A private limited (Pte. Ltd.) company is a legal entity that has been formed under the Companies Act to provide a structure for carrying on business and is governed by its members, who are also shareholders of the company. A sole proprietor is an individual who carries out business activities without forming any legal entity. In this article, we will discuss what are the differences between a private limited company and a sole proprietorship in Singapore.
What Is a Private Limited Company?
In order to understand what is a private limited company, it is important to first understand what is a public limited company. A public limited company is a type of company that allows investors to invest in the company through shares or debentures. It is also known as a listed company because it is traded publicly on a stock exchange like SGX. The main difference between a public limited company and a private limited company is that the former is open to all types of investors while the latter is only available to certain categories of people.
The formation of a private limited company requires the following:
• A minimum of two persons who wish to form a company;
• An incorporation document called Articles of Association must be submitted with the Registrar of Societies; and
• At least one share certificate is issued to each shareholder.
Under the Companies Act, a person can become a member of a private limited company if he/she meets at least one of the following conditions:
- He/She is a natural person;
- He/She is incorporated under the law relating to companies;
- He/She is registered as a professional accountant;
- He/She is employed in a capacity that involves the provision of services to other entities within the meaning of section 2(1)(a) of the Companies Act; and
- He/She holds more than 10% of the voting rights in the company.
As mentioned earlier, when you register your company, you have to issue at least one share certificate to every shareholder. This means that there is no formal requirement to identify the shareholders of a private limited company. However, it is advisable to keep track of the identity of the shareholders so that they can be held accountable if necessary. If you want to know how many shares a particular shareholder owns, you may contact him/her directly. You can also ask the company secretary to check the records.
Unlike a public limited company where the shareholders hold equal voting power, a private limited company has only one class of shares which gives them unequal voting powers. For example, a single shareholder holding 50% of the shares would have twice the voting power compared to another shareholder who holds 25% of the shares.
Singapore imposes different tax rates depending on whether a company is a public limited company or a private limited company. If a company is a public listed company, it pays corporate income tax (CIT) at 30%. On the other hand, if a company is a private limited company then it does not pay CIT but instead is taxed according to its profits.
When a private limited company is established, it automatically becomes subject to income tax. As such, the company should file its annual return (Form PTR) with the Inland Revenue Department. This is done annually from April 1st to March 31st.
As an owner of a private limited company in Singapore, you are liable for any debts incurred by the company even though you do not personally guarantee those debts. This liability is referred to as “personal liability”. The personal liability applies to the directors, managers, employees, agents, contractors, suppliers, and other third parties involved in the business of the company.
However, as the word "limit" in the name suggests, the liabilities among owners are proportional or "limited" to the amount of investment in the company.
A private limited company can raise funds through equity financing, debt financing, or both. It is important to note that all forms of funding must comply with the relevant laws and regulations.
In order to obtain external capital, a private limited company must first apply for a loan from a bank or outreach to reputable external investors. The bank or venture capitalist will conduct due diligence before approving the application for funding and the company takes it from there based on agreed terms.
What is a Sole Proprietorship?
Sole proprietorships are run by individuals who own 100% of the business. They cannot hire employees or take on business partners without registering as another type of business entity. Their assets belong to them alone and a sole proprietor is responsible for paying taxes and filing returns on his/her own.
Note: While employment is not a legally viable option, sole proprietorships can still hire contract workers.
The ownership structure of a sole proprietorship is simple: the individual owns the entire business outright. There is no need to form a separate legal entity because the sole proprietor is the owner of the business.
Think of it this way.
The reason a company incorporates is generally so the company can be seen legally speaking as a separate entity from the owners. A sole proprietorship is an opposite. The sole proprietor is the company, the company is the sole proprietor.
Tax filing requirements for sole proprietorships in Singapore are quite simple. The owner merely needs to report their business's income as part of their annual personal income tax.
Owners of a sole proprietorship are personally liable for any debts incurred during the course of running the business. If a creditor sues the owner of a sole proprietorship, he/she has to pay the court costs and damages. Because as we said before that the sole proprietor is the company and vice versa, there is little protection and the owner's liability is not limited in any way to the company's activities.
There are two ways to fund a sole proprietorship. One is to use your savings and the other is to borrow money from a bank. Both methods have advantages and disadvantages.
If you want to start a new business, then using your savings is probably the best choice. However, if you already have some cash saved up, then borrowing from a bank may be more suitable.
Sadly, Sole Proprietorships are typically seen as either too risky or too low in return profit for banks or investors to get involved with.
Which one should you choose?
It depends on what you're looking for.
If you're planning to open a small restaurant where you'll only employ yourself, then go ahead and save up your money. You don't need to incorporate your business yet and you won't have to deal with any formalities. Just keep track of all your expenses and make sure you file your annual personal income tax. This is the simplest route to opening a business. this goes for small operations online like an e-commerce store, dropshipping, etc.
On the other hand, if you plan to open a bigger business and you think you might need to hire staff, then it would be wise to register your business as a Limited Company. This gives you more protection and allows you to attract more capital. It also protects the owners in the proportion of their investment, rather than taking the full brunt of the company's debt.
Tax exemptions available to Pte Ltd owners
1. Income tax exemption
A Pte Ltd is exempt from paying income tax on its profits. This means that the company does not have to declare its profits to the Inland Revenue Authority (IRAS). Instead, the IRAS will collect taxes directly from the employees who earn the profits.
2. Capital Gains Tax (CGT) exemption
Pte Ltd is also exempt from paying CGT when it sells shares, assets, or property.
3. Employee Provident Fund (EPF) contribution exemption
An employer must contribute 2% of each employee’s salary into his/her EPF account. An employer can claim back half of this amount from the government.
Getting a business account after starting a private limited company
It's extremely important to open a business account for a private limited company. Unlike a sole proprietorship where the owner can use their own personal account for their business, a private limited company in Singapore needs a dedicated business account to make transactions and accept payments, and more.
Choosing the best business account comes from the business's need, and in Singapore, the newer a pte. ltd. the company usually can find it difficult to prove a business model or profit return that banks would enjoy providing bank accounts too.
At Statrys, we've built a payment platform that delivers business accounts to the hands of small businesses that banks don't want to.
We provide global multicurrency business accounts in Hong Kong and are soon to launch more business accounts in Singapore. Get started today.
How do Singapore Sole Proprietors pay tax?
Can sole proprietors in Singapore get funding from investors or bank loans?
Are private limited companies able to get tax exemptions?