From the tax scheme and legal liability perspective, business owners should consider converting the sole proprietorship business into a Private Limited company in Singapore.
Below are the factors to consider:
1. Tax Exemptions and Tax Rebates for the Company
Private Limited companies enjoy the headline tax rate of 17%, tax exemption schemes, tax incentives and corporate tax rebate.
Dividends are also tax-free when the shareholders receive them.
Sole proprietor, on the other hand, is taxed at the progressive tax resident tax rate.
There are no tax schemes, tax incentives or tax rebate for the sole proprietor.
2. Separate Legal Entity for the Company
A “private limited” company is a separate legal entity, and a sole proprietorship is not a separate legal entity.
As such, the sole proprietor (the owner) is personally liable for all its business liabilities.
3. Limited access to capital
Sole proprietorships have limited options when it comes to raising funds by getting loans from the financial institutions.
Private limited companies have many ways to raise funds through investors and easy access to funding for SMEs.
4. Legal Liability to debts
A sole proprietor faces a higher risk of personal financial ruin as compared to a director of a private limited company.
The shareholders of the Private limited company have limited liabilities because the private limited company has a separate legal existence from its shareholders.
Steps in converting a Sole Proprietorship into a Private Limited Company
Step 1: Incorporate a new Private Limited company
We would advise you to engage a company secretarial firm & accounting team to handle the required documentation and to cease the sole proprietorship.
You should also clear the tax liability of the sole proprietorship.
The newly incorporated Private limited company should take over the business from the sole proprietorship.
Step 2: Transfer of Assets
The sole proprietorship should transfer all assets to the newly incorporated private limited company.
a) Bank account – Next, close all the bank accounts of the sole proprietorship. Transfer the fund to the new bank accounts in the name of the new private limited company.
b) Assets – Transfer the assets from the sole proprietorship to the new private limited company. The sole proprietorship must settle all its debts and cease its business.
c) Licenses – When applicable, the new private limited company should apply for new operating licenses.
d) Contracts – Re-sign all contracts, which were in the name of the sole proprietorship, with the name of the new private limited company.
Step 3: Cessation of the Sole Proprietorship
The owner should inform ACRA to cease the sole proprietorship’s business.
Should you need assistance or would like to find out more about Company Secretarial services in Singapore, please send an email to Contact@AccountingSolutionsSingapore.com, and our business advisor will contact you.