Why and How to Convert Your Singapore Sole Proprietorship into a Pte Ltd Company
A sole proprietorship may be the easiest and least costly business structure to operate. However, it has limitations that may be resolved by converting the sole proprietorship into a private limited company.
This process of conversion is also known as incorporation, i.e. the legal process of forming a corporate entity, or a company that is registered under the Companies Act.
Why Convert a Sole Proprietorship into a Private Limited Company?
Often, one of the main motivations for converting a sole proprietorship into a private limited company would be for business expansion. As business expands and revenue increases, the benefits that come with the conversion supplement the rationale for incorporation.
Separate legal personality and limited liability
A private limited company has its own legal personality that is separate from those of its shareholders or company officers. However, sole proprietorships do not have separate legal personality from their owners. This leads to the sole proprietor taking on unlimited liability, i.e. being personally liable for all the lawsuits that the sole proprietorship may face.
In contrast, one of the most highly-desired advantages of incorporation is how private limited companies have limited liability, with their liability being limited to the amount of their paid-up capital. The extent of personal financial risk for company owners would therefore likely be lower than that of sole proprietorship owners.
As a sole proprietorship does not have a separate legal personality, its applicable tax rate for profits earned is determined by the sole proprietor’s personal income tax rate. The tax rate for individuals ranges from 0% to 22% depending on the individual’s chargeable income.
On the other hand, the corporate tax rate for companies is a flat 17% of their chargeable income. Therefore depending on the amount of chargeable income the sole proprietorship owner earns, converting the sole proprietorship into a private limited company may result in its owner being liable for lower taxes.
In addition, the Inland Revenue Authority of Singapore grants tax rebates to companies. A sole proprietorship would not be entitled to such tax benefits as they are extended only to companies.
For more information, refer to our guide to corporate tax in Singapore.
Wider funding options
For sole proprietorships, financing options are limited as sole proprietorship owners would have to use their own funds, or rely on their own creditworthiness to obtain loans. However, companies have more financing options such as through equity capital from shareholders, loans secured through corporate assets, or unsecured financing on credit of the company.
Financial institutions would be more confident to offer loans to a company that is not entirely dependent on a sole individual. The same may also apply to investors who are considering investing in the company. This is because there would be more trust and confidence in a company that has shareholders, and operates with a management governed by a board of directors which is obliged to comply with internal procedures and statutory regulations.
A sole proprietorship’s existence is contingent on the owner’s existence. If the owner retires or dies, the sole proprietorship will automatically cease to operate or even exist.
In contrast, a company does not cease to exist if the founder, or a director or shareholder retires or dies, and has the options of being transferred or sold. A company is terminated only if it is wound up.
Disadvantages of Converting
A primary disadvantage of converting a sole proprietorship into a private limited company is that the new company would now be subject to more regulation than before.
For example, a company would need to comply with formalities on matters such as meetings, annual returns, as well as have more formal documentation such as a certificate of incorporation and the company constitution. A sole proprietorship is not required to comply with such formalities.
Having to comply with more statutory regulations would result in higher administration expenses for company owners as well.
Procedure for Converting a Sole Proprietorship into a Private Limited Company
- Register the new company. First, business owners should check whether they are able to meet the requirements for setting up a private limited company in Singapore. They can then submit the application to register the new company through the Accounting and Corporate Regulatory Authority (ACRA)’s BizFile+ website. Remember to indicate during the registration process that the company is taking over the business of the sole proprietorship.
- Execute a formal transfer of all business assets to the newly-incorporated company. The transfer should be done promptly as the sole proprietorship must be closed within 3 months of incorporating the new company. The transfer would include:
- Closing of the bank accounts that were used for the sole proprietorship within 3 months of the company’s incorporation, and opening of new bank account(s) for the private limited company
- Settling the sole proprietorship’s debts (if any), followed by converting its remaining assets into capital for the company
- Novating or re-signing of contracts, service agreements or leases that were previously under the sole proprietorship, by the company
- Reapplying for licences or permits that are not transferrable from the sole proprietorship to the company, such as a Food Shop Licence for operation of a restaurant
- File a “Cessation of Business” on BizFile+ within 3 months of the company’s incorporation. This is to inform ACRA that the sole proprietorship has ceased.
After incorporating the company, it is helpful to take note if the following have been considered:
- The business registration number issued by ACRA must be on all the letterheads, invoices, billings or other official documents of the company
- If the company’s business involves import, export, and transshipment, then the company has to be registered with the Singapore Customs for a Customs Account
- If the company’s annual taxable turnover is more than or expected to be more than SGD 1 million, it must register for Goods & Services Tax
- The company must register with the Central Provident Fund (CPF) for the making of contributions to its employees’ CPF accounts
- The company is also required to pay a Skills Development Levy to the SkillsFuture Singapore Agency for each employee hired
While there are many benefits of converting a sole proprietorship into a private limited company, doing so would likely also result in higher compliance costs for business owners. Business owners should therefore carefully consider whether making the switch would be in the business’ interests.
If in doubt, business owners may choose to consult a corporate lawyer on whether it would be advisable for them incorporate their sole proprietorship.
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