Change a Sole Trader into LLC in Singapore

A sole proprietorship business is considered one of the easiest and less expensive business entities to operate in Singapore. Besides being less expensive and easy to operate, several limitations like business are not growing significantly.

You can correct this by converting it into a private limited company or a limited liability company. If you are looking to convert a sole proprietorship business to a Limited liability company for significant growth and better liability for protection, it is possible by completing few legal formalities.

However, it is important to consider few factors and how they will help your company grow.

There are several questions that every sole trader needs to consider before taking any step to convert into a limited liability company. Getting the answer to the question like why should you do it, the advantage and disadvantages will give you the clarity if you should take the step.

In this article, we will discuss these points, which will help shed light on the decision of converting business.

In most situations, converting a sole proprietorship business to a Singapore Private Limited company is the ideal choice. These new changes in your life can help expand your business to a greater extent, limit your liabilities, attract investors, protect your assets and recruit high-quality talent.

According to the Singapore companies act, a Limited liability company is a registered business entity in Singapore. It is a separate legal entity, and its members hold limited liability.

The corporate taxes are charged from the Limited Liability Company on profits earned, and shareholder gets the dividends exempted from tax. A liability company protects personal assets and interprets greater credibility and standing in the market.

The legal formalities of converting a sole proprietorship business to a private limited company in Singapore is quite straightforward, but it also involves multiple complexities associated with transferring all business matters from your sole proprietorship to Pte Ltd Company.

However, if you wish to change the registered office address of your Singapore Company, then you check our guide on Change the Registered Office of Your Singapore Company.

Why Convert a Sole Proprietorship into a Private Limited Company?

One of the primary motives for converting a sole proprietorship business into a Limited Liability Company is expanding business. With the business expansion, the revenue also increases. Here are some of the benefits you receive from converting a sole proprietorship business into a Limited Liability Company.

Separate legal entity and limited liability

A limited liability company has its own legal entity separate from the company officers and shareholders. However, in a Sole proprietorship business, you do not hold any separate legal entity from their owners as only one individual owns the sole proprietorship business. A sole trader is personally liable for handling all legal action involved in a sole proprietorship business.

In comparison, one of the primary advantages of incorporating a Limited liability company in Singapore is that it enjoys limited liability, with their liability being limited to the amount of their paid-up capital. However, the financial risk of the limited liability company owners will be lower when compared with sole proprietorship owners.

Tax benefits

Since sole proprietorship business owners do not enjoy separate legal entities, the tax charged from them will be on the profit earned by the sole proprietorship’s personal income tax rates. The tax rates for the sole trader ranges between 0% to 22% based on the individual chargeable income.

In comparison, the corporate tax rate for the limited liability companies will be flat by 17% on chargeable income. Therefore, if you decide to convert your sole proprietorship business into a limited liability company, the owners will be able to enjoy the benefit of lower tax.

Moreover, the Inland Revenue Authority of Singapore provides the benefit of tax rebates to the companies. In contrast, the sole proprietorship business owners don’t enjoy these benefits as in the future they are extended to the companies.

Wider funding options

In terms of funding, choosing to convert a sole proprietorship business into a limited liability company is always beneficial as sole traders have limited funding options as they are the ones who use their own funds and apply for loans by relying on their own creditworthiness. In contrast, the limited liability company has wider financing options, including equity capital from shareholders, unsecured financing on the credit of the company, loans secured to corporate assets, etc.

Moreover, several financial institutions in the market are also interested in providing loans to the company than the sole trader. The same is followed by investors who consider investing in a limited liability company rather than a sole proprietorship business. The reason behind choosing a limited liability company over a sole proprietorship business is that there will be several shareholders in the company. In addition, it will be operated by the right management team, governed by a board of directors that meets the internal procedure statutory regulations.

Future succession

Another advantage of converting a sole proprietorship business into a limited liability company is its future succession. However, a sole proprietorship business will come to an end when its owner doesn’t exist. For example, suppose the owner dies or retires, the sole proprietorship business will end or not exist.

