Converting a Sole Proprietorship or LLP to a LLC / Pte Ltd company
If you are considering the conversion of your sole proprietorship or Limited Liability Partnership (LLP) company to a Limited Liability Company (LLC) (also known as Private Limited (Pte Ltd) company) for better liability protection and flexibility for growth, it is not impossible. However, it is important to look into the impact and how it may potentially affect or help your company before you take that step.
There are several questions that you would need to consider before taking the step to convert your company. Answering the why you should do it, how it would benefit you, and what the advantages and disadvantages are would help to give you greater clarity on whether this is a step you should take. In this article, we discuss some of these points to help you put things into perspective.
In many cases, converting your sole proprietorship or LLP to a Singapore private limited company is a wise decision. A change like this can help you to expand your business, protect your assets, limit your liabilities, allow you to enjoy corporate tax incentives, attract investors and recruit high quality talent. In many other jurisdictions, a private limited company is also referred to 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. Private limited companies pay corporate tax on their profits and the shareholders receive dividends which are tax free. A private limited company offers protection of personal assets and portrays a higher credibility and standing in the market.
The statutory and legal aspect of converting a sole proprietorship or LLP to a private limited company in Singapore is relatively straightforward and most of the complexities will likely arise from issues associated with transferring business matters from your sole proprietorship or LLP to the Pte Ltd company.
Advantages of converting to Singapore Pte Ltd
There may be several reasons that are prompting you to convert your sole proprietorship or LLP to a private limited company in Singapore. At this point, to reaffirm your decision, let us first review the key advantages as outlined below.
As a sole proprietorship you may currently be facing some or all of the following issues:
- 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, but you are financially and legally responsible for all debts and legal actions against the business.
- 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. If you are engaged in a business where even an inadvertent action can result in damages to others, you face the risk of complete personal financial ruin.
- No corporate tax benefits or incentives - Taxes are determined at your personal income tax rate. Hence, any increase in profits will also lead to an increase in taxes. You are not entitled to any tax incentives that are otherwise available to small businesses.
- Limited capital - If your sole proprietorship is having financial difficulties, you may face difficulties in raising public funds. There are no legal mechanism which you can utilise to bring in investors as equity contributors. The only way for you to raise funds is by getting a loan. Otherwise, capital is limited to your finances and the profits generated through your business. This often leads to difficulties when you are looking to expand your business.
- No perpetual succession - Since its legal existence is tied with you, the business cease to operate with your retirement or demise. This will also lead to the end of the business entity.
- Low public perception - As only one person is accountable for all business deals, outsiders perceive a sole proprietorship as a small “mom-and-pop” type of operation. As such, other companies or business entities may find it difficult to work on large-scale business deals with you. This entity is the least preferred for serious business as nobody will be willing to lend you large credit or large sums of money. It may also be difficult to attract employees of a higher calibre or senior level executives.
An LLP is slightly different from a sole proprietorship. As an LLP, you enjoy a separate legal identity and its ensuing benefits, however, you are still exposed to certain drawbacks such as:
- Taxation - LLPs are considered a form of partnership and profits are treated as a part of each partners’ personal income and therefore, are taxed at personal income tax rates. These rates are typically higher than those for a private limited company.
- Corporate liabilities - For 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 asset.
- Personal liabilities - As a partner you are also personally responsible for liabilities that arise as result of your wrong doing. Claims for liabilities can be made against you and your personal assets.
For more detailed information on various types of business entities and their advantages and drawbacks, refer to Singapore business entities overview.
Drawbacks of converting to Singapore Pte Ltd
While converting to a Singapore private limited company will mitigate most of the issues outline above, there are some drawbacks to operating a Pte Ltd company.
- The administrative burden of operating a Pte Ltd company is heavier.
- Winding up a company is more complex and complicated
- Private limited companies must adhere to more stringent rules and regulations set out in the Singapore Companies Act. For most common compliance issues, refer to Singapore company compliance requirements.
Converting a Sole Proprietorship or LLP to a Private Limited Company in Singapore
The sole proprietorship or LLP is a completely separate legal form from a company and the law does not provide any process for conversion from one form to the other. Instead,what you will need to do is:
- Incorporate a new company. At the point of incorporating the company, you have to 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).
- Transfer the business matters (assets and any existing contracts) over to the newly incorporated private company from the old entity.
- 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 (Pte Ltd) company
The first step to setting up your company is the approval of your business name. According to Singapore law, no two entities can have the same business name. If you wish to set up your Singapore Pte Ltd company using the existing business name of your sole proprietorship or LLP, you must submit a 'No Objection Letter' to the Company Registrar. The letter must explain why you wish to retain the business name and also state whether the companies are owned by the same person. You must also undertake to cease operations of the old business entity within 3 months from 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 all business matters from the existing sole proprietorship or LLP business to the new company. Note that your existing business must cease all operations and be closed within 3 months from the incorporation date of the Pte Ltd company. This step will likely take the most time to complete. Some of the items that require transferring will include:
- 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 you can transfer your assets.
- Bank Accounts – You must close all banks accounts maintained by the sole proprietorship or LLP and open a new bank account(s) under the Pte Ltd company. You will also need to inform customers and other relevant people/bodies about the change and advise them to issue all cheques in favour of the new Pte Ltd company as the previous firm has ceased operations.
- Office Lease – If you are renting an office for your business, you will need to sign a new lease agreement under the Pte Ltd company
- Contracts / Service Agreements – You will need to re-sign any existing business contracts / service agreements under the new entity
- Licences/permits – You will need 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 decision on if you should convert your Sole Proprietorship or LLP into a Private Limited Singapore Company.
Step 3 – Terminate the Sole Proprietorship or LLP
Once the Pte Ltd company is incorporated, you will need to take the following actions within 3 months from the date of incorporation:
- The sole proprietorship must be terminated
- A Notice of Cessation needs to be issued to ACRA confirming the closure of the sole proprietorship
For an LLP, once you have successfully transferred all matters of the LLP business to the Pte Ltd company, you can choose to strike off or wind up the LLP. Striking off is a less complicated procedure than winding up.
More room for expansion
In conclusion, the structure of a private limited Singapore company is more complex than a sole proprietorship or LLP, but it offers better liability protection, usually has more room for expansion and portrays more credibility 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 LLP to a Pte Ltd company in Singapore requires 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.