One of the first big decision when starting your company in Singapore is deciding on the business structure. This decision help shapes the company’s future by determining:
- The company’s legal obligations
- The owner’s personal liability
- The company’s ability to attract investment
- And its ultimate potential for growth and scalability
A) What Is A Sole Proprietorship?
A sole proprietorship is a business owned and run by one person. There’s no legal distinction between you and your business; you are personally responsible for all its debts and liabilities. This structure is simple and cheap to set up.
Read more about Sole Proprietorships
B) What Is A Private Limited Company (Pte Ltd)?
A private limited company is a separate legal entity from its owners (shareholders). Its liabilities are distinct from the shareholders’ personal liabilities, which means your personal assets are protected. It is the most common and popular business structure, chosen by both local and foreign entrepreneurs.
Read more about Private Limited (Pte Ltd) Companies
C) What Is A Partnership Or A Limited Liability Partnership (LLP)
A Partnership or a Limited Liability Partnership (LLP) is an expansion of the Sole Proprietorship business structure. While a sole proprietorship has one owner, a partnership or LLP is for two or more owners.
An LLP also provides a legal shield that separates the business’s debts from the partners’ personal finances, making it a safer option for a multi-person business.
Read more about Partnerships and Limited Liability Partnerships (LLPs)
Comparing Private Limited (Pte Ltd), Sole Proprietorship & Limited Liability Partnership(LLP)
1) Personal Liability
The single most consequential factor in choosing a business structure is the level of personal liability. This decision directly determines the extent of an entrepreneur’s personal financial risk.
Unlimited Liability
In a Sole Proprietorship (or General Partnership), the business and its owner are one and the same legal entity.
This means all business debts, legal obligations, and financial losses are the personal responsibility of the owner. A crucial implication of this is that the owner’s personal assets such as a home, car, or personal savings, are not shielded and can be seized to settle business debts. This direct and tangible risk is a critical consideration.
While a Sole Proprietorship offers the lure of complete control and administrative simplicity, it places the entire burden of risk squarely on the entrepreneur’s shoulders.
Limited Liability
By contrast, a Private Limited (Pte Ltd) Company and an Limited Liability Partnership (LLP) provide a vital legal shield.
A Pte Ltd’s shareholders are protected from the company’s liabilities and are only at risk of losing the amount they have invested in share capital. Similarly, an LLP’s partners have limited liability for the partnership’s debts, though they remain personally liable for their own wrongful acts.
The presence of this limited liability structure fundamentally changes the risk-reward equation. While it introduces additional layers of corporate governance for private limited companies, such as the appointment of directors and a company secretary, it provides a crucial layer of separation that protects personal wealth from business failure.
2) Taxation
The tax implications of each structure can have a big impact on profitability.
Personal Tax
For a Sole Proprietorship and a Partnership, business profits are considered the personal income of the owner or partners. These profits are added to any other personal income and are taxed at Singapore’s progressive individual income tax rates, which can reach up to 24% for income exceeding S$1,000,000.
This pass−through tax treatment means there is no separate corporate tax filing; the business income is simply reported on the individual′s annual Income Tax Return (FormB/B1).
For a Sole Proprietor, the compliance obligation is minimal for smaller revenues, but businesses with an annual revenue of over S$200,000 must prepare a more detailed “4-Line Statement,” and those with a revenue exceeding S$500,000 must submit a certified statement of accounts.
For an LLP, the tax treatment is identical to a Partnership; it is not taxed at the entity level, and profits are passed through to the partners to be taxed at their respective individual or corporate rates.
Corporate Tax
A Pte Ltd, however, is a separate legal entity and is taxed on its chargeable income at a flat corporate tax rate of 17%. While this flat rate might seem higher than the initial progressive rates for individual income, a deeper analysis reveals a significant strategic advantage.
Singapore offers generous startup tax exemptions for the first three years of a company’s life, which can effectively lower the tax burden.
Additionally, the one-tier tax system ensures that dividends paid to shareholders are tax-exempt. This setup allows a Pte Ltd to serve as a powerful tax-planning tool for growth-focused businesses.
While a highly profitable Sole Proprietor may face a personal marginal tax rate that climbs into the highest brackets (22% or 24%), a Pte Ltd can cap its tax rate at an effective rate much lower than 17% due to exemptions, making it significantly more tax-efficient as the business scales and generates higher profits.
The decision to incorporate as a Pte Ltd is not merely about tax compliance; it is a strategic move to optimize financial efficiency.
3) Compliance Burden
The administrative burden varies dramatically across the different business structures.
Low Compliance Burden
A Sole Proprietorship is known for its minimal compliance requirements, making it easy and low-cost to set up and maintain. An LLP also has a lower compliance burden compared to a Pte Ltd, requiring only a simple annual declaration of solvency rather than more complex filings.
Stricter Compliance Obligations
In contrast, a Pte Ltd is a more formal and regulated structure that entails stricter compliance obligations. These include preparing and filing annual returns with ACRA and holding an Annual General Meeting (AGM).
Setting up a Pte Ltd company is also more complex. You need at least one director and one shareholder. Additionally, the company has to appoint a company secretary within six months of incorporation.
While these requirements may seem daunting, it is important to note an important exception: an Exempt Private Company (one with no more than 20 individual shareholders and no corporate shareholders) with an annual turnover of less than S$5 million is exempt from the requirement to audit its accounts and is not required to file its annual accounts for public information.
4) Scalability & Access to Funding
The choice of business structure directly influences a business’s ability to scale and attract capital.
Limited Growth Potential
For a Sole Proprietorship or a Partnership, raising capital is generally limited to the owners’ personal funds or external loans that are contingent on their individual creditworthiness. Public perception of these structures is less formal, which can hinder credibility with larger clients or investors.
The unlimited liability nature of the business structure also makes Sole Proprietorship or a Partnership un-investable for serious investors as they require a clear separation of personal and business assets to protect their capital.
Scalable & High Growth Potential
A Pte Ltd, on the other hand, is a separate legal entity that commands a credible, professional image. This credibility makes it easier to secure bank loans, attract external investors, and raise capital by issuing shares.
Beyond private funding, the decision to incorporate as a Pte Ltd is a prerequisite for accessing Singapore government grants and schemes, such as the Productivity Solutions Grant (PSG) and the Enterprise Development Grant (EDG). This is a crucial, often overlooked benefit.
Private Limited (Pte Ltd) Vs Sole Proprietorship Vs LLP: Business Structure Comparison
| Sole Proprietorship | Partnership | Limited Liability Partnership (LLP) | Private Limited Company (Pte Ltd) | |
| Legal Identity | Not separate from owner | Not separate from partners | Separate legal entity | Separate legal entity |
| Personal Liability | Unlimited | Unlimited | Limited to partner’s own actions | Limited to shareholder’s investment |
| Tax Structure | Personal income tax | Partner-based personal income tax | Partner-based personal income tax | Corporate Tax |
| Compliance Burden | Low | Low | Moderate (Annual Declaration) | High (AGMs, Annual Filings) |
| Setup Cost | Low (From S$115) | Low (From S$115) | Low (From S$115) | Higher (S$315) |
| Access to Funding/Grants | Low (personal funds/loans) | Moderate (partner contributions) | Low to Moderate (partner contributions) | High (shares, loans, grants) |
