Singapore Company Registration Specialist
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Conversion of a Proprietorship/LLP into LLC

When it comes to converting a Singapore Sole Proprietorship or LLP to a Singapore Private Limited company, you are going to have many queries in your mind. The major questions can include the following:

  • Is there a need for conversion?
  • Will it provide the desired advantages?
  • Is there any drawback or risk involved in conversion?
  • What is the process and is it simple or complex?

The following guide helps in answering most of these and similar questions that arise in your mind before or during the conversion.

Usually, it is a good decision to convert a Sole Proprietorship or LLP company to a Singapore Private Limited company. Some of the very direct potential benefits of such a conversion could include the following:

  • Grow your business
  • Defend your assets
  • Restrict the liabilities at risk
  • Take advantage of corporate tax incentives
  • Draw investors
  • Recruit better talent

A Singapore Private Limited company is referred to as by the following names in other jurisdictions:

  • PLC
  • LLC
  • Pvt Ltd
  • Corporation

A Private Limited company in Singapore is usually referred to as “Pte Ltd.”

A Pte Ltd company is a kind of business registered under Chapter 50 of the Singapore Companies Act. This business entity has a unique legal structure and its members are liable at a limited level. A Private Limited company pays corporate tax on profits while its shareholders are provided tax-free dividends. Such a company keeps the personal assets protected and stands for high level of trustworthiness in the market.

The legal and statutory requirements involved in the conversion of a Sole Proprietorship or LLP to a Pte Ltd company are mostly uncomplicated. Almost all the involved complexity is with regard to the issues related to the transfer of business affairs of the Sole Proprietorship/LLP to the Private Limited company.

Reasons for Conversion to Singapore Private Limited Company

You can have many reasons for converting your Sole Proprietorship/LLP into a Pte Ltd company. In order to confirm your decision, make sure to consider the following advantages brought about by this decision.

If you are a Sole Proprietorship, you will have to deal with the following issues:

  • Absence of unique legal entity – The law, authorities and public will see you as the same entity as your business. This means that you have total control over your business. However, this also means that you will stand legally and financially responsible for all legal liabilities and debts of the business.
  • Non “Limited” Liability – It is possible for creditors to sue the proprietor for any debts. A Court order can also be claimed against your personal assets. Any business that has the slightest chance of causing unintentional loss or damage to others, there is a high risk of total personal financial disaster for the sole proprietor.
  • Limited Capital – You are less likely to get access to public funds if your business enters into a financially difficult time. There is no legal provision that can let you inject money into the business through investors. Loan is the only way you can raise funds for your proprietorship. Else, your capital will be restricted to your business’ profits and existing finances.
  • Absence of Corporate Tax Incentives or Benefits – Taxes will be calculated at the rates for personal income tax. When the profits increase, it will also increase the taxes. The tax cuts offered to other small businesses cannot be enjoyed by a Sole Proprietorship.
  • Absence of Continual Succession – Such a business entity will stop existing once you retire or after your demise. A Sole Proprietorship will come to an end after your demise because its existence is linked to you.
  • Lower Credibility – Only a single individual stands accountable for the business activities and deals. Therefore, most people and businesses are less likely to engage in large-sized deals with your Sole Proprietorship. If you want to take your business to a larger scale, a Sole Proprietorship is not the ideal entity to be chosen. There is a lesser chance that investors and creditors will be ready to invest or lend large capital. Besides, it will be more challenging for the company to draw the attention of high-performance and efficient employees, and top level executives who seek a share in the business.

cLLP

There are some differences between an LLP and a Sole Proprietorship. Having an LLP company gives you the advantage of being a separate legal identity than your company, along with some resulting benefits. But you will still be exposed to some issues as the following:

  • Tax – When it comes to taxation, LLPs are considered similar to partnerships. Profits will be treated as the personal income of each partner and taxed according to the prevailing tax rates for personal income. The rates are mostly higher than the rates that apply to the income of a Singapore Private Limited Company.
  • Liability – If a partner in an LLP becomes liable to a company or individual because of his/her acts of commission/omission during the course of business of the LLP, the company will stand liable to the same level as the partner. This means that it is possible to receive claims against the LLP up to the full range of its assets. The partner will also stand liable and his/her personal assets can also be claimed for liabilities.

