If you are a freelancer in Singapore and seriously thinking of starting your own business, the first thought that comes to your mind is forming a sole proprietorship company.
A Sole Proprietorship company, by its very nature of minimum administrative complexities, may appear to be the most logical and suitable business vehicle to a freelance professional already accustomed to working alone and independently. However, a closer look with a broader perspective of Singapore company types will reveal that registering as a private limited company should always be your most preferred choice as a freelancer offering multiple benefits in the long term.
Freelancing is a profession where you work for yourself rather than for a company. Generally, freelancers take contractual work for companies and organizations but cannot be termed as self-employed in true sense.
When it comes to self-employment it means that you have your own business and do not work for anyone else. Generally, as a self-employed person, you own a business to provide goods and services to customers and have complete ownership and control of the business and independently decide how to operate the business, contrary to freelance professionals offering services as their livelihood.
In contrast to conventional employees, Freelancers are flexible in their working hours and they plan and execute projects, invoice customers, and pay taxes on their own. The freelancing fields are diverse and may range from writing and editing, photography, designing, consultancy including even sales and marketing.
With the 21st century witnessing a tremendous increase in technological advancements and innovations across the globe and more so in Singapore, increasing numbers of people are choosing to work freelance instead of working for a specific company. There are plenty of freelance jobs available in Singapore today, especially if you possess any skill in great demand. As per the Singapore Ministry of Manpower (MOM), some 0.2 millions Singapore citizens and permanent residents were working as freelancers in 2019.
A private limited company also called as Pvt. Ltd, is a dynamic and scalable business structure in Singapore. In contrast to other types of businesses that you can incorporate, such as a sole-proprietorship or partnership, Pte Ltd private limited company has a separate legal identity from its owners or shareholders.
A private limited company can sue or be sued under its name in Singapore and case of any legal issue arising in the course of its business activities, shareholders can stay out of it. You need to register a private limited company with the Accounting and Corporate Regulatory Authority (ACRA), the Company Registrar of Singapore.
- One resident director
- A physical Singapore office address
- If a foreigner wants to become a local director, he or she should apply to the Ministry of Manpower (MOM) for an EntrePass or Employment Pass
- Initial paid-up share capital of at least SGD 1
- One company secretary
- At least one shareholder (individual or corporate entity)
- Obtaining ACRA's approval for your company name
- Preparing documents to set up Singapore company
- Submitting Application to ACRA
The documents that are required to register a private limited company in Singapore are as follows
- Company name approved by the authorities
- Business activity description stating the type of activities the business is involved in and described as per the standard classification code
- Shareholding structure disclosure by the founders with the shareholding pattern detailing how the shares are distributed.
- Registered address proof with details of actual physical location in Singapore
- Identification details for the shareholders, the directors, and the company secretary.
- The company constitution documenting the Articles of Association as well as the Memorandum
- First Board resolution during which the directors of the company are appointed
- A copy of the National Registration Identity Card
Incorporating a private limited company can be very rewarding for a business entrepreneur offering many benefits.
As a freelancer, you must critically consider all the advantages and disadvantages of a private limited company and can be a time-consuming decision. However, note that many business owners plan for the long term and choose to incorporate a private limited company in Singapore.
A few advantages are
- Limited liability
Private limited companies are liable for their losses and debts incurred during their business operations however the shareholders’ liabilities only extend up to their investment in the company’s shares. Their assets are protected and not used to pay off the debts or losses of the company.
- Competitive tax rates
The corporate tax rate is very competitive in Singapore. Tax exemptions are available for new startups and partial tax exemptions for all companies, effectively resulting in only a 9% tax rate on the chargeable income of up to SGD 300,000. It is thus wise to set up a limited company over the other types as chargeable incomes of a sole proprietorship and partnership firms are treated as the personal income of the owners and partners that could potentially translate into higher tax expenses for the firms.
As Singapore follows a single-tier taxation regime, incomes once taxed at the corporate level will not be taxed again for the shareholders. Hence, the dividends received by the shareholders of a limited company are not taxed resulting in tax-free personal income for the shareholders.
- Startups are entitled to tax exemptions
The Singapore government supports local startups. Under the tax exemption scheme for the new startups, the local startups get:
- 75% tax exemption on their first SGD 100,000 of normal chargeable income
- An additional 50% tax exemption on their next SGD 100,000 of normal chargeable income
- Separate legal entity
A private limited company has its own legal identity, which is separate from its shareholders enabling it to acquire assets, enter into contracts, avail debts and be sued or sued in the company’s name.
Because of this distinct identity, the company remains a functional entity until the shareholders dissolve it or it gets liquidated by the orders of the court or the Registrar of Companies.
The death or disability of the owner/owners does not impair its existence or the contracts that it has entered into. More importantly, the identity thus created is protected and the use of the same/similar identity or name by any other business is legally prohibited.
- Ease of transfer of ownership
Company share certificates describe the portion of stakes a shareholder has in a company. Transferring ownership of shares is very simple and easy just through the transfer of shares to the new owner’s name.
