Setting up a Private Limited Company in Singapore – Is it Better than a Sole Proprietorship?

Setting up a Private Limited Company

Most businesses start small, often as a one-person operation. Others could be in an industry where sole proprietorships are dominant. Hawkers, consulting firms, or small retail shops. Depending on each company's business profile, the structure of a business entity is integral in many ways.

When establishing a business in Singapore, entrepreneurs face a crucial decision between different business structures. While the simplicity of a sole proprietorship may initially appear attractive, the Private Limited Company (Pte Ltd) emerges as the superior choice for most business owners. The enhanced protection, growth potential, and professional credibility offered by a private limited company structure far outweigh the minimal additional setup complexity, making it the preferred business entity for sustainable long-term success.

Understanding the Fundamental Differences

A sole proprietorship represents the simplest business structure in Singapore, where the business and owner are legally inseparable entities. This structure provides no legal separation between personal and business affairs, rendering the owner personally liable for all business obligations. In contrast, a Private Limited Company exists as a separate legal entity, distinct from its shareholders and directors. This fundamental distinction creates a protective barrier that shields personal assets from business liabilities.

Setting up of a private limited company may not be as complex as it may seem. The incorporation process for a private limited company involves appointing at least one shareholder and a local director, as well as a mandatory appointment of a corporate secretary within six months of incorporation. The incorporation process of a local company is done in a two-step approach (business name application followed by the business registration) on the Accounting and Corporate Regulatory Authority (ACRA) website.

While this requires more initial setup compared to sole proprietorship registration, the long-term benefits justify the additional administrative requirements.

Two Common Types of Private Limited Companies

In Singapore, two common types of private limited companies are the Exempt Private Company and the standard Private Limited Company. An Exempt Private Company is a company with no more than 20 shareholders, and none of them is a corporate entity.

This structure is often preferred by small to medium-sized businesses as it enjoys certain compliance exemptions and simplified reporting requirements. The Exempt Private Company also benefits from greater operational flexibility while maintaining limited liability protection for its shareholders. On the other hand, a standard Private Limited Company, which can have up to 50 shareholders, is commonly used by growing businesses that may require a wider shareholder base or corporate investors.

Six Key Advantages of Private Limited Companies Over Sole Proprietorships

1. Risk and Liability Segregation

The most significant advantage of a private limited company lies in limited liability protection. In a sole proprietorship, owners face unlimited personal liability, meaning creditors can pursue personal assets, including homes, savings, and investments, to satisfy business debts. This unlimited liability creates substantial financial risk, particularly for high-net-worth individuals whose entire wealth becomes vulnerable to business-related lawsuits.

Conversely, private limited company shareholders enjoy liability protection limited to their share investment. Even in cases of business insolvency or legal disputes, personal assets remain protected from creditors. This separation provides entrepreneurs with the confidence to take calculated business risks without jeopardizing their personal financial security.

2. Succession Planning and Business Continuity

Sole proprietorships cease to exist upon the owner's death unless successor arrangements are pre-established. This creates significant uncertainty for business continuity and succession planning. The business essentially dies with the proprietor, potentially leaving family members and stakeholders in difficult situations.

Private limited companies offer perpetual succession, ensuring business continuity regardless of changes in ownership or management (Board of Directors). The company's separate legal status ensures it continues to operate even when shareholders or directors change, providing stability for employees, customers, and business partners. This continuity makes long-term business planning more feasible and attractive to stakeholders.

3. Separate Legal Entity Status

A private limited company functions as a separate legal entity capable of entering into contracts, owning property, and pursuing legal action in its own name. This separation enables the company to establish business relationships and conduct transactions independently of its owners' personal affairs.

Sole proprietorships lack this separation, requiring all business activities to be conducted in the proprietor's personal name. This creates complications for contract negotiations, property ownership, and legal proceedings, as everything remains tied to the individual owner's personal capacity.

4. Asset Holding Capabilities

Private limited companies can hold assets in their own name, including real estate, intellectual property, and other valuable business assets. This capability enables efficient asset management and provides additional protection through asset segregation. Companies can own commercial properties, equipment, and investments as corporate assets, separating them from shareholders' personal holdings.

