When starting your own business as a freelancer, perhaps your first thought will be to register your company as a Sole Proprietorship. After all, that is what the structure is made for, right? It is for freelancers who work alone and wish to keep the administrative side of their business as uncomplicated as possible.
However, there is a strong case to be made for registering your one-man company as a Private Limited Company instead.
First off, registering your business as a sole proprietorship makes the filing of taxes a lot easier, as the amount of tax needed to be paid is assessed in the owner’s individual tax return. As a Private Limited Company, taxes would definitely be more complicated. There are more requirements to comply with. To learn more about the procedure, here’s the link to the official IRAS website.
The most prominent difference if you register your business as a Private Limited Company (PLC) is that your profits will be taxed at the corporate tax rate of 17%. The individual income tax rate, which is progressive, can go up to 22%. Thus, it might be more profitable to file taxes under the entity of a PLC.
As a registered company in Singapore, there is more financial support available to you from the government as compared to a sole proprietorship
For example, to qualify for the ACE Startups Grant by SPRING Singapore, the requirement is that your business has to be registered as a Private Limited Company, even though you may be a freelancer. The amount that could be funded is up to $30,000. By registering as a sole proprietorship, you would not be able to qualify for such aid granted by the government to help entrepreneurs.
Furthermore, there is a tax exemption scheme for Private Limited Companies that are just starting. Under this scheme, qualifying companies being assessed in the Year of Assessment till 2019 will not pay tax on their first $100,000 of profit. For the subsequent $200,000, only half of that amount will be subjected to tax. This will be the case for the first 3 years of tax assessment. Not only that, there are also plenty of other tax incentives that PLCs enjoy.
Whereas if the freelancer had registered as a Sole Proprietorship, in those 3 same years where Private Limited Companies enjoy tax exemption, he will have to pay income tax.
Liabilities and Identity
If you are a freelancer who had registered his business as a sole proprietorship in Singapore, you would be personally responsible for all the debts and losses that are incurred. A sole proprietorship is owned by the sole proprietor and has no separate legal identity of its own.
On the other hand, a Private Limited Company in Singapore is a separate legal entity distinct from its shareholders, employees and directors. The shareholder, in this case, is not personally liable for company debts and losses, and the liability of the shareholder only extends until his investment in the company.
In the event that the freelancer incurs significant debts and losses, his personal assets, like his house, will not have protection against them if he is registered as a sole proprietor. As a PLC, personal assets will be protected against company debts.
In order to decide on the best choice, it is important to also know that many companies will not choose to work with a Sole Proprietorship. If your potential clients require that you register your business as a Private Limited Company, it would be best to comply with them. For freelancers looking for a simpler approach to their business, perhaps a Sole Proprietorship may be the best choice for them. They would then be able to focus solely on getting work and delivering on them.
A common way for freelancers may be to start off as a sole proprietorship. Only when the business has grown to a certain extent, then will it be converted to a PLC in Singapore for lower taxes, ease of doing business and liability protection.
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