A sole proprietor business is one that is owned and controlled solely by an individual. It does not provide as a separate legal entity from the owner, and the owner has unlimited liability over the business. This means that the business can sue or be sued in the sole proprietor’s name. The owner is personally liable for any debts or losses to the business.
A partnership business is one that can be owned by 2 to 20 people. Similar to a sole proprietor, the business is not a separate legal entity from its owners. The partners are personally liable over the business, and it can sue or be sued in the partners’ names. Partners are personally liable for the business’ debts and losses.
A private limited company is a legal entity that is separate and distinct from its shareholders and directors. It is one that comprises up to 50 shareholders, where the members of the company are limited in liability by their shares. It can sue or be sued in the company’s name, but members are not personally liable for debts or losses of the company.
Ownership in terms of profits
Due to the nature and structure of the businesses as mentioned above, ownership is important in considering whether to run a business in which model. If one wants complete management and ownership over their company, a sole proprietor or partnership would be more applicable. This translates to when profits are earned from the business, they will fully go straight to the sole proprietor or partners’ pockets.
On the other hand, private limited companies are owned by shareholders who appoint directors to manage the company. Company performance and profit generation is the responsibility of these directors. When the company makes a profit, it is shared among the shareholders proportionally based on the number of shares they hold. This means that even as companies may stand to make larger profits due to its size, the profits are split to a greater extent due to the multitude of shareholders a company may have.
If I am a foreigner
Foreigners cannot apply for sole proprietorship or partnership, but they can apply and fully own a private limited company. If a foreigner who resides outside wants to register either a sole proprietorship or partnership, they must appoint a locally resident authorised representative. This representative must be a person aged at least 18 years old living in Singapore and of complete legal capacity. Foreigners residing in Singapore on the other hand would have to seek approval from the Ministry of Manpower before registering as a sole proprietor or partnership. Hence a foreigner or group of foreigners might find it cost saving and more convenient to run a business as a private limited company.
Considering the ease of obtaining capital for your business
Sole proprietors and partnerships are less attractive to potential investors as they do not sell shares due to its complete ownerships by the owners. Hence, the capital fueling the business usually stems from the owners own pockets who contribute into funding and running the business. Moreover, it is usually more difficult for a small business to obtain loans. Thus, if obtaining funds and capital for the business is something that is required for the business to be sustainable, then operating a sole proprietor or partnership may be less feasible in the long run.
On the other hand, private limited companies find it easier to make bank loans and are more attractive to investors as it is able to sell shares. Shareholders will also be attracted to companies more because they can make profits from the company while being limited in their liabilities.
Legal administration and formalities
In general, sole proprietorships and partnerships have less legal formalities and obligations that they have to fulfil year on year. This includes mainly the renewal of their business registration and their declaration of personal income tax rates (since profits made by these 2 such businesses are only taxed at the owner’s personal income tax rates).
Companies are subject to a larger amount of responsibilities in its administration work. For example, the employment of a Company Secretary is necessary to file annual returns. There are also statutory requirements for general meetings, directorship, share allotments etc. This might make it more burdensome and costly to set up and run as compared to sole proprietors or partnerships.
A private limited company pays taxes at the standard corporate rate of 17%. Moreover, it is eligible for tax exemptions under certain criteria. On the other hand, a sole proprietor or partnership pays taxes based on the owner’s personal income tax rates, which is progressive from 0 to 22%. This means that when earnings of a sole proprietor or partnership business is low, they relatively pay less than what a company would. However as business profits increase, the private limited company would pay a lower percentage of taxes in comparison.