The ability to hold assets corporately also facilitates better tax planning and estate planning strategies. Asset ownership through a company structure enables more sophisticated wealth management approaches compared to sole proprietorship arrangements, where all assets must be held personally.

5. Transferability and Valuation Benefits

Share ownership in private limited companies is easily transferable, enabling business owners to sell portions of their business, bring in investors, or transfer ownership to family members through structured transactions. This transferability creates liquidity options unavailable to sole proprietorships.

The corporate structure enables professional business valuation, making it possible to determine fair market value for investment, sale, or succession planning purposes. Established valuation methodologies exist for private companies, including net asset value calculations and market-based approaches. This capability proves essential when seeking investment, planning exits, or resolving ownership disputes.

6. Corporate Benefits and Tax Incentives

There are many advantages to being a company rather than a sole proprietorship setup. Often viewed by stakeholders as more credible and reliable, a private limited entity enjoys tax incentives, grants, and schemes exclusive to corporates. The company is also taxed at the corporate tax rate, which may be a significant incentive for established sole proprietorships to consider. This could be industry-specific incentives (research and development, trading, or financial sector incentives).

Additionally, it is common to note that many fringe benefits are targeted at corporates, ranging from telecommunications and connectivity plans to insurance and medical schemes.

Being part of a corporate setup opens doors to a range of benefits that may not be available otherwise.

Corporate Secretary Requirements for Private Limited Companies

Singapore law requires all private limited companies to appoint a corporate secretary within six months of incorporation. This requirement cannot remain vacant for more than six months at any time, emphasizing the importance of the role in corporate governance.

The corporate secretary must be a natural person residing in Singapore, whether a Singapore citizen, permanent resident, or eligible pass holder. For private companies, any individual with SingPass who resides in Singapore can qualify as a company secretary. However, the secretary cannot simultaneously serve as the sole director of the company, ensuring proper separation of roles.

The corporate secretary serves as the primary compliance officer, ensuring adherence to the requirements of Singapore's Companies Act. Their responsibilities include maintaining statutory records, filing annual returns, organizing Annual General Meetings, and ensuring regulatory compliance. They are also tasked with adherence to the company's constitution (Memorandum and Articles of Association). Companies can engage third-party professional services to fulfill this role, which proves particularly beneficial for businesses lacking in-house expertise.

Essential Role of Bookkeeping and Tax Planning

Proper bookkeeping remains essential for businesses of all sizes, including small enterprises. Singapore's regulatory framework, governed by ACRA and IRAS, requires companies to maintain accurate accounting records, prepare annual financial statements, and file corporate tax returns. Neglecting these requirements can result in penalties, late fees, and legal consequences.

Effective bookkeeping provides better financial visibility and control, enabling business owners to monitor cash flow, track expenses, and measure profitability. This financial clarity supports informed decision-making regarding reinvestment, hiring, and operational adjustments. Small businesses particularly benefit from professional bookkeeping services, which ensure compliance while providing real-time financial insights.

Tax Planning Advantages for Private Limited Companies

Private limited companies in Singapore enjoy significant tax advantages over sole proprietorships. The corporate tax system offers various exemption schemes and incentives designed to encourage business growth and investment.

The Startup Tax Exemption scheme (SUTE) provides new companies with a 75% exemption on the first S$100,000 of chargeable income and a 50% exemption on the next S$100,000 for the first three consecutive years. This substantial tax relief enables start-ups to reinvest their profits in growth rather than incurring significant tax obligations during their establishment phase.

Partial Tax Exemption (PTE) offers ongoing benefits to all qualifying companies, providing 75% exemption on the first S$10,000 of normal chargeable income and 50% exemption on the next S$190,000. These exemptions can significantly reduce the effective tax rate for small to medium enterprises.

The single-tier corporate tax system means after-tax profits can be distributed as dividends to shareholders without additional taxation. This eliminates concerns about double taxation and makes corporate structures more tax-efficient than sole proprietorships, where business income is taxed as personal income at potentially higher rates.

Strategic Tax Planning Benefits

Professional tax planning becomes particularly valuable for private limited companies due to the complexity of available incentives and the need for proper documentation. Strategic tax planning can help businesses maximize available deductions, accelerate expenses, and optimize their tax position through legitimate means.

