What is a benefit of sole proprietorships than corporations and partnerships do not have?
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Deciding how to form your business will influence many aspects of your business, including how profits and liability are divided, how your business pays taxes and who runs the business. If you are a large business, forming a corporation offers several advantages over forming a partnership or sole proprietorship. Examining the benefits of a corporate structure can help you decide if forming a corporation is the best bet for your business. Show
A corporation is owned by shareholders, who profit from the company's gains. A partnership is owned by two or more people who divide the business' profits. A sole proprietorship is owned by one person who alone is responsible for losses and reaps profits. A corporation is the most complex form of business and involves the most paperwork and expenses to set up, but it can offer certain rewards that other forms of business do not. Liability ProtectionThe biggest benefit a corporation offers over other business structures is liability protection, according to Entrepreneur. Shareholders do not risk losing personal assets because of a company's debts, because corporations are considered separate legal entities from the people who own them. Owners of partnerships and sole proprietorships, on the other hand, are held responsible for all company debts and legal responsibilities, and are subject to losing personal assets if the company goes bankrupt or is caught up in costly legal situations. Access to FundsCorporations can more easily raise funds than other forms of businesses, according to the U.S. Small Business Administration. Corporations can sell stock to raise money for business expenses or cover debts. Sole proprietors and business partners, on the other hand, must try to come up with funds on their own or turn to loans or credit programs to raise money. It takes less time and effort to sell stocks than it does to apply for loans or seek out investors for a business. Tax BenefitsCorporations enjoy some tax benefits that sole proprietorships and partnerships do not. Corporations must file taxes separately from the shareholders. Owners of corporations pay taxes on any salaries, bonuses and dividends they earn from the corporation. However, loopholes exist to ease the burden of paying taxes as a corporation and as individual shareholders. A corporation is not required to pay tax on earnings paid as compensation to employees or shareholders, and it can deduct the payments as a business expense. Also, the corporate tax rate is usually lower than the personal income tax rate. The owners of sole proprietorships and partnerships pay income taxes at regular rates on the profits they earn from their companies. Sometimes, you may suddenly get the urge to try your hand in setting up a new business. After all, why not? But here lies some difficult questions that you will have to answer. What sort of business model should you prefer? Would you want to run a sole proprietorship or should you set up a limited liability company instead? This article aims to inform potential business owners of the basics of each business model, as well as its benefits and disadvantages, so that they can make an informed decision when deciding what kind of business they might want to set up in Singapore. Should You Set Up a Sole Proprietorship or a Company?Sole proprietorshipA sole proprietorship refers to a business that is owned by one entity, which can be an individual, company or a limited liability partnership. There are no other partners in the business. The owner of such a business is also referred to as a sole proprietor. A sole proprietorship does not create a separate legal entity from the business owner, and this means that the business owner can be exposed to unlimited liability. In other words, the business owner can be made personally liable for all the debts that are incurred by the sole proprietorship. Also, since there is no separate legal entity, the owner can sue, and also be sued, on behalf of the sole proprietorship. CompanyA company is a business entity that has been registered under the Companies Act in Singapore. You would recognise the term “Pte Ltd” or “Ltd” being added to the back of a company’s name. The key difference between a sole proprietorship and a company is that of its legal status. A company is treated as a separate legal entity from the shareholders who own the company. This means the shareholders will not be held personally liable for debts incurred by the company. Also, since the company is a separate legal entity, it is capable of bearing its own debts and liabilities, and can sue or be sued in its own name. With the key characteristics of the sole proprietorship and the company laid out, the following sections will cover the pros and cons of preferring one business structure over the other, with regard to: CitizenshipIf you are a Singapore citizen, then from an eligibility point of view, there is no obvious benefit or disadvantage that you may face when deciding whether to set up a company or a sole proprietorship. However, the situation is different if you are a foreigner who wants to set up a business in Singapore. As a general rule, foreigners who are in Singapore by virtue of their passes (such as a Work Permit, S Pass or Visit Pass) will not be allowed to set up a sole proprietorship in Singapore. Instead, they are permitted to set up and own shares in a company here provided that they do not register themselves as director or work in that particular company. However, there are a few exceptions:
Ease of registering the businessWith respect to the process of registering your business, it is a lot easier for you to set up a sole proprietorship in Singapore. Whether you are setting up a sole proprietorship or a company, you will first need a suitable business name for it. To do so, you will have to conduct a search on BizFile+ to check if the particular business name is available. Once you have confirmed its availability, you will have to apply to register the business name. The application will cost you $15. If the application is approved, the business name will be reserved for your business for 120 days, by which you should aim to either set up your sole proprietorship or incorporate your company. If you fail to register your business by then, the business name will be made available for others to register. For sole proprietorships, once you have registered your business name, you can then proceed to register your sole proprietorship business. You will have to log in to BizFile+ using your SingPass account details. Alternatively, you can also engage the services of a registered filing agent (such as a corporate secretarial firm or a law firm) to submit the application on your behalf. You will have to submit a $100 registration fee to register your sole proprietorship. The registration will usually be approved within 15 minutes once the registration fee is paid. For a company however, there are more steps that you may need to complete before you can successfully incorporate a company. The entire process involves a considerably larger amount of effort than what you may have to spend to set up a sole proprietorship instead. To incorporate a company, you must also:
Only when you have prepared all these information can you then register a company. Similar to the process of registering a sole proprietorship, you will have to log in to BizFile+ to submit the required information. An email notification will then be sent to all the company’s directors, shareholders and the company secretary, who must each endorse their consent to set up the company online via BizFile+ within 60 days from the date of notification. Finally, the fee for registering a company is also more expensive. On top of the $15 name application fee, you will also have to pay a registration fee of $300. This is $200 more than what you will have to spend if you set up a sole proprietorship instead. Legal identity and legal liabilityThere is a very important advantage in setting up a company as opposed to a sole proprietorship. As mentioned earlier, the creation of the sole proprietorship does not create a separate legal identity from the business owner who owns the sole proprietorship. This means that if you set up a sole proprietorship, your liability is unlimited and you will be made personally liable for your business’ debts. The consequences of being personally liable for the debts that a sole proprietorship incurs can potentially be disastrous. To give an example, assume that you have registered a sole proprietorship, which has gone on to incur a debt of $1 million. Since the sole proprietorship is not a separate legal entity from the owner, the owner will have to be prepared to fork out $1 million to settle the debt himself in the event that the business is unable to do so, or risk facing bankruptcy proceedings from the sole proprietorship’s creditors. However, the situation is different when you set up a company, which has its own separate legal identity from the company’s shareholders. The whole purpose of setting up a separate legal entity is to limit the liability of the shareholders owning the company, or the directors running the company. The courts will generally not allow creditors to pursue the wealth of the shareholders or directors to repay the company’s debts. Thus, following from the abovementioned example, if you had created a limited liability company, then your liability is limited to the amount of paid-up capital you had invested in the company. Therefore, even if the company incurs a $1 million in debt and is unable to pay it, the creditors generally cannot come after you personally to have this debt repaid. Notwithstanding this general rule, there are a few exceptions in which a creditor will be allowed to go after a director personally for debts incurred by the company, such as when:
You can find out more in our other article about when the director of a company can be made personally liable for the debts incurred by it. Compliance requirementsFor sole proprietorship, the main compliance requirement that you will have to satisfy is to ensure that you renew your business registration of the sole proprietorship upon its expiry. Your business registration will be valid for a period of 1 year or 3 years, depending on the initial duration of registration chosen. If you intend to carry on your business after this period, you must renew your registration before your business registration expires. You will be allowed to start making the renewal application 60 days before the registration expires. The renewal fee for sole proprietorship is $30 for 1 year and $90 for 3 years. You will be allowed to indicate a renewal for 3 years only if you have met any one of these following conditions:
