Insights about a Sole Proprietorship in Singapore: From A to Z

Starting a business in Singapore is a strategic decision, and choosing the right business structure is crucial. A sole proprietorship is one of the simplest and most common business structures, especially for small businesses and startups. In this article, Offshore Company Corp will delve into the world of sole proprietorships in Singapore, exploring what they are, their advantages, disadvantages, challenges faced by foreigners, and the steps involved in incorporating one.

What is a sole proprietorship?

Definition

A sole proprietorship is an unincorporated business where a single owner is responsible for reporting the profits on their personal income tax return. Many sole proprietors operate under their names because there's no requirement to create a separate business or trade identity.

Commonly known as a sole trader or proprietorship, a sole proprietorship is the simplest form of business to establish and dissolve, primarily because it involves minimal government oversight. Consequently, it is a favored choice among business owners who operate independently, such as solo contractors and consultants. A majority of small businesses commence as sole proprietorships and may either persist in this form or expand and transition into a limited liability entity or corporation.

How it work

When establishing a business with a single owner, the quickest and most straightforward approach is to opt for a sole proprietorship. A sole proprietorship commences as soon as you initiate business activities, obviating the need for filing federal or state paperwork and imposing minimal regulatory requirements. This makes it an appealing choice for self-employed individuals embarking on their entrepreneurial journey.

It's important to note that a sole proprietorship operates in a significantly distinct manner compared to a corporation, a limited liability company (LLC), or a limited liability partnership (LLP) because it does not establish a distinct legal entity. Consequently, the owner of a sole proprietorship remains personally liable for any debts or obligations incurred by the business.

What is a sole proprietorship?

5 convincing advantages of Sole Proprietorships in Singapore

The choice of a sole proprietorship in Singapore among many types of company structures demonstrates that it offers numerous compelling benefits. Here are 5 potential benefits of a sole proprietorship in Singapore:

1. Tax benefits:

The advantages of sole proprietorships in Singapore related to taxes. Income derived from a pass-through enterprise is solely liable to a singular level of income tax and, under specific circumstances, might qualify for a 20% tax deduction. In addition to the reduction in corporate tax rates, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a tax incentive for pass-through businesses. This incentive effectively permits them to deduct up to 20% of their qualified business income, potentially leading to substantial savings. The provision for this deduction remains in effect until January 1, 2026, unless Congress chooses to extend it.

2. Ease of setup

In a sole proprietorship in Singapore, you aren't burdened with extensive paperwork, like the requirement to formally register with your state. Your specific needs may involve securing a license or permit, which can vary based on your state and the nature of your business. However, this reduced paperwork simplifies the process of launching your business swiftly.

3. Simplified accounting

The accounting and financial reporting requirements are less complex, reducing the burden of compliance. In the case of a sole proprietorship, there's no necessity for a dedicated business checking account, which is a mandatory requirement for various other business entities. You can conveniently manage all your financial transactions using your account.

4. Total control

A sole proprietorship places you right at the top of the business, with absolute administrative authority. You get express rights to govern all the activities, make management decisions, as well as control the future of the business.

5. A full share of the profits

Due to the fact that you will be the sole stakeholder in your company, all profits are returned to you. You won't have to split the rewards with any other people.

5 Vulnerable disadvantages of sole proprietorships in Singapore

Any type of company has two features. Alongside the potential benefits of a sole proprietorship in Singapore, this business structure still carries risks that leaders should be cautious about. Here are some of the most prevalent drawbacks associated with sole proprietorships.

1. Unlimited liability

One of the most significant disadvantages of a sole proprietorship is that the owner's liability is unlimited. In case of business debts or legal issues, personal assets, including savings and property, are at risk.

2. Limited capital

Sole proprietors may face challenges when it comes to raising capital for business expansion. Their sources of funding are typically limited to personal savings and loans.

3. Lack of continuity

A sole proprietorship's life is tied to the owner. If the owner passes away or becomes incapacitated, the business may cease to exist unless a clear succession plan is in place.