- High growth rates and ease of raising capital
When a Singapore private limited company grows in size, it can opt for getting converted into a public company. Once it goes public, it can easily raise funds by offering its shares and debentures to the general public.
- Higher attractiveness to foreign investors
Banks and financial institutions prefer to lend to private limited companies as they see more accountability and credibility in such companies.
Incorporation of a private limited company also has some limitations and are
- Complex and lengthy Process of winding up
Winding up a private limited company is more complicated and expensive. The legal complexities are many and often need the hiring of legal experts.
- Higher Administrative Cost
A private limited company must put a lot of administrative efforts and hire qualified employees for its successful operation resulting in higher operational costs. Even the cost of setting up businesses is higher than that of sole proprietorship companies.
- Many post-registration compliance requirements
Stringent rules and regulations are imposed by ACRA and IRAS requiring many ongoing statutory compliances for a private limited company. The accounting set up for a private limited company is also complicated often requiring experienced external accounting services in Singapore.
The most important thing to decide before starting a business in Singapore is the type of business structure that the company will embark upon and choose from the 3 common types of business vehicles including Sole Proprietorship, Limited Liability Partnership and Private Limited Company.
For a freelancer, the two most obvious choices are Sole Proprietorship and Private Limited Company and the pros and cons associated with these two types of business structures based on different perspectives are summarized below.
- Legal Considerations
A sole proprietorship in Singapore does not become a separate legal entity hence it is synonymous with an owner or proprietor of the business. The company owner is personally accountable for all liabilities, business losses and debts incurred during the entire business life cycle.
A Private limited company, on the other hand, is a separate legal entity where owner and shareholders are not personally liable for company debts and losses with limited liability to their investments in the company.
- Tax Implications
For Sole proprietorships, profits from the business are taxed at individually applicable tax rates. Singapore sole proprietors are taxed at zero to 22 per cent progressive tax rates.
Corporate tax rates are applied for Private limited companies and taxed at the prevailing corporate tax rate of 17 per cent. Qualifying Private limited startups enjoy the Tax Exemption Scheme in the first 3 assessment Years. From 2020 onwards, SGD 125,000 is exempted from the first SGD 200,000 taxable income.
From 2020, Private limited companies can also enjoy the Partial Tax Exemption from the 4th YA and SGD 102,500 is exempted from tax for the first SGD 200,000 chargeable income.
Private limited companies, therefore, can enjoy significant business leverage from tax exemption during the first three years of assessment in comparison with Sole proprietorships where no such exemptions are applicably forcing them to pay higher taxes during this period.
- Statutory Regulations
Sole proprietorships don’t have many filing requirements. Taxable income from the business is assessed on an individual basis and reflected in the personal tax return of proprietors.
Private limited companies need to comply with more regulatory requirements including the appointment of a Company Secretary, holding Annual General Meeting (AGM) and filing Annual Returns (AR) with ACRA. A private limited company that is not considered as a small business also requires appointing an auditor. However, the additional compliance requirements though complicated and requires outside help from professional Company secretary services in Singapore ultimately become a blessing in disguise for improved transparency, long term growth and sustainability of the company.
Business income is also assessed and taxed as per AR of the Private limited company.
- Corporate Income Tax (CIT) Rebate and SME Cash Grant
The Singapore government announced SME cash grant and CIT Rebate in its 2020 budget as financial support to corporates.
Small and medium-sized enterprises (SMEs) will get a cash grant to offset their rental costs as part of government efforts to help them get back on their feet after covid 19 lockdowns.
To help businesses reduce the adverse economic impact of the COVID-19 outbreak, the “Stabilisation and Support Package” was announced in the Budget Statement for the financial year 2020. Corporate income tax rebate (CIT) is given to all companies to ease business costs and support restructuring by companies and applies for YA 2013 to YA 2020.
A sole proprietorship is not eligible for CIT Rebate and SME Cash Grant.
Private limited companies are eligible for CIT Rebate and SME Cash Grant announced by the Government.
- Financial Incentives
There are more government financial incentives available to a Private limited company compared to Sole proprietorship. Many grants are available to a Private limited company including Startup SG Equity, Startup SG Founder and Market Readiness Assistance (MRA) grant.
Businesses willing to avail the Startup SG Equity grant will need to be Private limited company while MRA grant application from Sole proprietorships will be assessed on a case-by-case basis.
It may seem that sole proprietorship’s are more suitable for small businesses with minimal risks when compared to private limited companies demanding more compliance requirements. However, a private limited company provides distinct advantages over sole proprietorship business in terms of scalability and fundraising, better personal asset protection and most importantly tax savings.
Also, many clients do not prefer to work with a Sole Proprietorship and it would be a wise decision to register your business as a Private Limited Company.
Private limited companies are the most common and attractive amongst foreign business aspirants and the Singapore government also encourages the formation of this company vehicle for their better accountability and more stringent regulatory compliances.
The benefits of private limited companies are more visible when businesses generate high profits and are expanding their operations.