Converting a Sole Proprietorship into a Singapore Private Limited Company

It is always a wise decision to convert a sole proprietorship or Limited Liability Partnership (LLP) company into a Limited Liability Company (LLC) (also known as a Private Limited company (Pte Ltd)). This change provides your business with better liability protection, flexibility for growth, and many more. 

The legal and statutory aspects of converting a sole proprietorship or LLP into a Private Limited company in Singapore are relatively easy. However, it is important to see how it could potentially affect or help your company before taking that step. The information given below will serve as a guide for answering many questions related to the conversion of sole proprietorship or LLP to an LLC or Pte Ltd. 

Key Considerations for Converting Your Business into a Singapore Private Limited Company

Here are a few main reasons why you should consider converting your sole proprietorship into an LLC or Pte Ltd:

1. Separate Legal Entity

In the eyes of the law and the public, you and your business are inseparable. As a result, you have complete control over the company and its operations, but you are financially and legally responsible for all debts and legal actions against the business.

2. Liability

A Private Limited company registered as a business entity under the Companies Act (Cap 50) has a separate legal personality from its owners. Thus, the members of the company have limited liability. On the other hand, creditors can sue you for incurred debts and attain personal assets and property if you are a sole proprietor. Sole proprietors, therefore, face a greater risk of personal financial collapse than directors of Private Limited companies.

3. Tax Benefits

As a sole proprietor, taxes are determined based on your personal income tax rate. Therefore, any increase in profit will also lead to an increase in taxes. You are not entitled to any of the tax incentives available to small businesses. Private Limited companies, on the other hand, pay corporate tax on their profits, and dividends that the shareholders receive are not taxed. Taxes are determined at their personal income tax rates.

4. Limited Capital

If your sole proprietorship is experiencing financial difficulties, you may struggle to raise public funds. There is no legal mechanism you can use to bring in investors as equity contributors. The only way for you to raise funds is by getting a loan. Otherwise, capital is limited to your finances and the profits generated through your business. This often causes difficulties when you want to expand your business.

5. Perpetual Succession

The legal existence of a sole proprietorship is contingent on your existence. Therefore, your retirement or death automatically means the termination of your business. Moreover, your family members and friends who are interested in continuing the business will not be able to do so without the administrative hassle of incorporating a business—which is not the case for Private Limited companies.

6. Public Perception

Sole proprietorships face difficulties in doing business on a larger scale due to the perception that they are less profitable than Private Limited companies. Sole proprietorships are also the least preferred business entity for serious businesses. As a result, it is hard for sole proprietors to find sources who are willing to lend them large credit or large sums of money. It may also be difficult to attract employees of a higher caliber or senior-level executives.

Disadvantages of an LLP

An LLP is slightly different from a sole proprietorship. As an LLP, you enjoy a separate legal identity and subsequent benefits, but you still face certain drawbacks such as:

1. Higher Tax Rate

LLPs are considered a form of partnership, so the profits are treated as part of each partner’s personal income. Therefore, they are taxed at personal income tax rates. These rates are usually higher than for private limited companies.

2. Liabilities

An LLP will be liable in respect of debts or legal obligations if its partner is liable to them, i.e., the liability of an LLP is the full extent of its assets. Likewise, the liability of an LLP is also the liability of its partner; therefore, claims can be made against the partner’s personal assets.

You may also want to refer to this related article:

Types of Business Entities in Singapore

What are the Consequences of Converting Your Business into a Pte Ltd Company?

While converting to a Singapore private limited company will alleviate most of the problems outlined above, there are some important things you should know when it comes to operating a Pte Ltd company:

• The compliance requirements of a Private Limited company are much higher than those of a sole proprietorship.
• Winding up a company is more complex and complicated
• Private limited companies must comply with stringent rules and regulations set out in the Singapore Companies Act.

Steps to Convert a Sole Proprietorship to a Pte Ltd Company

 Only three steps are required in converting a sole proprietorship or an LLP to an LLC or a Pte Ltd company in Singapore:

1. Company Incorporation

Before you get to register your Private Limited company, you must first get your business name approved. According to Singapore law, no two entities can have the same business name. If you wish to establish your Singapore Pte Ltd company using the existing business name of your sole proprietorship or LLP, you must submit a ‘No Objection Letter’ to the Company Registrar.

In the letter, you must explain the reasons behind retaining the old name and prove to them that the owner of the two entities is the same. At the same time, you must make provisions for the termination of the old business operation within three months from the date of incorporation of the new company.

For more details on the requirements and incorporation procedures, see the Singapore Company Registration guide.

2. Transfer of Business Matters

After incorporating a private limited liability company, the next step is the transfer of business affairs from the old business to the new one. Items that need to be transferred include:

• Assets: The net assets acquired by a Pte Ltd company can be converted as paid-in capital. Therefore, an agreement and settlement are needed. Any debt owing to creditors (including government authorities by way of summonses/fines/penalties) will have to be settled before transferring such assets.
• Bank Accounts: All bank accounts used for sole proprietorships must be closed within three months. Then, you will need to open a new bank account(s) under the Pte Ltd company. Remember to inform your customers, and other relevant people/bodies about the change and advise them to issue all cheques in favor of the new Pte Ltd company as the previous firm has ceased operations.
• Contracts/Service Agreements/Leases: Contracts/service agreements/leases signed under your previous sole proprietorship business must be novated or re-signed under the new entity.

Furthermore, you will need to get new licenses or permits (because they are usually non-transferable). You should seek advice from agencies that issued your licenses or permits about their validity. It is highly advisable to seek advice from a professional firm if you are unsure about what to do.

3. The Sole Proprietorship or LLP Termination

Once the new company is established, the old business must be terminated within three months from the incorporation date. You must then issue a Notice of Cessation to ACRA confirming the closure of your old firm. 

On the other hand, in the case of an LLP, once the transfer of all business dealings has been successfully carried out, you can choose to strike off or wind up the LLP. Winding up is a much more complex process than striking off.

Wrap Up

The structure of a private limited Singapore company is more complex than a sole proprietorship or LLP. However, converting to a Pte Ltd company enables you to expand your business, protect your assets, limit your liabilities, enjoy corporate tax incentives, attract investors and recruit high-quality talent. It is highly recommended that you engage a professional Singapore company incorporation firm if you are planning to make this change. 

If you are uncertain about the steps that need to be followed, please talk to our expert. Biz Atom is always available to assist you in incorporating your dream business in Singapore.

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