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What is Sole Proprietorship?

If you are considering the conversion of your sole proprietorship or Limited Liability Partnership (LLP) company to a Limited Liability Company (LLC) (also known as Private Limited (Pte Ltd) company) for better liability protection and flexibility for growth, it is not impossible. However, it is important to look into the impact and how it may potentially affect or help your company before you take that step.

There are several questions that you would need to consider before taking the step to convert your company. Answering the why you should do it, how it would benefit you, and what the advantages and disadvantages are would help to give you greater clarity on whether this is a step you should take. In this article, we discuss some of these points to help you put things into perspective.

Advantages of converting to Singapore PTE LTD Company.

There may be several reasons that are prompting you to convert your sole proprietorship or LLP to a Pte Ltd company in Singapore. At this point, to reaffirm your decision, let us first review the key advantages as outlined below.

As a sole proprietorship you may currently be facing some or all of the following issues:

Converting LLP to a PTE LTD Company

The sole proprietorship or LLP is a completely separate legal form from a company and the law does not provide any process for conversion from one form to the other. Instead,what you will need to do is:

How To Convert Your Business To A Singapore PTE LTD Company?

Here’s how to do it in four simple steps:

Consent :- As the owner of the sole proprietorship, you will need to write a letter you have no objections using the business name to become the name of a PTE  LTD  company. This is called a No Objection Letter and explains why you want to retain the business name and whether the same person owns it.

Incorporate a PTE  LTD:- For most formations, the fee is around $500-1500, depending on your requirement. At the very least, you will need a registered mailing address, one local resident to be a director and appoint a company secretary within six months of incorporating.

As soon as the PTE  LTD company is formed, the owner needs to close the sole proprietorship within 3 months of incorporating the new company

Asset Transfer :- Once we identify the assets/liabilities list that need to be transferred to PTE  LTD company, we can either recognize these assets as an ‘amount injected by director’ or ‘share capital’ of the PTE  LTD company.

A director’s injection can be an interest bearing loan or non-interest bearing loan (advances).

It is advised you engage a professional to help you prepare the transfer. These computations can be complex, and involve buy / sell notes where one business buys assets and liabilities from another.

Items that will be required to transfer include:

  • The net assets taken over by the PTE LTD company.
  • Bank accounts: You must close all banks accounts maintained by the sole-proprietorship firm and open a new account under the PTE LTD company. This will affect your customers, GIROs, auto payments, so ensure you update stakeholders on the change of account.
  • If you are renting an office for your business, you will need to re-sign the lease agreement under the PTE LTD company. Likewise you may need to re-sign existing business contracts / service agreements.
  • Licences/permits: You may need to apply for new licenses or permits, as these usually cannot be transferred.

Ceasation :- Once the company is incorporated, the sole proprietorship firm must be terminated within 3 months from the date of incorporation. Lodge a Notice of Cessation to ACRA confirming the closure of the sole proprietorship within 3 months from the date of incorporation of the PTE LTD company.

Why Should You Convert To PTE LTD Company In Singapore?

In essence, a sole proprietorship has the following drawbacks:

    • 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.

    • Liability

As a PTE LTD 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 PTE LTD company.

    • Tax benefits

PTE LTD companies pay corporate tax on their profits and dividends that the shareholders receive dividends are not taxed. Taxes 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 favorable 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 PTE LTD 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 PTE LTD 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:

    • Tax

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.

    • Liability

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.