As a business grows, some business owners may want to convert their sole proprietorship into a private limited company. Here are some of the reasons why some business owners may want to make the switch.
1) To limit liabilities
As a sole proprietor, your liabilities are unlimited. This means that you are liable for any losses which your business may incur. On the other hand, a company has limited liability and can only be liable for its assets. To separate the personal assets from the liabilities of the company, some sole proprietors may choose to convert to a private limited company.
2) Separate legal entity
A company is a separate legal entity. Think of it as another person as it can sue and be sued, own properties and take loans in its own name.
3) Corporate tax benefits
Singapore has one of the lowest corporate tax rates in the world. A sole proprietor is taxed based on the personal income tax rate whereas a company is taxed based on the corporate tax rates. Currently, there are many corporate tax incentives for companies. Here are two articles to better explain the current tax reliefs for new start-ups and established companies.
Common Tax Reliefs that will help to reduce the tax bill for New Start-Up Companies
Common Tax Reliefs that will help to reduce the tax bill for Companies
4) The ability to raise capital
A company can issue shares and thus it is much easier to involve investors in a company. Fundraising and access to capital are what some companies need to prosper.
A sole proprietorship ceases when the owner passes on. A company remains even after the demise of its shareholders or directors. The company shares are passed on through a will or through the intestate succession act. If you want to pass on your business to your next generation, a company structure is the one to go for.
Here are the steps to converting a sole proprietorship into a company.
1) Incorporate a new private limited company
A company requires at least one shareholder, a local resident director and a company secretary. When incorporating, the applicant must state that this new company is to take over a sole proprietorship. There should be a transition date as well. The procedures for starting a private limited company in Singapore remain the same.
2) Obtaining approval for the company’s name
It is likely that you would the new company to have the same name as the sole proprietorship. Let’s say your sole proprietorship is Example Trading and you want your company to be called Example Trading Pte Ltd. The registrar is not going to allow Example Trading Pte Ltd to be registered as it is similar to Example Trading unless you obtain a no objection letter from the owner of Example Trading. Since you are the owner of Example Trading, you will be able to produce this letter.
3) Formally transfer all assets over to the newly incorporated company
The sole proprietor should be closed within 3 months from the incorporation of the new company. Thus the director of the company should ensure that all assets are shifted over to the company and all outstanding liabilities of the sole proprietorship are resolved. A few matters to resolve would be:
- Opening a new bank account for the company and closing the bank account of the sole proprietorship
- Novating and resigning of contracts previously from the sole proprietorship to the new company
- Reapplying or transferring any licences from the sole proprietorship to the new company
- Resolving or transferring any assets and liabilities from the sole proprietorship to the new company
- Changing the name in all marketing materials, websites, name cards
- Reapplying for new accounts with government agencies like the Central Provident Fund (CPF) Board or Singapore Customs
Do note that there are more administrative and corporate regulatory matters to adhere to as a company as compared to a sole proprietorship. If you are thinking of keeping your business cost light you may want to remain as a sole proprietor.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at Singapore Secretary Services
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Other useful articles:
How to file corporate tax returns for companies
How long does it take to incorporate a Singapore company?
How much do I have to pay in taxes as a start up company in Singapore?
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