Converting a Sole Proprietorship / LLP to Private Limited in Singapore – A Detailed Guide
Singapore provides endless opportunities to entrepreneurs from across the globe when it comes to company incorporation. There are various types of business structures to choose from. However, the private limited company, Limited Liability Partnership (LLP), and sole proprietorship remain to be the popular choices. While the first one is known for its scalability, the last one has been widely acclaimed for its simple structure. The LLP is for the like-minded, business-oriented professionals with complimenting skills. One must compare private limited company vs. sole proprietorship & LLP to know which structure suits their requirements the most.
Entrepreneurs need to be sure about the business structure they want to use as this critical decision can have a tremendous impact on the future potential of the business. It reflects on the flexibility in the business activities, future growth, and the taxation of the business.
This blog will unveil a detailed information about the three popular business structures – private limited company (Pte Ltd), LLP & Sole Proprietorship. You will find everything you need to know about these business structures.
Your all questions such as what is the private limited company? What are the advantages and disadvantages of the private limited company? What is sole proprietorship & LLP?
Comparison between the company, sole proprietorship & LLP, how to convert a sole proprietorship to a private limited company? Will be answered in this blog in an elaborated manner.
It also reveals how the taxation policies have been made for these three business structures. All in all, it is a complete guide on Singapore company, sole proprietorship, and LLP.
Private Limited Company in Singapore
Most of the entrepreneurs prefer to register their companies as Private Limited Companies in Singapore. It is mandatory for these companies to use a suffix ‘Private Limited,’ ‘Pte Ltd’ or ‘Ltd’ as an integral part of their company name.
Anyone above the age of 18 can opt for incorporating a private limited company in Singapore. The registration of the company is carried out by the Accounting and Corporate Regulatory Authority (ACRA) of Singapore. According to the Singapore Companies Act, a private limited company is considered as an independent legal entity that is separate from its owners. The company is allowed to own property, enter into legal contracts, sue and be sued. The advantages of a private limited company, when compared to the sole proprietorship, are many.
The company directors and shareholders are not liable for the debts incurred by the company. However, the liability of the company towards its creditors is unlimited.
Sole Proprietorship in Singapore
A sole proprietorship is a business firm, owned by a person or a company. There are no partners. Since it is not a corporate entity, the owner is responsible for all its debts and liabilities. It cannot own the properties in its name.
To start a sole proprietorship in Singapore, you may approach a good incorporation firm such as SBS Consulting. The experts of the firm will initiate the effort to ensure the trouble-free registration of your firm.
LLP (Limited Liability Partnership)
An LLP in Singapore is a business structure that is co-owned by two or more partners. Most importantly, in an LLP, a partner cannot be held liable for the misconduct or negligence of another partner. It is an independent entity, separate from it owners and thus, can own property, sue or be sued in its name. The right and duties of the partners are governed by the LLP agreement.
Advantages & Disadvantages of Private Limited Company, Sole Proprietorship & LLP
Taxation: Private Limited Company Vs Sole Proprietorship & LLP
There is a stark difference between taxation of an incorporated company and sole proprietorship/LLP business. While the profits generated by a company are taxed at corporate income tax rates, the income of a sole-proprietorship & LLP is that of its owner who needs to pay personal income tax (0%-22%). On the other hand, Singapore corporate income tax ranges from 0% – 17%.
Singapore follows single tier tax system where income earned by a company is taxed at the corporate level only, dividend distributed among the shareholders are declared tax-free. There is no capital gains tax. Also, there are plenty of tax benefits and incentives available for locally incorporated companies. But, the sole proprietorship & LLP do not qualify for the tax rebates, exemptions, or the incentives offered to Singapore registered companies.
A newly registered company gets full tax exemption on its chargeable income of up to S$1,00,000 for its initial three years. The chargeable income of existing and new companies ranging from S$1,00,000 – S$3,00,000 is taxed at 8.5%. And the annual revenue earnings beyond S$3,00,000 is taxed at 17% (which is the headline corporate income tax rate in Singapore). On top of it, the wide network of trade agreements with more than 70 countries enables these entities to avoid double taxation.
