meaning it makes more sense for institutions to invest in them than a sole proprietor.
• Raising funding
As it's very difficult to get external loans or investments for a sole proprietor, they generally use their own savings as the capital to run the business or might take help from friends and family.
Raising funds for a private limited business on the other hand is much easier. They can raise capital through equity, bank loans, and other external investment like Venture Capital firms.
Which is the best option for your business?
If your business has a high chance of profitability with a scope to scale its operations, then the private limited company structure is suitable for you.
But if you plan to keep smaller operations and you are the only individual who can provide the service for your business, then a sole proprietorship business structure is better suited for you.
No, a business cannot be a private limited company and a sole proprietorship at the same time as a private company is a separate legal entity while being a sole proprietor is not.
No, when you are a sole proprietor, designations such as a ‘Director’ or ‘CEO’ are not applicable.
As you cannot have corporate designations in a sole proprietorship, there are no directors.
No, you cannot have a CEO in a proprietorship business as there is no corporate hierarchy at play.
No, a private limited business must have a minimum of two shareholders and hence cannot be started by a single person.