However, for companies, there are a lot of other regulatory compliance requirements that they will have to follow, and this can be considered to be a hassle. While a shareholder does not have to obtain a renewal licence for the company (since a company lasts in perpetuity until it is wound up or struck off the register), a company would still have to meet the following requirements:
As you can see, the steps to be taken to ensure that the company meets its regulatory requirements can be far more time-consuming and involve more effort as opposed to meeting the compliance requirements for setting up a sole proprietorship. There are a lot more benefits to setting up a sole proprietorship if you prefer to run a business with minimal fuss. Ease of raising fundsFor a sole proprietorship, the capital that a business owner may obtain to expand his business may mostly come out of his own pocket, and whatever profits the business is generating. Banks will normally be more hesitant to dispense loans to such businesses as they may feel that such businesses (which are usually small in nature) are insufficient security to cover the loan amount disbursed. Thus, to obtain loans, the business owner may have to pledge his own personal assets (such as his car and house, for example) to secure the loans. Additionally and as the name implies, it is not possible to add a new business partner in a sole proprietorship. Therefore, any additional capital that a potential investor may be willing to add may come through the form of a loan or a goodwill contribution, which may not be appealing if the potential investor wants to take a cut of the business’ profits. On the other hand, the appeal with setting up a company is that more investors may be willing to subscribe to the company’s shares, since the liability of such investors would be limited to whatever paid-up capital they have subscribed to. Knowing that their liability is limited can also reassure potential investors interested to invest in companies with “riskier” profiles in exchange for earning more profits. Banks also prefer to loan monies out to companies, since they are known to have more collateral assets that they can pledge as security. Therefore, in the context of obtaining finances to run your business, there are more benefits attached to starting up a company as opposed to starting a sole proprietorship. TaxationFor sole proprietorships, a business tax is not imposed on such entities. Instead, all the profits that the sole proprietorships earn in the business are considered to be the personal income of such business owners. Thus, the business owner will be taxed at the appropriate personal income tax rate, based on his earnings in the business. Any tax rebates that he may obtain will also be based on personal factors such as whether he has any dependants or has contributed to charity. The situation is very much different for a company. Companies will have to pay a corporate tax rate of 17%, though there are many tax exemption schemes that such companies will enjoy. For example, under the Start Up Tax Exemption scheme, a newly incorporated company in 2020 or after can enjoy a tax exemption on its first $200,000 of its chargeable income for its first 3 years. The start-up will receive a 75% tax exemption on the first $100,000 of normal chargeable income, with a further 50% exemption on the next $100,000 of normal chargeable income. This means that the total tax exemption that a newly incorporated company may obtain is $125,000 (75% x $100,000 + 50% x $100,000). In such a situation, there may be more appeal in setting up a company as opposed to setting up a sole proprietorship. The tax exemption schemes may also encourage companies to reinvest the monies they have saved from paying additional tax, which in turn encourages such businesses to grow even further. Perceived credibility of businessA company may be seen to be more credible than a sole proprietorship. This is generally because the company has key officer holders (such as a director and a company secretary) who are responsible for spearheading the company’s growth and enhancing its profile. Additionally, companies are generally observed to be more deliberative with the decisions they make, since they have to be accountable to their shareholders on matters pertaining to the company’s health. Given that decisions made by a company also usually involve some element of a formal procedure, such as passing shareholders’ or directors’ resolutions, there is also an element of confidence instilled in these processes. Conversely, a sole proprietorship can be seen as less credible because its business model is mainly driven by personal decisions made by a single individual. Although the business owner can make decisions very quickly, there is also no control mechanism as to whether his decisions are objectively beneficial for the growth of the sole proprietorship. SuccessionA sole proprietorship cannot last in perpetuity. As stated earlier, the registration of a sole proprietorship is to be renewed either at the end of 1 or 3 years. Even if the registration is dutifully renewed, the business will come to an end once the business owner either retires or dies. Additionally, the sole proprietorship also cannot be transferred to another person in a quick or easy manner. Instead, any assets or licences that the business owner owns will have to be transferred to the incoming business owner, and this may prove to be disruptive to the operations of the business. However, for a company, the situation is different. The