A good deal of companies start off as sole proprietorship businesses, only to convert to a corporation, partnership, or private limited company as the business grows. A&W and J.C. Penney are a couple of examples of businesses that grew from sole proprietorship to partnerships and incorporations.
Sole proprietorship is a simple business structure: the sole proprietor handles the assets, liabilities, and equity of the business without any partners or investors. However, as the business grows, it may be necessary to incorporate to allow for business expansion, and to stabilize the business in its market.
Why Convert a Sole Proprietorship to a Private Limited Company?
One way of incorporating a sole proprietorship business in Singapore is to convert the company into a private limited company, thereby creating a separate legal entity from the owner, and gain additional business capital from investors.
The sole proprietor may want to onboard partners into the business venture, or separate their personal assets from those of the company. While the most common reason for converting a sole proprietorship to a private limited company is the expansion of the existing business, other common reasons include tax benefits, limited liability, and more.
Advantages and Risks of Converting a Sole Proprietorship to Pte Ltd
Sole proprietorships have their own advantages, including complete ownership of the company, and simple business structure. However, sole proprietorship businesses are limited in growth, which is why some businesses choose to convert for the benefits of running a private limited company.
Benefits of Converting a Sole Proprietorship to a Pte Ltd Company
Separate Legal Entity
Under the Singapore Companies Act, a private limited company is considered an independent legal entity separate from the business owners. This is a stark difference from sole proprietorship, where the business owner and the business are considered the same personality, and are legally responsible for the assets and liabilities of each other.
Having a separate legal identity protects the business owners from any financial, criminal, or fiduciary duty issues that may arise from the business. This is meant to insulate the shareholders of the business from the business' activities, and separate personal considerations when making decisions on behalf of the business.
Tax Benefits
Private limited companies benefit from corporate tax incentives that sole proprietorship businesses do not have. Private limited companies may have tax exemptions, depending on the type of business. The Start-Up Tax Exemption (SUTE) program offers tax deductions on newly-incorporated businesses, which is a major incentive for the conversion process.
Additionally, shareholders receive dividends from a private limited company that are not considered part of the income taxed under the Singapore Companies Act. Dividends are calculated along with the personal assets of shareholders instead.
Limited Liability
By being a separate legal entity, the private limited company is unaffected by the complete personal financial ruin of any of its shareholders. Alternatively, the shareholders are unaffected by any debts incurred by the private limited company as part of the limited liability of a business owner under the Singapore Companies Act.
Shareholders Capital
Private limited companies enjoy corporate tax incentives and shareholders capital, which is counted as business assets under the new company. Where sole proprietorships are fully-funded by the business owner, a Pte Ltd company can gather funds from interested investors, growing the company's capital.
Business Continuance
In a sole proprietorship, the business falters once the business owner retires or dies. In a Pte Ltd company, there is business continuity: the board of directors may appoint or elect company leaders in the event that one or more leaders retire or die.
Risks of Converting a Sole Proprietorship to a Pte Ltd Company
Division of Ownership
Unlike a sole proprietorship where the business owner is entitled to all the net profits of the company, a Pte Ltd has division of ownership between its shareholders. Major shareholders are eligible to become part of the executive board of directors, while shareholders of public shares are entitled to dividends calculated from the total net income of the company.
Compliance Responsibilities
Private limited companies have more responsibilities and compliance regulations when it comes to conducting business compared to sole proprietorships. Because of this many newly-incorporated companies turn to corporate services firms to assist them in their compliance requirements.
Converting a Sole Proprietorship Business to a Private Limited Company: A Step-by-Step Guide
Step 1: Letter of No Objection
The first step is writing a letter stating that, as the sole proprietor, you do not object to a private limited company using your business name for their business with the understanding that the sole proprietorship will be dissolved after the conversion process.
Step 2: Incorporating a Sole Proprietorship into a Private Limited Company Registered in Singapore
The next step is incorporating the existing business as a private limited company, which is essentially registering a private limited company under the same name as the sole proprietorship. The new private limited company is required to have:
- At least one (1) resident director;
- At least one (1) shareholder;
- At least one (1) corporate secretary;
- A minimum capital of SGD1;
- A registered address in Singapore.
Once all criteria have been met, the company may register as a private limited company. Prepare the necessary documents, submit the application form, and wait for the approval from the Accounting and Corporate Regulatory Authority (ACRA) in Singapore.
Step 3: Transferring Assets from Sole Proprietorship to Private Limited
Once the application is approved, you may not transfer all assets from the sole proprietorship to the new private limited company. Assets include any contracts and agreements made by the sole proprietorship, as well as licenses and permits. You will have to go through the official channels to transfer assets:
- Assets - Any debts incurred by the sole proprietor must be paid in full before the net assets of the company can be transferred to the new Pte Ltd company. The net assets are assumed by the new company as paid up capital, and are not considered as income by the new private limited Singapore company.
- Bank Accounts - The owner of the sole proprietorship will have to notify their bank of the incorporation, and the sole proprietorship must transfer all bank accounts to the private limited company within three months of incorporation. The bank accounts of the existing sole proprietorship business must then be closed, and all bank transfers must be made payable to the new private limited company.
- Contracts and Agreements - Any contracts or agreements made under the sole proprietorship should be transferred to the private limited company henceforth, and relevant parties must re-sign contracts under the new private limited company.
- Licenses - Most government licenses are non-transferrable, so the private limited company will have to re-apply for licenses and permits as a new entity as soon as the incorporation has been approved.
Step 4: Termination of Sole Proprietorship
The last step is the termination of the sole proprietorship's legal existence to legitimize the incorporation of the new private limited company. ACRA will provide a notification stating that the sole proprietorship has ceased to carry on the business, and has now fully incorporated as a Singapore private limited company.
WealthBridge Corporate Solutions
How can WealthBridge assist you? Incorporation can be a lengthy, confusing process, and many potential private limited companies remain stagnant as sole proprietorship businesses despite the owner's desire to incorporate due to registration mistakes. WealthBridge makes the process easy for any sole proprietor as we'll handle the documents for you!
Check out our Singapore company incorporation services to see how we can help you run your business!