Often, some years after of a business owner runs his/her sole proprietorship successfully, it becomes clear that the next logical step would be to expand the business’ operations by operating as a Private Limited entity.
Or, in the course of overcoming the teething obstacles of operating as a sole proprietorship, a new entrepreneur realises that his/her business model could possibly function better in the form of a Private Limited company, or take advantage of its benefits.
Sole Proprietorship vs. Private Limited Company
For all these various reasons, converting your sole proprietorship or Limited Liability Partnership into a Private limited Singapore company is often a wise decision. Such changes can help you to expand your business, have better access to financing, protect your assets, risk-manage your liabilities, enjoy corporate tax incentives, attract investors and recruit quality talent on board your team.
Pros and Cons of Either Entity
These issues are important considerations at the forefront of concerns for business owners who want to convert from a sole proprietorship to a Private Limited company:
- Separate legal entity
When it comes to Sole Proprietorships, the owner and the business are one and the same under the law and in your dealings with the public. Even though you have the privilege of greater autonomy over the business and its operations, you are financially and legally responsible for all liability against the business, for instance for debts and in lawsuits.
As a Private Limited company registered as a business entity under the Singapore Companies Act (Cap 50) has a separate legal personality from the owner, the company members have limited liability.For sole proprietorships, creditors may sue you for debts incurred and reach into your personal assets and property. Therefore a sole proprietor faces a greater risk of complete personal financial ruin compared to a director of a Private Limited company.
- Tax benefits
Private Limited companies pay corporate tax on their profits and dividends that the shareholders receive dividends are not taxedTaxes are determined at your personal income tax rate
- Limited capital
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— which means your sources of working capital are limited to your own money and the rolling over of any profits you make from the business.
- Perpetual succession
A sole proprietorship’s legal existence is contingent on your existence, therefore your retirement or demise will automatically mean the cessation of your business therefore 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 the business— which is not the case for a Private Limited company
- Public perception
Sole proprietorships face difficulties in doing business on a larger scale because the perception is less than favourable than if they were to do it with a larger business entity like a Private Limited company. business deals with you. Further, it is also more difficult for sole proprietorships to attract high-caliber employees who are ambitious and who view the business as offering little opportunity for growth as well as being more unstable than a Private Limited company.
- Administrative burden
Conversely, the compliance requirements of a Private Limited company are much higher than those of a sole proprietorship, be it in the ongoing compliance or the matters to be dealt with upon winding up are more complex than for a sole proprietorship. Also, the Private Limited company is governed by the laws, rules and regulations under the Singapore Companies Act.
For LLPs, you enjoy a separate legal identity and its ensuing benefits, however, there are still other disincentives:
LLPs, being partnerships, are assessed in such a way that means profits are treated as the personal income of each partner therefore taxed at personal income tax rate that are typically higher than the corporate tax rate upon a Private Limited company.
An LLP will be liable in respect of any debts or legal liability if its partner is liable to them, i.e. the liability of an LLP is to the full extent of its assets.Conversely, an LLP’s liabilities are also the partner’s therefore claims can be made against the partner’s personal assets.
Converting a Sole Proprietorship/LLP into a Private Limited company
Rikvin is able to assist you with the conversion of the sole proprietorship into a Private Limited company, namely in the following manner:
- First you will have to incorporate a new Private Limited company, indicating that the company is to take over the business of the sole proprietorship/LLP, as well as the effective transition date.
- 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.
- Finally, the sole proprietorship/LLP is to be terminated and ACRA is to be informed that you have ceased to carry on business as a sole proprietorship/LLP and now.
Transferring assets from existing business to new Private Limited company
Because your existing sole proprietorship business must be closed within 3 months of incorporating your new Private Limited company, the transfer of these items will have to be seen to promptly:
- Bank Accounts
All banks accounts used for the sole-proprietorship/LLP need to be closed, and a new bank account(s) under the Private Limited company need to be opened. Naturally, all cheques and bank transfers need to be made in favour of the Private Limited company henceforth.
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, therefore need to be re-applied from the government authority issuing the licenses/ permits.
As a professional firm, Rikvin can advise you on all the above matters if you are uncertain as to what should be done.