Pros And Cons Operating As A Sole Proprietorship

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Pros And Cons Operating As A Sole Proprietorship

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Among all business structures, sole proprietorships are the easiest ones to set up and operate but the flipside is, this entity type might face challenges when it comes to raising business loan in Singapore.

Why setting it up and running it is a breeze

In business-friendly Singapore, registering a sole proprietorship is a breeze.  First, there aren’t any special requirements that may be difficult to gather.  If you’re a Singaporean or permanent resident, you can simply apply for registration online and the process should not take more than 30 minutes.

Secondly, it won’t cost you much, about $115 compared to private exempt companies which cost about $315 to register. Compliance and regulatory costs are also minimum as a sole proprietor does not have to adhere to certain regulatory requirements such as preparing yearly financial reports and appointing a corporate secretary.

Finally, you don’t have to consult so many people to start one.  You make the decision on all aspects of the business from the time you launch it until actual operations.  If you want to incorporate changes in your original plans, the decision rests on your shoulders and no one else.

Running the business is easy in the sense that you control it completely.  Decision-making is fast because unlike businesses that might have to answer to other external shareholders, you are at full liberty to choose which options to consider.  There’s no red tape. Without business partners or external shareholders to account to, you don’t need approval from anyone.  You are your own boss.

But of course, it can’t be all that rosy. There are downsides too that tip the balance.  Let’s look at some of them.

Debt accountability

As an owner of a sole proprietorship, you are personally liable to all types of debts incurred by the business. There is no separate legal entity recognition unlike a private limited company where the directors and the company are treated as separate legal entities.

If you find yourself saddled with obligations to creditors, vendors, and other persons or entities to whom you owe money, you alone are answerable to them.

Limited opportunity for growth

Corporations wanting to lure investors may opt to sell shares of the company through a stock offering.  It is only logical for an investor to want a piece of the company’s equity in exchange for a sum of money he’ll invest in the business.

If you are a sole proprietor, this option isn’t available to you if you want to expand yet retain your business’ structure.  Raising funds for expansion, for instance, can be difficult or close to impossible without the ability to issue shares and equity. Valuation of the company will also be tricky since equity is usually an integral part of measuring value.

For this reason, it can be quite difficult for a business owner like you to raise capital especially when you deem its high time to expand.  Plans to scale up your business may forever be in the backseat because there aren’t enough people willing to invest in your business.

Tax matters

Although a sole proprietor can write off related business expenses in their income statement, he or she is taxed the net profit of the business at the personal individual tax rate.

A private limited exempt company that is newly incorporated however enjoy certain tax benefits. At the time of this writing, newly incorporated companies get tax exemption on the first $100k and 50% exemption on the next $200k for the first consecutive three years of assessment.

Perceived lack of credibility

The general perception is that sole proprietorships lack credibility.  Because you are in control of everything and you are accountable only to yourself, it is so easy to slip and commit mistakes that could put a dent on your credibility as a business owner.

There is a general perception that a sole proprietorship lacks structure and credibility unlike a private limited company. Because of this lack of credibility where a sole proprietor is essentially seen as just a one-man show, most banks might not be as keen to finance sole proprietors.

Sole proprietors are also technically not required to prepare full set of financial report. Therefore, some bootstrapped entrepreneurs will prefer to start operating their business under a sole proprietor as it saves compliance costs and resources.

This however might be a detriment when the sole proprietor is trying to apply for financing as without a financial report or detail set of account statements, banks are not able to give much weight to the loan assessment.

Conclusion

A sole proprietor is great for small businesses to set up and running immediately without too much distractions on regulatory and compliance issues accounting wise.

However, once the business is on track and more resources available, conversion to a private limited company should be considered. This will improve the perceived credibility and access to financing for the business and makes it easier to establish trust with bankers.

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