Converting Sole Proprietorship or LLP to a Private Limited Company in Singapore

If you are thinking of converting your sole proprietorship or LLP business to a private limited company in Singapore, you may have several questions in mind. Should you take the step of converting? Is it really going to be advantageous? Are there any major drawbacks? Is the procedure complicated or simple? This guide attempts to answer many of these questions on your mind.

If you wish to expand your business, protect your assets, face limited liability, enjoy corporate tax incentives, attract investors and high quality talent, converting your sole-proprietorship or LLP to a private limited Singapore company is a wise decision. In many other jurisdictions, a private limited company is also referred as LLC, PLC, Corporation, Pvt Ltd, and so on. In Singapore, a private limited company is often referred as Pte Ltd.

A private limited company is a business entity registered under the Singapore Companies Act, Chapter 50. It has a separate legal personality and members have limited liability. Companies pay corporate tax on their profits, shareholders receive dividends which are tax free. A private limited company offers protection of personal assets and has high credibility and standing in the market.

The statutory aspect of converting a sole proprietorship or LLP to a private limited company in Singapore is relatively straightforward and most of the complexity actually lies with transferring the business matters of your sole proprietorship or LLP to the Pte Ltd Company.

Advantages of converting to Singapore Pte Ltd

There may be several reasons for you wanting to convert your sole proprietorship or LLP to a private limited company in Singapore. At this point, to reaffirm your decision to convert, it is important to re-examine the issues of consideration as outlined below.

As a sole proprietorship you are currently exposed to the following:

1. No separate legal entity - In the eyes of the law and the public, you are one and the same with the business. As a result you have complete control over the business and its operations, and you are financially and legally responsible for all debts and legal actions against the business.
2. Unlimited liability - Creditors may sue you for debts incurred and can also obtain a court order to claim against your personal assets, including your property.
3. No corporate tax benefits or incentives - Taxes are determined at your personal income tax rate. Hence, with an increase in profits there will be an increase in taxes as well.
4. Limited capital - If the business is having financial difficulties, you may not be able to get public funds. Capital is limited to your finances and the profits generated by the business. Thus, business expansion is difficult.
5. No perpetual succession - The business no longer operates with your retirement or demise.
6. Low public perception - Since only one person is accountable for all business deals, outsiders find it difficult to do business with you. This entity is the least preferred for serious business as nobody would be willing to lend you large sums of money. It is also difficult to attract high-caliber employees, or senior level executives who usually look for owning a share of the business.

As a LLP although you enjoy a separate legal identity and its ensuing benefits, you are exposed to certain drawbacks such as: 

1. From a tax perspective, LLPs are treated as partnerships and profits are treated as part of each partners’ personal income and are taxed at personal income tax rates.
2. In the course of the business of an LLP, if a partner becomes liable to any person or company through his acts of commission or omission, the LLP is liable to the same extent as the partner. Therefore claims can be made against an LLP to the full extent of its assets.
3. As a partner you are personally responsible for liabilities that arise as result of your wrong doing. Claims for liabilities can be made against you and your personal assets.

To get a general idea of various types of business entities along with their advantages and drawbacks, refer to Singapore business entities overview.

Drawbacks of converting to Singapore Pte Ltd

1. The administrative burden of operating a pte ltd company is heavier.
2. Closing a company is more complex and complicated.
3. Private limited companies must follow more stringent rules and regulation as set out in the Singapore Companies Act. For most common compliance issues, refer to Singapore company compliance requirements.

Steps Involved in Converting a Sole Proprietorship or LLP to a Private Limited Company in Singapore

The sole proprietorship or LLP is a separate legal entity from a company and the law does not provide any process for conversion. Instead, what needs to be done is:

1. Incorporate a new company. At the point of incorporating the company, you may indicate that the company is going to take over the business of the sole proprietorship or LLP. You must indicate the date of termination of the business (which can be postdated up to 3 months).
2. You will need to transfer the business assets and any existing contracts over to the newly incorporated private company.
3. The final step is to terminate the sole proprietorship or LLP and inform the Company Registrar that you have ceased to carry on business as a sole proprietorship or LLP.

Step 1 - Incorporate a Private Limited Company

The first step involved in incorporation is approval of your business name. According to Singapore law, no two entities can have the same business name. If you wish to incorporate a Singapore company Pte Ltd using the existing business name, you must submit a No Objection Letter to the Company Registrar. The letter must set out to explain why you want to retain the business name and also state whether it is owned by the same person. You must also undertake to cease the business within 3 months of the date of incorporation of the company.

For more details on incorporation requirements and procedures, refer to Singapore Company Registration guide.

Step 2 - Transfer Business Matters from existing business to new Pte Ltd company

Once you have incorporated the private limited Singapore company, the next step is to transfer the business matters belonging to the existing sole proprietorship or LLP business to the new company, because your existing business must be closed within 3 months of incorporating the Pte Ltd company. This step will likely take the most time. Some of the items that will require transfer include:

1. Assets - The net assets taken over by the Pte Ltd company can be converted as paid up capital. As such an agreement and resolutions are required. You will have to pay any outstanding dues to the creditors before transferring your assets.
2. Bank Accounts - You must close all banks accounts maintained by the sole-proprietorship firm or LLP and open a new bank account(s) under the Pte Ltd company. You must inform customers and other relevant people/bodies about the change and also advise them to issue all cheques in favour of the Pte Ltd company as the firm is no longer in operation.
3. Office Lease - If you are renting an office for your business, you will need to re-sign the lease agreement under the Pte Ltd company.
4. Contracts / Service Agreements - You will need to re-sign existing business contracts / service agreements under the new entity.
5. Licences/permits - You will have to get new licenses or permits (as licenses and permits usually cannot be transferred). You should seek the advice of the agency issuing the licenses or permits on their validity. It is generally advisable to seek advice from a professional firm if you are uncertain as to what should be done.

It is strongly advised that you explore and plan the above matters before making a final decision to convert your Sole Proprietorship or LLP into a Private Limited Singapore Company.

Step 3 - Terminate the Sole- Proprietorship or LLP

Sole Proprietorship

Once the company is incorporated, the sole-proprietorship firm must be terminated within 3 months from the date of incorporation. This should be followed by a Notice of Cessation issued to ACRA confirming the closure of the sole proprietorship within 3 months from the date of incorporation of the private limited company.

LLP

Once you have successfully transferred all matters of the LLP business to Pte Ltd company, you can choose to strike off or wind up the LLP. Striking Off is a less complicated procedure than winding up. 

On a final note

In conclusion, the structure of a private limited Singapore company is more complex than sole proprietorship or LLP. But a private limited company usually has a lot more room for expansion and is more attractive to investors. While it might cost more to start a private limited company, the ends may justify the means if you can handle the extra work and complexity of the structure. 

Converting a Sole Proprietorship or a Limited Limited Liability Partnership to a Private Limited Company in Singapore requires some careful planning and execution. It is highly recommended that you seek professional help if you plan to convert your existing Singapore business into a Pte Ltd company.