4. Limited expertise

As a sole proprietor, you may have limited expertise in all areas of business operations, which can be a drawback when handling complex aspects such as legal compliance or financial management.

5. Difficulty in scaling

Expanding a sole proprietorship can be challenging due to limited resources and capital. It may struggle to compete with larger businesses.

Some challenges foreigners face when setting up sole proprietorship in Singapore

When it comes to Singapore citizens, there are no clear advantages or disadvantages in terms of eligibility when deciding between establishing a company or a sole proprietorship in Singapore. However, the situation differs for foreigners looking to start a business in Singapore.

As a general rule, foreigners residing in Singapore on specific passes like Work Permit, S Pass, or Visit Pass are not allowed to establish a sole proprietorship in Singapore. Instead, they can establish and own shares in a company in Singapore as long as they don't register themselves as a director or work in that company.

Nevertheless, there are some exceptions:

1. If you are in Singapore on a Dependant's Pass or a Long-Term Visit Pass, you can work for a company with a Letter of Consent from the Ministry of Manpower.
2. On the other hand, if you are a foreigner holding an EntrePass, you have the option to establish either a sole proprietorship or a company in Singapore.

Besides, they also can face unique challenges foreigners face when setting up sole proprietorship in Singapore. Some of the common challenges include:

• Work Pass Requirements: Foreigners need to hold an appropriate work pass, such as an Employment Pass or Entrepreneur Pass, to legally operate a sole proprietorship in Singapore.
• Local Nominee: Some foreigners may require a local nominee director or shareholder, which can be complex and costly.
• Registration and Licensing: Navigating Singapore's regulatory framework, licenses, and permits can be unfamiliar territory for foreigners.
• Bank Account Opening: Foreign entrepreneurs may encounter difficulties when opening a business bank account due to Know Your Customer (KYC) requirements.
• Taxation: Understanding Singapore's tax regulations and ensuring compliance can be challenging for newcomers

Documents required to incorporate a sole proprietorship in Singapore

When registering a sole proprietorship in Singapore, you'll need the following documents/information required to incorporate a sole proprietorship in Singapore :

1. Preferred business name
2. Description of the main business activities
3. Local business address for the proposed business
4. A copy of the owner's Singaporean ID
5. Local residential address of the sole proprietor
6. Declaration of compliance and a Statement of Non-Disqualification

Documents required to incorporate a sole proprietorship in Singapore

The registration process involves two steps: a) reserving the business name, and b) registering the business itself. This process is computerized and efficient. Registering a sole proprietorship can typically be completed within one day, assuming that all required documents are correctly submitted. However, if the name or nature of the business requires referral to another authority, the process may take a few weeks. Certain businesses, such as those in the financial, media, or educational services sectors, may be referred to the relevant authorities.

To increase the chances of a swift name approval, ensure that the proposed name:

1. Is not identical or too similar to any existing local company or business names.
2. Does not violate any trademarks or copyrights.
3. Is not obscene or vulgar.
4. Is not already reserved.

How to incorporate a sole proprietorship in Singapore

Incorporating a sole proprietorship in Singapore involves several steps, including:

1. Registration of a business name: Select a distinctive name for your company and confirm that it is available. Register the name with the Accounting and Corporate Regulatory Authority (ACRA).
2. Register Your Business: Submit the Sole Proprietorship Registration Form to ACRA. You can do this online or in person.
3. Business Licenses and Permits: Obtain any necessary licenses or permits based on your business activities.
4. Bank Account: Open a separate business bank account for your sole proprietorship.
5. Tax Registration: Register for Goods and Services Tax (GST) if your business meets the requirements.
6. Compliance and Reporting: Ensure you understand and comply with all relevant regulations, including filing annual returns and maintaining proper financial records.

Conclusion

A sole proprietorship is an accessible and flexible business structure that can be an excellent choice for entrepreneurs in Singapore. However, it's essential to weigh the advantages and disadvantages carefully and consider the specific challenges faced by foreigners when setting up in the country. With the right documentation and a clear understanding of the process, you can successfully incorporate a sole proprietorship and embark on your entrepreneurial journey in Singapore.