In this article, we will make a comparison between the two most common types of business structures – Sole Proprietorship and Private Limited Company. To help you understand more about these two business structures before you read on, please click here for Sole Proprietorship and here for Private Limited Company.
Comparing Sole Proprietorship And Private Limited Company
Before deciding on a business structure, you may want to make an objective comparison between a Sole Proprietorship and a Private Limited Company and see which one best meets your needs. Of course, there is also the Partnership business structure to consider if you have two or more co-founders for your business venture.
|Sole Proprietorship||Private Limited Company|
|Legal Entity||A Sole Proprietorship’s entity is not separated from its owner. This means that legally speaking, your business and you are one and the same. And because the business doesn’t have its own entity, it can’t own property in its name.||A Private Limited Company is a separate legal entity from its owners (shareholders) and directors. This means that the company can legally enter into contracts, conduct transactions, own assets and properties, assume obligations, incur and pay debts, and sue and be sued.|
|Liability||A Sole Proprietorship has unlimited liability. In other words, you as the proprietor personally assume all risks, debts and liabilities. Even if it was your employees who have committed the wrong-doings like negligence or fraudulent acts, you are ultimately responsible for them.||A Private Limited Company has limited liability. What it means is that you, as the owner (and shareholder), are not liable for the company’s debts. Your company, which has a separate legal entity, is responsible.|
|Financial Risk||Because of unlimited liability, Sole Proprietorship is one of the riskiest business structures. Since the proprietor bears all risks and liabilities, if the business gets into a debt situation, the creditors can go after you for repayment. If you can’t pay, they can seize your personal assets and property, and even sue you for bankruptcy.||Your financial risk extends only to the amount of capital you have invested in the company. If the company is unable to pay its debts, creditors cannot seize your personal assets. The company (not you) can file for bankruptcy if it is unable to repay the debts.|
|Perpetual Succession||A Sole Proprietorship does not have perpetual succession, so if you retire or pass away, the business will automatically cease operations.||A Private Limited Company has perpetual succession. It doesn’t need to wind up if any of the shareholders or directors passed away. Since the shares of a Private Limited Company can change hands, changes made in shareholding are a common thing.|
|Tax Structure||As a sole proprietor, you are taxed at the personal income tax rate. It benefits those staying in countries with a lower personal income tax rate, especially if the profits from the business are modest. Sole Proprietorships owned by corporations are taxed at the corporate tax rate.||The profits from a Private Limited Company are taxed at the prevailing corporate income tax rate. It can also enjoy whatever tax incentives or assistance schemes offered by the government. In Singapore, some of these tax incentives can be very attractive, for example, eligible start-ups enjoy 75% exemption from tax on the first S$100,000 of chargeable income.|
|Regulatory Obligation||Because there are minimal statutory requirements to meet (e.g. no AGM, company secretary, share allotments, etc. are needed), you don’t have to worry about filings of annual returns, preparation of audited financial statements, etc. This is especially beneficial if you have a very small establishment, and you wish to keep it that way.||There are tighter rules and statutory regulations for Private Limited Companies compared to Sole Proprietorships and Partnerships. These include the filing of annual returns, AGM, the appointment of Director and Company Secretary, etc. Meeting these statutory regulations may require more manpower and/or higher operating cost.|
|Access to Grants, Investments and Loans||It is challenging to attract capital investment (unless the investor is a friend or relative) or obtain loans from financial institutions because Sole Proprietorships are a risky investment.||It is a lot easier for a Private Limited Company to obtain government grants and incentives, capital funding from professional investors or loans from financial institutions.|
|Company Image||The public and the business community tend to consider Sole Proprietorship as less credible. This means that you could face challenges in getting large-scale contracts from multi-national companies or government agencies.||Private Limited Companies are generally more highly regarded in terms of credibility and status. They instil more confidence in customers and other business partners and stakeholders.|
What Is A Sole Proprietorship Good For?
As you can see, while a Sole Proprietorship is the easiest form of business to operate, it has its risks and limitations. However, there are still many businesses around the world that are operating as Sole Proprietorships. What kinds of trade are suitable for Sole Proprietorship?
- Micro-businesses that are wholly owned and run by one person, such as freelancers, gig workers and independent contractors;
- Small businesses with negligible risks, such as web design firms, interior design companies, application programming firms or even tuition centres; and
- Entrepreneurs who wish to bootstrap their business while developing their ideas or testing business feasibility.
On the other hand, if you have big ambition for your business and wish to attract professional investors’ funding or even dream of going public someday, the Private Limited Company business structure is the way to go.
Converting A Sole Proprietorship Into A Private Limited Company
What if you are already a sole proprietor and your business is experiencing exponential growth? Can you convert a Sole Proprietorship to a Private Limited Company? Well, you can, although strictly speaking, it is not a “conversion”. You need to incorporate a new Private Limited Company using the same name as your Sole Proprietorship and then wind up your Sole Proprietorship. Here’s how you do it.
1. Register A Private Limited Company
Firstly, you need to register a new Private Limited Company. For more information, please read our article How To Register A Business In Singapore.
At this point, your Sole Proprietorship is still in operation. Since two businesses cannot have the same name, you, as the sole proprietor, have to submit a No Objection Letter to the Accounting and Corporate Regulatory Authority (ACRA) so that your Private Limited Company can retain the same name.
2. Transfer All Assets And Business Matters To The Private Limited Company
Once you have successfully incorporated the Private Limited Company, you should transfer all existing assets and business matters of the Sole Proprietorship to the Private Limited Company. Before you do that, be sure to settle all debts or liabilities of the Sole Proprietorship. Some of the assets and business matters can include:
- Bank accounts – you need to close existing ones and open a new account under the Private Limited Company’s name and transfer all funds to the new account;
- Existing contracts and service agreements – these need to be novated or reassigned to the Private Limited Company;
- Assets – These can be converted into paid-up capital of the Private Limited Company; and
- Office, manufacturing, retail leases – these need to be transferred to the Private Limited Company.
Do note that licenses and permits are usually not transferrable. Be sure to check with the relevant government agencies on how to apply for new ones under the Private Limited Company’s name.
3. Termination Of Sole Proprietorship
Once you have issued the No Objection Letter (to the use of the same company name) and transferred all assets and business matters to the new Private Limited Company, you can then cease the operations of your Sole Proprietorship. Remember that these must be completed within three months of incorporating the Private Limited Company. To terminate your Sole Proprietorship business operations, you can inform ACRA through their website.