If You Have Been in the Sole Proprietorship Company for Some Time, Why Not Convert Sole Proprietorship Into Private Limited for the Better
When the urge to start business surfaces, an entrepreneur would commonly begin with a small business enterprise. This business enterprise would consist of a sole proprietor. It is common for businesses to start like such. But, as the company develops and expands, holding on to a sole proprietorship may not be a good idea for the long run. Let’s take a look at why it is time to convert sole proprietorship into a private limited.
When you set up a sole proprietorship, you and the business share the same identity. If another party were to sue your business, it would be your name and reputation that will be at stakes. As for a private limited company, the company itself is a separate identity. If something happens to the company, your reputation will still be intact. By law, the private limited company will have its reputation to care for. It is regarded as an individual. A private limited company may see different shareholders throughout its lifetime. The company remains, even if one or more shareholders die. As for a private limited company, the ownership of the company is transferable. This makes way for new shareholders, leading to more capital injection, which can be used for business expansion.
As a sole proprietor of a business, you are liable for all losses and debts acquired by the business. You would probably have to fork out your life savings to save this business of yours. Or if the trade winds up, you would likely end up a bankrupt too. If you were to convert into a private limited company, the liability is limited to the investment in the company. Worst case scenario, the shareholders are not able to get any investment in return if the company becomes insolvent. Whatever debts acquired by the company, the shareholders of a private limited company are not liable for it. Hence, making a private limited company look appealing as personal assets of shareholders are safe and sound.
As mentioned before, a sole proprietorship shares the same identity with the owner. Hence, any profit tax will be taxed according to Individual Tax. The individual tax could begin from 0% up to 22%. As for a private limited company, any profits will be subjected to corporate income tax, 17% flat rate. There is also a scheme for qualifying start-ups to be exempted from tax for the first three years. As a private limited company, it is considered a ‘person’ hence a tax resident, therefore, eligible for local tax exemptions or incentives.
If you run a successful sole proprietorship company, then you can quickly get financial support based on your positive accounts. But, if otherwise, it is slightly tighter as the business accounts reflect your management of the business. Thus, financial institutions may be wary of providing the support you desire. Private limited companies, on the other hand, have an advantage in obtaining financial aid. There are plenty of sources a private limited company can look for support, not specifically financial institutions.