Choosing between Private Limited and Sole Proprietorship
As a busy entrepreneur or business leader, you should choose the legal structure for your business that enables you to grow fast and unencumbered. Two popular options are a private Limited entity and a sole proprietorship. But which one is the better choice for the transformative business growth you desire? Let’s compare the two options and find out.
A private limited company and a sole proprietorship are two very different business legal structures. Here are some differences between the two at a glance:
| Private Limited | Sole Proprietorship | |
| Ownership | Owned by multiple shareholders. | Owned and operated by a single individual |
| Liability | Shareholders have limited liability. Their liability is limited to the amount of money they invest in the company. | The owner has unlimited liability for the business’s debts and obligations. This means that if the business is sued or cannot pay its debts, the owner’s assets can be used to pay the debts |
| Legal Status | Is a separate legal entity. A Private Limited company can sue or be sued for its property, and enter into legally binding contracts. | Isn’t a separate legal entity from the owner |
| Capital | A private limited company can raise funds by selling shares to investors | Limited to the owner’s savings and loans from banks or individuals. |
| Control | Management is delegated to directors who are appointed by the shareholders. The shareholders make decisions based on the number of shares they hold. | The owner has complete control over the business and makes all the decisions |
| Taxation | A private limited company is taxed as a separate entity. This often results in a lower tax rate for the company. | A sole proprietorship’s income is taxed as the owner’s personal income |
| Duration | A private limited company continues to exist irrespective of the owner’s status | A sole proprietorship typically ends when the owner dies or decides to cease the business |
A private limited company is a legal entity that is separate from its owners or shareholders. It has its name, can own property, and can enter into contracts, among other things. A sole proprietorship, on the other hand, is an unincorporated business owned and operated by one person. The owner is personally responsible for all of the business’s liabilities.
These attributes will shape how you grow your business
Access to finance
A private limited company can raise capital through the sale of shares, which can be a valuable source of funding for business growth. In contrast, sole proprietors are limited to personal savings and loans for financing business growth and hence have limited access to funding options.
Although Private Limited Companies require more administrative work to fulfill their tax obligations, proper compliance with these regulations instills confidence in stakeholders such as investors and lenders that the company is run properly, thereby potentially attracting more funding for business growth initiatives. This is also why investors prefer private limited companies over sole proprietors.
Tax and incentives
In Singapore, private limited companies are subjected to a corporate tax rate of 17%, which is lower than the top marginal personal income tax rates for sole proprietors. This makes it easier for private limited companies to retain profits and invest in business growth. Private limited companies are taxed on the company profits earned during the tax year. The taxes are calculated based on the net profits of the company, which is the company’s revenue minus expenses such as salaries, rent, utilities, etc.
Singapore offers various tax incentives for private limited companies such as investment allowances, tax deductions on R&D, and innovation activities to encourage companies to invest in innovation and technology, which can lead to faster growth of their businesses. To fully use existing tax advantages, it is always advisable to consult with a tax professional or an accountant, to choose the best option based on the business’s size, profits, and structure.
Financial Stability & Credibility
The separate legal entity status of a private limited company offers more protection to the shareholders against the company’s debts and liabilities. This means the owners are not personally responsible for the company’s debts or liabilities.
Private limited companies exude a level of credibility, professionalism, and marketability that other legal entities may not offer. Clients and suppliers are more likely to transact with private limited companies because they are registered legal entities, with clearly defined guidelines. A private limited company also has a perpetual existence, which gives clients the confidence that your entity will continue to operate even if the owners change.
Conclusion
So which one is the better option for transformative business growth? It depends on your goals and priorities. If you value limited liability and access to capital, a private limited entity may be the better choice. However, if you value simplicity and control, a sole proprietorship may be a better fit. Choosing the right legal structure for your business is an important decision that requires careful consideration. By understanding the advantages and disadvantages of each option, you can make an informed decision that will enable your business to achieve transformative growth.
If you’re a business owner looking to incorporate in Singapore or are interested in expanding your business there, it is crucial to get the right advice to help ensure your success. Singapore Corporate Services can provide you with professional advice on everything from the incorporation process to company registration and taxation. Our team of experienced professionals can help you navigate the regulatory requirements and ensure that you meet all the necessary criteria for incorporation. Get in touch today for a consultation and let us help you take the first step toward incorporation in Singapore.
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