Convert Sole Proprietorship to Private Limited Singapore (Company)
From the above analysis, one can easily figure out that private limited company is an ideal choice for a growing business. If you are running a successful sole-proprietorship/LLP, it makes sense to take the business to the next level by turning it into a private limited company.
This change will enable you to expand your business, provide it the legal protection, curb the limits of liability to be borne by the owners, avail the benefits of tax incentives, ease of raising capital by attracting investors, and the ability to recruit high-quality talent.
Reiterating, a private limited company stands as a separate legal entity and needs to pay the taxes as per the prevailing corporate tax rates. The shareholders receive their dividends tax-free.
How to Convert Sole Proprietorship to Pte Ltd? What are the Steps Required to be taken?
Leaf through the steps given below to find out how a sole proprietorship or an LLP can be converted to LLC (private limited company).
- Registration of a new private limited company is the first step. At the time of incorporation, the owner needs to mention that the newly formed company is going to take over the business operations of the existing sole proprietorship or the LLP. The owner is also required to mention the date of termination of the sole proprietorship or the LLP.
- The owner should get all the business contracts and the assets transferred to the newly formed private limited company.
- Finally, the sole-proprietorship or the LLP should be terminated, and the company Registrar i.e. ACRA should be informed about the cessation of business undertakings of the sole proprietorship or the LLP.
Step 1 – Register a New Private Limited Company
This is the first step of the conversion process. To start with, you have to get the approval for the business name. In Singapore, the law does not permit two entities to have the same business name. However, if you still want the new entity to have the same business name, then you will have to submit a ‘No Objection Letter’ to the company registrar.
In that letter, you will have to explain the reason behind retaining the old name, and also prove it to them that the owner of both the entities is the same. At the same time, you have to make the provision of ceasing the operations of the old business within 3 months of the date of incorporation of the new company.
Step 2 – Transfer the Business Undertakings from the Existing business to the New LLC
After incorporating the private limited company, the next step is the transference of business matters of the old business to the new one. The items that need to be transferred include –
- Assets – The assets that will be taken over by the Pte Ltd Company can be converted to paid up capital. However, an agreement and a resolution are required, and care needs to be taken to clear all the outstanding dues to the creditors before transferring the assets.
- Bank Account – All the bank accounts under the name of the sole-proprietorship or LLP needs to be closed, and a new account under the name of the Pte Ltd Company should be opened.
- Lease Agreement – The lease agreement in the case of rented properties need to be resigned under the name of the new private limited company.
- Contract Agreements – All the existing business contracts and service agreements need to be signed under the new entity’s name.
- Permits – The owner has to get a fresh set of licenses under the new company’s name.
- GST Register – If the old business firm is GST-registered then, it is advisable to cancel it on the day of incorporation of the new Pte company. Get the new company GST registered immediately, in order to continue your business transactions.
- MOM / CPF Account – It is necessary to transfer MOM and CPF accounts of your employees to your newly-established Pte company. Fill and submit the relevant MOM and CPF forms to initiate the process.
Step 3 – Terminate the Old Sole-Proprietorship or LLP
Once the new company is incorporated, the old business should be terminated within 3 months from the date of incorporation. A ‘Notice of Cessation’ sent to ACRA confirming the closure of the old business should follow this. It is mandatory that this notice should also be sent within three months from the date of incorporation of the new private limited company.
On the other hand, in the case of an LLP, after the transference of all business matters is successfully done, the owner can choose to strike off or wind up the LLP. Winding up is a much complex process than striking off.
It is advised that you engage a professional Singapore company incorporation firm if you are uncertain on the steps that need to be followed. The process of converting sole proprietorship to private limited Singapore could be simple or challenging based on the size, liabilities, assets or members of the business. More often than not, the suppliers and creditors do not interfere with your decision to convert sole proprietor to Pte. Ltd as long as the business fosters a good and strong relationship with them. However, exceptions may be there. So, you must carefully study the situation and then execute the plan. If needed, do not hesitate to seek legal assistance from the experts of SBS consulting before taking the final plunge.