company lasts in perpetuity unless it is wound up or struck off from the register. Thus, even if the original business owner dies, the company will survive and be able to continue its business normally. Additionally, a transfer of the company can be made effectively without disrupting any business operations at all. This is usually done through the transfer of shares from one party to another. Ease of closing the businessIt is easier to close down a sole proprietorship as opposed to closing a company. For a sole proprietorship, you can choose not to renew your business permit and let it lapse. This will automatically bring the sole proprietorship to an end. Alternatively, you can file for a “cessation of business” application in BizFile+. Your business will be terminated once you have successfully filed the application. Conversely, there are a number of ways in which you can close a company, although all would necessarily include some level of complexity. First, you can apply to ACRA to strike off the company from the register. ACRA may consider this application if there are reasonable grounds to believe that the company is not carrying any business and meets the relevant criteria for striking off. The relevant criteria would include factors such as whether:
However, if the company does not meet the criteria for striking off, then you may have to adopt other ways such as a member’s voluntary winding up process, or a compulsory winding up process, to wind the company up. The duration of these processes can take anywhere from 3 months to 12 months or more, based on whether there are any challenges to the winding up process and whether the court approves of the winding up. — There are both benefits and disadvantages to setting up a sole proprietorship and a company. On the one hand, the sole proprietorship is easier to set up and dismantle. Business decisions can be made swiftly without the need to consult anyone, and there are fewer regulatory obligations that such a proprietorship has to meet. However, since the business owner and the proprietorship are one and the same legal entity, creditors can go after the business owner’s personal assets to satisfy the debts of the business. Furthermore, because of the looser structure and typically more informal decision-making process adopted in sole proprietorships, banks and public perception of such sole proprietorships tend to be more negative rather than supportive of them. On the other hand, there needs to be a level of concentrated effort required to set up and run a company. Not only is it more expensive to set up a company initially, there are a lot of regulatory compliance requirements that the company will have to fulfil. However, because the company is a separate legal entity from its shareholders, creditors cannot go after the shareholder’s personal assets to satisfy the company’s debts. Additionally, given that the board of directors of the company are accountable to its shareholders, there is some level of check and balance imposed on the decision-making of such companies, which in turn promotes confidence and enhances public image of such entities. Ultimately, it depends on you to determine which business model you may want to adopt, keeping in mind the goals that you may want to achieve and the risks you are willing to take to achieve that goal. Also do take note that while it is always possible to convert a sole proprietorship into a company, you cannot do the converse. Thus, if you have any doubts on the business model that you may want to adopt, there is no harm in starting out with a sole proprietorship first. This is because it is easier to start up and close down a sole proprietorship instead of a company. Then, if your business does well to the extent that you feel it may benefit from having a separate legal identity, among other advantages, you can convert your sole proprietorship into a company later on. But for the time being, if you feel that the process of setting up either a company or a sole proprietorship is overwhelming, it may be best for you to engage a corporate service provider. A corporate service provider can not only guide you through the process of setting up your preferred business entity, but can also ensure that you meet any regulatory compliance requirements that your business has to satisfy. You can reach out to our corporate secretarial service here. What is a benefit of sole proprietorship that corporations and partnership do not have?A sole proprietor also benefits from pass-through taxation, so you'll report your business's income or loss in the same way. The difference is that you don't have the option to file as a corporation. You're also not required to pay taxes on the full amount of your sole proprietorship's income.
What are the advantages of sole proprietorship over partnership?start-up costs are low. you have maximum privacy. establishing and operating your business is simple. it's easy to change your legal structure later if circumstances change you can easily wind up your business.
What are the advantages of a corporation compared to a sole proprietorship or partnership?As a result, the corporation offers some unique advantages. These include (1) limited liability: owners are not personally responsible for the debts of the business, (2) the ability to raise capital by selling shares of stock, and (3) easy transfer of ownership from one individual to another.
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