In comparison, the limited liability company does not come to an end even after its founder, Director or shareholder retires or dies. A company can be transferred or sold to other individuals. Therefore, a company can only be terminated after getting wound up.

Disadvantages of Converting a Sole Proprietorship into a Private Limited Company

One of the disadvantages of converting Sole proprietorship to Ltd Liability Company is that you will require to get addressed to more provisions than that of sole proprietorship business after converting into a new company.

For example, a limited liability company needs to satisfy some legal formalities related to business matters, including annual returns, Company meetings, and some additional documentation such as certificate of incorporation and constitution of the company. However, these formalities do not need to be meet by sole proprietorship business owners.

Satisfying company statutory regulation also leads to additional administrative expenses for the company owners.

Procedure for Converting a Sole Proprietorship into a Private Limited Company

After you have decided to transform your sole proprietorship business into a limited liability company, you can successfully register as a Limited liability company in Singapore by following the given steps.

Register the new company

Firstly, the business owner will need to inspect if they satisfy the company registration requirements to establish a private limited company in Singapore. Then, once they are eligible, they will require filling the online application for a new company with the Accounting and Corporate Regulatory Authority (ACRA) at the BizFile website.

Obtain approval for the company’s name.

The respective business owner also needs to file a “No Objection” letter with the company registrar if they are willing to use their existing sole proprietorship business name as the name of the newly registered Limited liability company in Singapore.

Transfer business matters from existing business to new Pte. Ltd. Company

After successfully registering your Limited company in Singapore, the other step you need to do is to transfer all your company-related matters from sole proprietorship business to a newly registered limited liability company in Singapore.

Always remember that your existing sole proprietorship business needs to cease all its operations and will be closed within three months following the date of registering a Limited liability company in Singapore.

This process requires more time to complete. Some of the following given items that need to be transferred are given below:

Assets

All the net assets that have been transferred to the limited liability company can be transformed into paid-up capital. For such a transfer, an agreement and resolution will be needed. However, prior to transferring all the assets to a limited liability company, you need to pay all the outstanding dues to the creditors.

Bank Accounts

You also need to close all your bank account, which were operating in the name of a sole proprietorship business, and set up a new bank account in the name of a limited liability company.

Besides changing your bank accounts, you will also require to update all your respective customers and relevant bodies regarding the transformation of your sole proprietorship business into a limited liability company.

However, you will require advising them to issue the check in the name of a new private limited company rather than a sole proprietorship business as all the previously held business operations have been terminated.

Office Lease

If you are willing to rent a new office for your new company in Singapore, you will require entering into a new lease agreement under the private limited company.

Contracts / Service Agreements

You will again be required to sign an existing business contract of service agreement under the new business entity.

Licenses/permits

Business owners are required to apply for new business licenses and permits as you are not granted to transfer your existing business license or permit. In this regard, you can also get advice from the concerned agency providing a license or permit based on the validity. However, you can also consult with a professional lawyer if you do not know about the issuance of licenses and permits.

File the Cessation of Business

After that, in the next step, you will require to file the Cessation of Business” on the Biz File website within the period of 3 months following the date of Limited Liability Company incorporation. This is done to update the Accounting and Corporate Regulatory Authority (ACRA) that your existing sole proprietorship business has been terminated and converted into a Limited Liability Company.

What do you need to do after Company incorporation?

Once your company is successfully incorporated in Singapore, you will be required to consider that following given things have also been completed:

• If your company deals in imports, transshipment, and exports, your company needs to be registered with Singapore customs for a customs account.
• In case the annual taxable turnover of your company is more than SGD 1 million, then you need to register your company for Goods & Services Tax.
• The Singapore-based company needs to register with Central Provident fund to make all the required contribution to employees CPF account.
• The Company needs to pay a Skills development levy to the Skills Future Singapore Agency for appointing every employee in the Company.

No doubt there are a plethora of benefits of transforming a sole proprietorship business into a Limited liability company in Singapore, but after converting, it will also lead to higher compliance costs for business owners.

So before reaching any conclusion, it’s suggested to every business owner to carefully consider all the points carefully and then decide whether it’s beneficial to cease several years old sole proprietorship business and convert it into a limited liability company.

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