As mentioned in the various articles in the series, the three most common forms of business structures are Sole Proprietorship, Partnership and Private Limited Company. In this article, let us explore the simplest the business structure, Sole Proprietorship, including its characteristics, pros and cons and compliance requirements.
What Is A Sole Proprietorship?
Sole Proprietorship is one of the simplest forms of business structure. It is a business that is owned by an individual or a company. The sole proprietor has absolute ownership and authority in the management of the business.
The key characteristic of a Sole Proprietorship is that the business does not have a separate entity from its owner. What it means is that under the law, the business and the owner are one and the same. It also means that the owner has unlimited liability; while he owns all the assets and profits of the business, he is also personally liable for all the business’s debts and liabilities. If his business fails or owes many unpaid debts, the business creditors have the rights to claim the proprietor’s personal assets as compensation.
And because the business does not have its own entity, it also cannot own property in its name. For example, if you need to acquire a motorbike for delivery, you’ll have to purchase it under your name instead of your business’s.
Profits earned by the business are taxed at the proprietor’s personal income tax rate. However, if the proprietor is a corporation, profits will be taxed according to the corporate tax rate.
Sole Proprietorships are typically suitable for micro-businesses that are wholly owned and run by one person, such as freelancers, gig workers, independent contractors and other small businesses, or businesses that have negligible risks.
Pros And Cons Of Sole Proprietorship
- If you wish to have total control over all aspects of your business, including decisions on sales, transactions, contracts and business and marketing strategies, Sole Proprietorship is the business structure for you. No board of directors or other shareholders will get in your way because you don’t need them. Your power is absolute!
- Sole Proprietorship is one of the quickest and easiest business structures to set up. Got a few minutes to spare? That’s how much time it takes to register one!
- Compared to a Private Limited Company, Sole Proprietorships are cheaper to register with minimal regulatory obligations.
- As there are no statutory requirements for AGMs, share allotments, annual filings, etc., this business structure is low maintenance, requiring minimal paperwork and other formalities, thus making Sole Proprietorship the cheapest and easiest to operate.
- Because you personally bear all the risks and liabilities incurred by the business, Sole Proprietorship is one of the riskiest business structures out there. Remember this: you’re ultimately responsible even if your employees commit negligence or fraudulent acts.
- As Sole Proprietorships are often seen as a high risk, it is a lot harder to obtain loans from banks and other financial institutions, and almost impossible to attract capital investment from business angels and venture capitalists.
However, it doesn’t mean that Sole Proprietorships are useless to you if you have big ambition for your business. Sometimes, it makes sense to start your venture as a Sole Proprietorship first to test out your business idea since it is relatively cheap and easy to set up. As your business grows and needs investments or loans to further its expansion, you can always convert it to a Private Limited Company. To find out more about converting Sole Proprietorship to Private Limited Company, please read our article Sole Proprietorship Vs Private Limited Company (By The Way, Can I Convert?).
Sole Proprietorships have the least compliance requirements, making it one of the most straightforward business structures to set up. These include:
- A single individual (at least 18 years old) or a corporation can register a Sole Proprietorship. In Singapore, full local or foreign ownership is permitted, although bankrupts and persons convicted of offences involving fraud or dishonesty are not qualified to register.
- A Sole Proprietorship needs at least one manager who is a resident in Singapore (at least 18 years old and not disqualified under the Companies Act). The manager can be the sole proprietor himself or herself.
- You need to choose a Company Name (in English) that is not the same or similar to another business name or existing trademark or contain any offensive or vulgar words. You also need to seek the Accounting and Corporate Regulatory Authority’s (ACRA) approval before you can use that name (this can be done during the business registration process).
- You also need a registered office address. While it cannot be a PO Box, you can use a virtual office for registration. For certain trades, residential homes (including HDB flats) can be used as offices. Find out more about the types of business you can operate from an HDB flat here.
For more information about how to register a business, please read our article How To Register A Business In Singapore.