Converting Solo Proprietor To Private limited company

1. Consent

As the owner of a sole proprietorship, you must write a No Objection Letter. For approval to use the business name for a private limited company. This letter explains why you want to keep the business name and if the same person owns it.

2. Incorporate a Private Limited Company¹

The formation fee is usually S$1,000-2,000, depending on your needs. You’ll need a registered mailing address, at least one local resident as a director. And appoint a company secretary within six months of incorporating.

After forming the private limited company, close the sole proprietorship within three months.

3. Asset Transfer

You need to transfer assets and liabilities to the private limited company. Do it by categorizing them as either an ‘amount injected by the director’ or ‘share capital.’

Director’s injection can be in the form of an interest-bearing. Or non-interest-bearing loan (advances).

It’s advisable to hire a professional for help with the transfer. Because it involve complex computations and buy/sell notes. when one business acquires assets and liabilities from another.

Items to transfer include:

• Net assets acquired by the private limited company.

• Bank accounts:
  Close all accounts of the sole proprietorship and open a new one for the private limited company. Inform customers, GIROs, and auto payments about the account change.

• If you rent an office, sign a new lease agreement under the private limited company. You may also need to re-sign existing business contracts or service agreements.

• Licenses and permits generally cannot be transferred, so you may need to apply for new ones.

4. Cessation

After the private limited company is incorporated, terminate the sole proprietorship. The longest period to do that is three months from the incorporation date. Lodge a Notice of Cessation with ACRA to confirm the closure.

In essence, a sole proprietorship² has the following drawbacks³:

Separate Legal Entity:

In Sole Proprietorships, you and the business are legally considered the same entity. You have more control over the business. but you’re personally responsible for all its financial and legal obligations. Examples include debts and lawsuits.

Liability:

In a Private Limited company the company is a separate legal entity from the owner. This is stated in the Singapore Companies Act. This limits the liability of company members. In Sole Proprietorships, creditors can sue you for business debts. And can access your personal assets. Thus putting you at higher risk of personal financial loss. As compared to a Private Limited company you are safe from personal financial loss.

Tax Benefits:

Private Limited companies pay corporate tax on profits. The shareholders don’t pay taxes on dividends. Personal income tax rates apply to individuals.

Limited Capital:

Sole proprietorships struggle to secure funding, whether through loans or equity from investors. Your working capital usually relies on your own money and business profits.

Perpetual Succession:

A sole proprietorship’s existence depends on you, so if you retire or pass away, the business ends. Family or friends interested in continuing must go through the hassle of incorporating. A Private Limited company doesn’t need to go through the same hassle.

Public Perception:

Sole proprietorships can face challenges when doing larger-scale business. Because of less favorable public perception. Larger entities like Private Limited companies doesn’t face this challenge. Attracting ambitious and capable employees is also harder. As they may see less growth opportunity and stability in the sole proprietorship.

Administrative Burden:

But, Private Limited companies have more complex compliance requirements. As compared to sole proprietorships, both ongoing and during winding up. They need to comply with the Singapore Companies Act.

For LLPs:

LLPs offer a separate legal identity but have downsides:

Tax:

LLPs are taxed as partnerships, with profits treated as personal income. But are often taxed at higher rates than the corporate tax rate of Private Limited companies.

Liability:

LLPs are liable for debts or legal obligations to the extent of their assets. Partners’ personal assets can also be targeted for claims.