The 2025 Budget measures provide additional tax relief, including 50% corporate income tax rebates and cash grants for eligible companies. These initiatives demonstrate the government's commitment to supporting business growth through favorable tax policies.

How Professional Services Can Help Your Business Success

Establishing and maintaining a private limited company requires expertise in corporate compliance, accounting, and tax planning. Professional accounting and corporate secretarial services provide comprehensive support to ensure your business operates efficiently while meeting all regulatory requirements.

Our experienced team offers comprehensive corporate solutions, including company incorporation, corporate secretary services, bookkeeping, tax advisory services, and ongoing compliance management. We understand the complexities of Singapore's regulatory environment and help businesses navigate these requirements while maximizing available benefits and opportunities.

Foreign Companies looking to set up a business in Singapore.

Foreign companies can reach out to a corporate service provider, such as OakTree Accounting & Corporate Solutions, to assist with setting up a business. Most corporate service providers offer nominee director services to fulfill the local director requirements. The local director assists with local and statutory requirements and will not interfere with the foreign director's duties regarding operations. At OakTree, our local director is well-experienced and offers valuable business advice tailored to your needs in Singapore.

We offer elaborations and explanations on various topics on business registration, such as:

• Appropriate SSIC Code (Singapore Standard Industrial Classification Code)

• Process the Business Name Application and business registration

• Company Constitution (Model Constitution

• Annual Statutory filing (Annual Return, XBRL Format)

• Directors Details, Shareholders details completeness

As a comprehensive corporate service provider, we also offer advice and services in the field of HR, Payroll, and tax consulting:

• Adherence to the Central provident fund (CPF), the Ministry of Manpower, and the employment act

• Goods and Services Tax in Singapore (GST Registration, GST Obligations requirement)

• Corporate Tax Annual Filing

• Singapore Income Tax Act (Inland Revenue Authority of Singapore)

  
  

Considering setting up a business? Find out more before you make an informed decision!

Starting a business is a huge decision. It requires financial resources, time, and a significant commitment.

Contact our professionals today to discuss how we can support your business journey from incorporation through growth and expansion. Our tailored services ensure your private limited company operates with full compliance while optimizing its tax position and operational efficiency.

Whether you're establishing a new business or considering a conversion from sole proprietorship to a private limited company structure, our expertise helps you make informed decisions that support long-term business success. We provide practical guidance based on current regulations and industry best practices, ensuring your business structure aligns with your growth objectives.

Making an informed decision - Selecting a private limited company as the optimal structure

The choice between a sole proprietorship and a private limited company structure has a significant impact on business success and personal financial security. While sole proprietorships offer simplicity, the substantial benefits of private limited companies—including liability protection, business continuity, asset holding capabilities, transferability, and tax advantages—make them the superior choice for most entrepreneurs.

The requirement for corporate secretary appointment, combined with proper bookkeeping and tax planning, ensures private limited companies operate with professional governance and compliance standards. These requirements, while adding administrative responsibilities, provide the foundation for sustainable business growth and credibility in the marketplace.

Frequently Asked Questions (FAQ)

Q1: Can a sole proprietor convert to a private limited company later?

A: Yes, sole proprietors can convert their business to a private limited company structure. This involves incorporating a new company and transferring business assets and operations to the corporate entity. The process requires careful planning to address tax implications, asset transfers, and ongoing compliance requirements. Professional guidance is recommended to ensure a smooth transition while maximizing available benefits.

Q2: What is the minimum capital requirement for incorporating a private limited company in Singapore?

A: The minimum paid-up capital requirement for a Singapore private limited company is just S$1, making incorporation accessible to entrepreneurs with limited initial capital. However, companies should consider their actual paid-up capital needs for business operations, as the nominal minimum may not reflect practical funding requirements for business activities and growth. A higher amount may instill more confidence in stakeholders that you work with.

Q3: How much does it cost to maintain a private limited company compared to a sole proprietorship annually?

A: Private limited companies have higher ongoing compliance costs than sole proprietorships, including corporate secretary fees (typically S$800-2,500 annually), annual return filing, accounting and audit requirements (if applicable), and corporate tax filing. However, these additional costs are often offset by tax benefits, enhanced credibility for securing funding, and liability protection benefits that can result in substantial savings on risk management and insurance costs.

DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.