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What Should be Your Choice Between a Sole Proprietorship and a Private Limited Company in Singapore?

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If you have decided on a company setup in Singapore this year then it is undoubtedly one of the best decisions taken by you. Singapore is the most vibrant, promising and business-friendly country in Southeast Asia and despite the coronavirus pandemic taking a heavy toll on the world economy, Singapore could mobilize almost $17.2 billion in fixed asset investments in 2020 alone.

The FDI commitments in the pandemic year have surpassed the medium to long term target of the Economic Development Board (EDB) ranging from USD 8 to 10 billion and are at the highest since 2008. The electronics, chemicals, and research and development sectors received the majority of capital investments but will promote growth in other sectors as well.

The country’s priorities to keep the borders open for ensuring business continuity garnered the confidence of the global business community. This Asian nation has long been recognised for it’s business-friendly policies and secured top positions in several global rankings awarded by international organizations. Choosing the right type of business structure is primarily governed by the nature and size of the business, licensing requirements, bus taxes and other liabilities, documentation needs, fundraising potential, future growth and expansion prospects etc.

There are many types of business structures available for you in Singapore however we will limit our discussions on the two popular types, a Subsidiary or private limited company and sole proprietorship company amongst the foreigners. A Singapore subsidiary is a private limited company structure available in Singapore and the majority shareholder is a corporation either a local or a foreign company or an individual. It is the most common and preferred form of business structure for small to medium size foreign companies in Singapore.

The subsidiary structure allows the company to function as a separate legal entity from the parent company and provides several advantages including

  • Protection of the parent company and individual assets from the liabilities of the subsidiary
  • 100% foreign ownership in the subsidiary
  • Similar tax exemptions and incentives as applicable to Singapore resident companies
  • Easier and simpler regulatory compliance requirements such as no need for financial statements of the parent company.
  • Several types of Tax Incentives, Rebates and Credits

A sole proprietorship is the simplest but the riskiest business structure in Singapore and can only be availed by Singapore permanent residents, entrePass holders or citizens. As it is not treated as a separate legal entity, it usually poses considerable disadvantages for small to medium-sized businesses. Annual registration renewal from ACRA is mandatory for this business structure.

If somebody sues a sole-proprietorship company and it is unable to pay the dues, the owner must make payments from his assets. This structure allows a single shareholder and new equity participation is not possible as the business grows and expands.

Business entities aspiring for future growth normally don’t go for a sole-proprietorship structure which is generally poorly perceived by the financial institutions and customers. Selling off a sole-proprietorship business is often difficult too.

The tax benefits enjoyed by other business structures are not available to sole proprietorships including a higher effective tax rate than that for a private limited company.

Sole proprietorship businesses however offer a few advantages including less documentation, fewer tax compliances and easier processes, straightforward banking, lower registration fees and freedom of taking business policy decisions. It is easy and convenient to set up a company in Singapore without any bureaucratic interference and corruption. If you are to choose between a sole proprietorship and a private limited company, it is usually recommended that you go for the latter unless you are willing to set up a trading business in Singapore as an individual.

A sole readership business for foreigners is allowed in Singapore if you are not residing in Singapore, you need to appoint a resident as an authorized representative.

Foreign individuals or corporations willing to set up a business in Singapore typically choose a private limited structure as this offers many benefits already discussed. The tax climate in Singapore is simple and aims at promoting investment in the country. Income tax to companies and individuals is levied on the income generated from the businesses.

The applicable tax rate for a sole proprietorship company varies between 2% to 22 & as the last amended Income Tax Act by Inland Revenue Authority of Singapore (IRAS) in 2017 with no tax exemption allowed for this business structure.

IRAS imposes a 17 % corporate tax rate on private limited companies in Singapore. From the assessment year 2020, two partial tax exemptions have been provided to the private limited companies and are as follows

  • 75% tax exemption on the first SGD 100,000 of regular income and,
  • 50% tax exemption on the next SGD 100,000 of regular income

Formation of a sole proprietorship company must be done online through the BizFile+ portal using personal access or SingPass. If you don’t have personal access, then you must appoint registered corporate services firm for filing your case.

Once you register for a sole proprietorship, you will have minimum compliance requirements. This business structure doesn’t need to get their accounts audited and file for annual returns separately as this is done in the tax return of the owner during an assessment.

A private limited company whereas must comply with more regulatory compliance compared to a sole proprietorship company. The private limited structure can have 1 to 50 shareholders but must appoint a minimum of one Singapore resident as Director with full legal capacity. A foreign company director can also take up this position if he has an employment pass but needs a letter of consent (LOC) from the Ministry of Manpower (MOM).

The owners or shareholders of a private limited company need to appoint a Company Secretary who is a resident in Singapore for company secretarial services including the filing of annual returns with ACRA.

Bottom line

Both local and foreign investors can incorporate a private limited company in Singapore however it must not be a listed company. A private limited company can be converted to a public limited company by outsourcing a PRO services provider in Singapore.Mr. Pankaj Kumar is a member of ICAI (Indian Institute of Chartered Accountants of India) since 2002. He has over 17 years of experience in cross border advisory, international taxation, structured finance, trade finance and management consulting. He advises MNCs and SMEs on formation of cross border corporations and business structures and structuring commercial transactions. Previously he has worked with Amicorp Group, DM Ventures, Amba Research (Singapore) and ICICI Bank. He primarily manages Client Advisory, Relationship Management & Business Development amongst group strategies and identification of new business opportunities.

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