It is always advisable to convert sole proprietorship into a private limited Singapore company. This helps to expand the business, make available more funding options, provide legal protection to assets, better risk-manage liabilities, enjoy corporate tax incentives, attract investors and recruit quality talent.
Key Considerations for Converting Your Business to a Singapore Private Limited Company
The important considerations for business owners who want to convert their sole proprietorships into private limited companies are as follows:
Separate Legal Entity
Sole proprietorships are not separate legal entities and the owners are legally responsible for all liabilities against the business. Whereas, a private limited company is treated as a separate legal entity.
As a private limited company registered under the Singapore Companies Act has a separate legal existence from its owner; the company shareholders have limited liability. Thus, in comparison, a sole proprietor faces a greater risk of complete personal financial ruin compared to a director of a private limited company.
Sole proprietorships are taxed at the owner’s personal income tax rate. On the other hand, Private Limited Companies are taxed at corporate rates, and are eligible for tax exemption. Moreover, the dividends that the shareholders receive dividends are not taxed.
Sole proprietorships often have limited funding-raising options, whether in terms of getting loans from financial institutions or in terms of equity fundraising from investors. A private limited firm can cast their net wide.
A sole proprietorship’s legal existence is contingent on the owner’s existence, whose retirement or demise will automatically mean the cessation of the business.
Sole proprietorships face difficulties in doing business on a larger scale because the business perception is less favourable to them. Furthermore, it is also more difficult for sole proprietorships to attract high-calibre employees.
But do note that the compliance requirements of a private limited company are much more than those of a sole proprietorship. Also, a private limited company is always governed by the laws, rules and regulations under the Singapore Companies Act, which are much stricter.
Change in Ownership/Business Constitution
Do note that on changing the business constitution or ownership, there is a transfer of business from one person to another. In such transactions, transferor is the previous owner/ business constitution and transferee is the new owner/constitution. So when you change the business constitution from sole-proprietorship to private limited company, there will be transfer of business from you (the sole-proprietor) to the private limited company.
Four Steps in Converting a Sole Proprietorship into a Private Limited Company
Step 1 – No Objection Letter
As the owner of the sole proprietorship, you will need to write a letter stating that you have no objections using the business name to now be the name of a private limited company.
Step 2 – Incorporating a Private Limited Company
Then you will have to incorporate a new private limited company, indicating that the company is to take over the business of the sole proprietorship, as well as the effective transition date. When starting a private limited company in Singapore, you will need the following:
- At least one shareholder
- One Singapore resident director
- 1 company secretary
- At least S$1 in initial paid-up share capital
- A Singapore registered office address
Step 3 – Transfer of Assets
Next, all business assets will have to be formally transferred to the newly incorporated private limited company, including the novation of existing contracts of the old business.
Transferring assets from existing business to new private limited company has to be prompt as your existing sole proprietorship business must be closed within three months of incorporating your new private limited company.
- Bank Accounts – All banks accounts used for the sole-proprietorship need to be closed within three months and a new bank account(s) under the private limited company need to be opened. All cheques and bank transfers need to be made in favour of the private limited company henceforth.
- Assets – Net assets of the sole proprietorship that are assumed by the private limited company can be converted into paid up capital for the private limited company, via the making of resolutions and further contracts/agreements. Any debt owing to any creditors (including government authorities by way of summonses/fines/penalties) will have to be settled before the transfer of such assets.
- Contracts / Service Agreements/ Leases – The contracts/service agreements/leases signed under the sole proprietorship business will have to be novated or even re-signed under the new entity.
- Licences/ permits – New licenses / permits are not transferable in most cases, and therefore need to be re-applied from the government authority issuing the licenses/ permits.
Step 4 – Cessation of Sole Proprietorship
Finally, the sole proprietorship is to be terminated and ACRA is to be informed that you have ceased to carry on business as a sole proprietorship and now.
Need help with converting your sole proprietorship to a private limited company?
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