Check the section on overview of Singapore business entities for more details about the different types of companies in Singapore.

Disadvantages of Conversion to Singapore Private Limited Company

Conversion of your Sole Proprietorship or LLP to a Pte Ltd company can help alleviate most of the problems mentioned above. However, the conversion in itself has some other disadvantages. This includes the following:

  • Running a Private Limited company costs more in terms of the administrative expenses.
  • It is more complicated to close the company.
  • A Pte Ltd company will have to follow stricter rules and regulations under the Singapore Companies Act.

How to Convert a Sole Proprietorship or LLP to a Pte Ltd Company

A Sole Proprietorship or LLP is an entirely different legal entity compared to a “company”. Singapore law doesn’t have any provisions for converting between these forms.

When the Private Limited company is being incorporated, it will be required to indicate that your company plans to take over the Sole Proprietorship or LLP. This also includes indicating the date of terminating the business, and it could be extended to 3 months from the date of declaration. It will also be required to transfer all the business assets and current contracts to the new Pte Ltd company.

After all these steps are taken, it will be required to inform the Company Registrar about the termination of the Sole Proprietorship or LLP.

The process of such a so-called “conversion” will involve the following steps:

1. Incorporation of Private Limited Company

The process of incorporation begins with filing the proposed company name for approval. The Singapore Law prohibits 2 business entities from having same or identical names. You can incorporate a Pte Ltd company with the same business name as your Sole Proprietorship or LLP, but this can be done only by submitting a No Objection Letter to the Registrar. It will be required to provide explanation for retaining the same business name and inform if it is owned by the same individual. It will also be required to agree to end the Sole Proprietorship or LLP within three months of the incorporation of the Pte Ltd company.

Check the Singapore Company Registration guide for more information about company incorporation and the process.

2. Business Transfer from Sole Proprietorship or LLP to Newly Incorporated Company

After the Pte Ltd company has been incorporated, it will be required to transfer all the business matters of the Sole Proprietorship or LLP to the newly incorporated company. It is mandatory to close the Sole Proprietorship/LLP within three months of the incorporation of the new company. It is this step involving the transfer of business affairs that consumes a lot of time in the process. The key elements that will be transferred are as follows:

  • Assets – The Private Limited company can transform the transferred net assets into paid up capital. This will require agreements and resolutions. The assets of a Sole Proprietorship or LLP can be transferred only after paying off all the outstanding dues against the creditors.
  • Contracts and Service Agreements – It will be required to re-authorize any existing business contracts or service agreements. This will be done under the new business entity’s name and seal.
  • Bank Accounts – It will be required to close any bank account held by the Sole Proprietorship or LLP and create a new account(s) for the new company. All customers and involved people or authorities will have to be informed about the change in the bank account. They will also have to be informed about the new company name so that they can draw cheques in the new name.
  • Lease – If the business offices are rented on lease, it will be required to sign the agreement again under the new Private Limited company.
  • Licenses and Permits – The new company will have to apply for new licenses and permits because it is not possible to transfer these items. It will be best to get suggestions from the relevant authorities about the validity of the existing licenses and permits. It is best to seek the advice of a professional agency if you are not certain about how to proceed with this aspect.

3. Termination of the Sole Proprietorship or LLP

Sole Proprietorship

After the incorporation of the Private Limited company, the Singapore law requires that the Sole Proprietorship is terminated within three months. It will also be required to issue a Notice of Cessation of the Sole Proprietorship to the ACRA within three months of the company incorporation.

LLP

After all the business matters/affairs are transferred successfully from the LLP to the Private Limited company, the former can be winded up or struck off. It will be easier to strike off instead of winding up the business entity.

Conclusion

Overall, the structure of a Pte Ltd company is highly complicated compared to a Sole Proprietorship or LLP. However, a conversion to such a company provides special liability protection and it is much more expandable and investor-friendly. It may be costlier to begin a Pte Ltd company, but if you can manage the complexity and intense business processes, you will be making a better decision.

The conversion of a Sole Proprietorship or LLP into a Singapore Private Limited company demands intensive planning and processes. It will be best to seek the help of a professional firm if you want to go ahead with the decision to convert.

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