Choosing the Right Business Entity

New business owners often have a glimmer in their eye, like they’ve seen a vision of a promised land in the distance. Now they just have to figure out how to get there.  

First of all, you need to register your business entity. Sole proprietorships and local companies are the more commonly registered business entity structure. But what’s the difference? Let’s explore this with the example of Alice, a new business owner on her way to the promised land of profits.

The Traffic Police

All businesses need to register with ACRA (Accounting and Corporate Regulatory Authority), the national regulator of business entities in Singapore. They’re like your friendly traffic police who makes sure people are driving safely on roads.

Back to our story, how does Alice decide which mode of transport to take on the road to profits? Speed aside, registering as a sole proprietor is like walking, and registering as a local company is like driving a car.

Sole proprietorship

As a sole proprietor, you are the only person who owns and runs the business. You take home all the profits, and you also have unlimited, personal liability for the business’s debts and losses.

The registration cost is low and there are less associated administrative duties.

Local company

A local company is like having a car because it’s a separate legal entity which affords a layer of protection.  

What happens if you run into accidents

Accidents occurs every now and then, just like when a business meets issues like cash flow problems.

If Alice got into an accident while walking to the promised land of profits, she would be directly and fully impacted because sole proprietors are personally and fully liable. Debts owing to her suppliers is fully liable to her creditors in her personal name.

If Alice were driving a car, it’s the car that bears the brunt of the damage. Her damage would only extend to the car damages. Company owners’ liabilities are only limited to their investment in shares of the company.

How much tax?

As a sole proprietor, your business profits is chargeable as personal income tax. If Alice is a big earner, she’ll pay more in tax, up to a maximum 20% tax rate. There are no tax exemptions for personal income tax, though the usual individual tax deductions apply.

As a local company, the company’s income is chargeable as corporate tax. So no matter how high your profits, you’ll pay a flat rate of 17%. For the first three years, you will also enjoy full tax exemptions for the first S$100,000 in profits. Partial tax exemptions apply for the subsequent years. This is like paying road tax for driving on the road.

Annual paperwork

As a sole proprietor walking solo, there’s no annual filing requirement with ACRA. All you have to do is remain active, which is where Alice continues walking to the promised land of profits.

For local companies, every year you must lodge a set of papers with ACRA, kind of like an annual driving licence. If Alice drives a car to the land of profits, she will have to ensure that her driving licence is renewed annually in order to continue driving to her destination legally.

In some instances, Alice maybe the owner of the car, but she can also hire a chauffeur to drive the car for her. Local companies have shareholders and directors, who may or may not be the same people. Shareholders own the car (the company), directors are like the drivers of the car.  

Because of this separation of roles, ACRA requires that local companies hold an AGM every year to approve the corporate annual filings and accounts, among other matters. However, you can also appoint yourself as the shareholder and the director of the company.   

Local companies also need to appoint corporate secretaries. Like an in-car GPS who reminds navigates directors down the right path, corporate secretaries are needed to ensure the company’s regulatory compliance.

So which business entity model suits your business?