What Is It Better To Convert To A Private Limited Company?
A sole proprietorship or partnership is an easier and least costly business structure to operate as compared to private limited. However, incorporating a company as a sole proprietorship or partnership has limitations that may be resolved by converting your business into a private limited company.
Therefore, many foreign companies choose to register a private limited company in Singapore. Registering a private limited company in Singapore could help you to expand the business, increase funding options, attract investors, provide legal protection to personal assets, limit your liabilities, enjoy corporate tax incentives, and recruit high-quality talents. In short, there are many more benefits to converting your company to a private limited company.
Advantages of Converting to A Singapore Private Limited Company
The key advantages of converting sole proprietorship or partnership and to register a private limited company in Singapore are:
1) Wider funding options and attract investors
For sole proprietorship or partnership, financial options are limited as sole proprietor or partners would have to use their own money and or rely on their own credit-worthiness to obtain loans. In contrast, after registering a private limited company, financial institutions would be more confident to offer loans to a company that does not entirely depend on a sole individual.
The confidence also applies to investors who feel safer to invest in a company that operates with a management that is governed by a board of directors. Investors also feel safer knowing that the private limited company’s shareholders are obliged to comply with statutory regulations. Since trustworthiness is a key characteristic that all investors look out for, they will feel more secure in investing in a private limited company as compared to a sole proprietor.
2) Separate legal entity and limited liability
Sole proprietorship and partnership are not separate legal entities and the business owners are legally responsible for all the liabilities against the business. In comparison, a private limited company is treated as a separate legal entity from those of its shareholders or company officers. One of the most highly desired advantages of a private limited company is that the liability is limited to the amount of their paid-up capital. The extent of personal financial risk for company owners would therefore likely be lower than both sole proprietorship and partnership. This is an important point to consider when you thinking of setting up a local company because you want to minimize the financial risks you take. In the event that your company does not succeed, you will not put yourself into further debt and worsen the situation.
3) Tax benefits for private limited companies in Singapore
Sole proprietorship and partnership do not have a separate legal personality; its applicable tax rate for profits earned is determined by the individual’s income tax rate. Hence, any increase in profits will also lead to an increase in personal income tax. The tax rate for individuals ranges from 0% to 22%, hence your company may not prove to be profitable to you in the long term. Whereas the corporate tax rate for the company is a flat 17% of their chargeable income, and IRAS grants tax rebates to a private limited company as well. These rebates were implemented to encourage aspiring business owners to set up a company in Singapore, hence your company should take advantage of this benefit.
Therefore, converting the sole proprietorship or partnership into a private limited company may result in its owner being liable for lower taxes.
4) Perpetual succession
A sole proprietorship or partnership’s existence is contingent on the owner’s existence, whose retirement or death will lead to the end of the business entity. This risks the business as in the event of accidents, the owner would be unable to manage the company and it will be difficult to hand over the company to another person. However, a private limited company will not cease to exist if the director or shareholder retire or demise, and has the options of being transferred or sold. A company is only terminated if it is wound up.
5) Public perception
It is hard to attract highly talented employees who are ambitious to work with sole proprietorship or partnership as the public view the business as offering little opportunity for growth as well as being more unstable than a private limited company. This similarly applies to other companies or business entities who may find it difficult to work on the large-scale business with sole proprietorship/partnership. A private limited company is viewed to be more trustworthy as the board of directors all have equal say in making the financial decisions for the company, hence their judgment will be viewed to be much more knowledgeable and objective. A sole proprietor or partnership may be viewed to make skewed business judgments based on personal motives, and other companies may be wary of working together with such companies.
Primary Consideration of Converting to a Singapore Private Limited Company
Conversion to a private limited company will alleviate most of the issues outline above, but there are some key responsibilities that you should also take into consideration.
- Winding up a company is more difficult and complex.
- All the private limited companies must comply with formalities on matters such as annual general meeting, annual returns as well as have more formal documentation such as a certificate of incorporation and the company constitution.
- Having to comply with more statutory regulations would result in higher administration burden and expenses.
Most of the administrative work can be dealt with if the company has a capable in-house team, or it can be outsourced to a reputable company service provider. Having an experienced company secretary to advise and manage all legal documentation will greatly help the conversion from a sole proprietorship to a private limited company.
Procedure for converting a sole proprietorship or partnership to a private limited company
WLP is able to assist you throughout the entire Singapore company incorporation process of conversion from sole proprietorship/ partnership to a private limited company. This process may not be well understood by foreign or new entrepreneurs, hence it will be advisable for these business owners to enlist the help of a service provider.
Step 1: Get the company name approved
According to Singapore law, no two entities can have the same business name. The business owner may submit a “No Objection” letter to the Company Registrar if you wish to use the sole proprietorship/ partnership’s existing business name as the name of the private limited company. The approval process may take a week or two depending on the Company Registrar.
Step 2: Register with ACRA
Once the company incorporation Singapore documents have been prepared, a Singapore company can be officially registered with ACRA. The process of company incorporation in Singapore itself takes less than an hour.
Step 3: Execute a formal transfer of all business matters
All the business assets will have to be formally transferred to the newly incorporated private limited company within 3 months of company incorporation Singapore. This process includes closing corporate bank accounts (that the sole proprietorship or partnership used), re-signing all the service contracts or agreements, settling the sole proprietorship/ partnership debts, and re-applying for licenses or permits that are not transferrable from the sole proprietorship/ partnership.
Step 4: Cessation of Sole Proprietorship
A Notice of Cessation needs to be issued to ACRA confirming the closure of the sole proprietorship or partnership within 3 months from the date of company incorporation in Singapore.
Need help in converting your company?
The process of converting sole proprietorship or partnership to a private limited company could be simple or challenging based on the size, liabilities, or assets of the business. If needed, please feel free to contact our experts at WLP before taking the final plunge. Our experts will be able to provide you with professional advice and support in ensuring that your company fulfills all legal requirements and successfully convert your company.
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