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Converting a Sole Proprietorship to a Private Limited Company

Often, after successfully running a proprietorship for some years, it becomes clear that the next logical step would be to expand the business’ operations by becoming a private limited entity.

Or, in the course of overcoming the early 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 and is ready to take advantage of a PLC’s benefits.

 

Sole Proprietorship vs. Private Limited Company

For all these reasons, converting your sole proprietorship into a private limited Singapore company is often a wise decision. Conversion can help you to expand your business, have better access to financing, protect your assets, better manage risks associated with liabilities, enjoy corporate tax incentives, attract investors and recruit quality talent for your team.

Pros and Cons of Either Entity
The following 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:

Issue Sole Proprietorship Private Limited Company
Separate Legal Entity The owner and the business are one and the same under the law and in your dealings with the public. You have the privilege of greater autonomy over the business and its operations. You are NOTpersonally financially and legally responsible for all liability against the business, for instance for debts and lawsuits.
Liability Creditors may sue you for debts incurred and attach your personal assets and property. Therefore a sole proprietor faces a greater risk of complete personal financial ruin. A business entity under the Singapore Companies Act (Cap 50) has a separate legal personality from the owner and the company members, who all have limited liability.
Tax Benefits on Tax Saving For Setup Company for comparison of how much tax is saved by converting your sole proprietorship into a PLC. Taxes are determined at your personal income tax rate. Pays corporate tax on its profits. Dividends that the shareholders receive dividends are not taxed.
Limited Capital Often has limited funding- options, whether in terms of getting loans from financial institutions or equity fundraising from investors— which means your sources of working capital are limited to your own money and any profits you make from the business. Funding is easier through private placement of stock and/or bonds.
Perpetual Succession Legal existence is contingent on your existence — your retirement or demise will automatically mean the cessation of your business. 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. Succession planning is not a problem.
Public Perception Faces difficulties in doing business on a larger scale because the perception is less than favorable. Easier to attract high-caliber employees who are ambitious and who view the business as offering more opportunity for growth as well as greater stability.
Government Grants Few grant opportunities. Enjoy more government grants. For example, in Year of Assessment (YA) 2012, companies will receive a one-off, non-taxable SME cash grant of S$5,000. This cash grant is given to help companies offset the high costs which may persist in a business slowdown and is large enough to cover your annual compliance costs.
Administrative Burden Compliance and other administrative burdens are much less onerous. Requirements are much higher and more complex with respect to ongoing compliance or matters to be dealt with upon liquidation. Governed by the laws, rules and regulations under the Singapore Companies Act.

 

Converting a Sole Proprietorship into a Private Limited Company

3E Accounting is able to assist you with the conversion of the sole proprietorship into a private limited company:

  1. You will have to reserve the name for your new private limited company, indicating that the company is to take over the business of the sole proprietorship, as well as specifying the effective transition date.
  2. 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.
  3. 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 as of a specified date.
  4. The private limited company will be setup and ready for operation.

Transferring Assets from Existing Business to a New Private Limited Company

Because your existing sole proprietorship business must be closed before incorporating your new private limited company, the transfer of the following items must be accomplished quickly:

  1. Bank Accounts — All banks accounts used for the sole-proprietorship need to be closed, and a new bank account(s) under the private limited company needs to be opened. Naturally, all checks and bank transfers need to be drawn from the private limited company henceforth.
  2. Assets — Net assets of the sole proprietorship that are assumed by the private limited company can be converted into paid up capital for the PLC, via new resolutions and further contracts/agreements. Any debt owed to any creditors (including government authorities by way of summonses/fines/penalties) will have to be settled before the transfer of such assets. Alternatively, you may consider reassigning all the debts to the newly setup company. Should you own any property in your sole proprietorship, the transfer of the assets to the PLC will trigger stamp duties, making it is advisable to sell off these assets before the conversion process takes place.
  3. Property — If the sole proprietor own a property, you may need to pay GST, stamp duty, and legal cost for transferring the property from sole proprietor to private limited company. Kindly engage a lawyer and he can advice you on the details.
  4. GST Register — If the sole proprietorship is GST-registered, we recommend you register the newly-established PLC for GST immediately and cancel the GST registration for the sole-proprietorship on the date of incorporation.
  5. Contracts / Service Agreements / Leases / Tenancy Agreements — The contracts/service agreements/leases/tenancy agreements signed under the sole proprietorship business will have to be novated or re-signed under the new entity. Kindly seek prior approval from your landlord before the conversion process takes place.
  6. Licenses / Permits — In most cases, new licenses/permits are not transferable. Therefore, you need to re-apply to the government authority issuing the licenses/permits.
  7. MOM / CPF Account — New MOM and CPF accountsare required for the newly-established company. However, the accounts are transferable by completing the relevant MOM and CPF form.

As a professional firm, 3E Accounting can advise you on all the above matters if you are uncertain as to how to proceed.

Sole Proprietorship