Converting a Sole Proprietorship to a Private Limited Company
Often, a few years after 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 realizes 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. In other jurisdictions, a private limited company may be denoted as LLC, PLC, Corporation, Pvt Ltd, among others. In Singapore, it is commonly referred to as Pte Ltd.
Key Differences Between Sole Proprietorship and Private Limited Company:
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:
| Basis of Differences | Sole Proprietorship | 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. | Private Limited Companies in Singapore enjoy the status of being a separate legal entity from their owners. This means that the company itself is considered a distinct legal entity in the eyes of the law and in all business transactions. As a result, the company, not the individual shareholders, assumes legal responsibility for its liabilities, debts, and legal obligations. |
| Liability | For sole proprietorships, creditors may sue you for debts incurred and reach into your personal assets and property. A sole proprietor faces a greater risk of complete personal financial ruin compared to a director of a Private Limited company. | 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 |
| Tax Benefits | Taxes are determined at your personal income tax rate | Private Limited companies pay corporate tax on their profits and dividends that the shareholders receive are not taxed. |
| 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. | Private Limited Companies in Singapore typically have more diverse funding-raising options compared to sole proprietorships. These entities can access capital through various avenues, including obtaining loans from financial institutions, issuing equity to investors, and leveraging alternative financing mechanisms such as venture capital or angel investments. The ability to raise funds through equity offerings allows Private Limited Companies to expand their working capital beyond personal resources and accumulated profits. |
| 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. | The legal existence of a Private Limited Company is independent of its shareholders, meaning that the company can continue its operations seamlessly even in the event of changes in ownership, such as the retirement, demise, or transfer of shares among shareholders. This continuity ensures that the business remains stable and unaffected by the personal circumstances of its shareholders. |
| Public Perception | Sole proprietorship may face challenges in business perception and attracting high-caliber employees. | Pte. ltd. companies usually have favorable perception; attract high-caliber employees; better for larger-scale business deals. |
| Administrative Burden | Sole Proprietorships have lower compliance requirements and asimpler winding-up process. | Sole Proprietorships have lower compliance requirements and asimpler winding-up process. |
Key Differences Between Limited Liability Partnerships (LLPs) and Private Limited Companies (PLCs) in Singapore:
For LLPs, you enjoy a separate legal identity and its ensuing benefits, however, there are still other disincentives:
| Consideration | Limited Liability Partnership (LLP) | Private Limited Company (PLC) |
|---|---|---|
| Tax | Profits are treated as personal income of partners, taxed at personal income tax rates. | Subject to corporate tax rates, potentially lower than personal income tax rates. |
| Liability | Liability extends to the full extent of LLP’s assets; partners’ personal assets at risk. | Limited liability protects personal assets of shareholders. |
Converting a Sole Proprietorship/LLP into a Private Limited Company
Rikvin can 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 now.
Recommended for you, Download Singapore Private Limited Company Incorporation Guide »
How to Transfer Assets From Existing Business to a New Singapore 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:
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Bank Accounts
All bank accounts used for the sole-proprietorship/LLP need to be closed, and a new bank account(s) under the Private Limited company needs to be opened. Naturally, all cheques and bank transfers need to be made in favour of the Private Limited company henceforth.
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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.
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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.
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Licences/Permits
New licenses/permits are not transferable in most cases, and therefore need to be re-applied by 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.
Switch to a Singapore Private Limited Company with ease
We make your conversion process simple. Thousands of companies rely on us to convert their Sole Proprietorships to Private Limited Companies. You should too.
