How Hard Is It To Change Business Structures?
Before you start the converting from sole proprietorship to private limited company, make sure you have the requirements needed for incorporating a private limited company for a smoother, faster transition.
Here are the basic requirements for incorporating your private limited company:
- Your company already needs a basic organizational framework that consists of three types of roles: a director/s, at least one of whom has to be a local resident, at least one shareholder, and a company secretary. So you’re going to need to build your hierarchy before even considering a transition to private limited company.
- You will need to submit the details and particulars of the director/s, the shareholder/s, and the company secretary.
- After 3 months, companies are also required to hire an auditor. Foreign nationals are allowed ownership of a company, but only through partnering with a local firm.
- You will need a bank account in a major Singapore bank. Some of the top banks for you to consider are Maybank, UOB, DBS, OCBC, HSBC, Standard Chartered, and Citibank.
- The company has to be registered at a local Singaporean address. This has to be an actual, physical office.
- A description of the company’s business activities–what kind of work they plan to engage in.
- The company’s Constitution. This is a layout of–among many things–company structure, how it will be managed, how general meetings will be conducted, how shares are distributed, and the responsibilities and rights of shareholders.
All documents can be submitted through BizFile+, the Accounting and Corporate Regulatory Authority’s (ACRA) online filing and submission portal.
Below is a step-by-step breakdown of how to convert your business from sole proprietorship to private limited company. You can also enlist the help of third-party firms to help manage the paperwork for business incorporation. At U Ventures, we can even handle all the work of incorporating your business.
- Prepare a No Objection Letter, which states that you permit the name to be used for and by a company.
- You will need to set up a bank account for your private limited company. You will no longer be able to use the personal bank account you may have used for sole proprietorship.
- All the contracts, leases, and permits you have obtained as a sole proprietor will, in most cases, need to be resubmitted and resigned as a private limited company.
- Draft your company’s Constitution. If you do not want to create one from scratch, a model template is available for reference from the ACRA’s site.
- Register the new company under the ACRA. If your name transfer has been pre-approved from Step 1, then this will be relatively quick. The registration process costs a total of SGD350, and can be done in as fast as 15 minutes.
- You will need to tell ACRA that you are no longer a sole proprietor within 3 months of your company’s incorporation.
Post-incorporation, it is important to still take note of a few matters to avoid penalties and keep compliant.
- If your projected annual revenue exceeds SGD1 million, then you will have to file for the Goods and Services Tax (GST).
- The company’s business number needs to be on all important documents.
- The company must be registered with the Central Provident Fund to start contributing for their employees’ social savings.
- The company needs to start paying the Skills Development Levy that you have to pay for each employee you have working in Singapore. This is on top of the CPF, and different from the Foreign Worker Levy. These levies will be used to ensure that employee development stays funded.
There are many advantages to becoming a private limited company–more financial backing, less liabilities, and more credibility in the eyes of the consumer. However, the process for changing from sole proprietorship and incorporating a private limited company can incur heavy costs. Private limited companies also have higher operational and compliance costs.
Is it really worth it?
To help you decide, here’s a detailed pros-and-cons rundown of sole proprietorship and private limited companies:
Pros and Cons: Sole proprietorship
The main advantage of being a sole proprietor is freedom and a certain type of convenience. You don’t have a mountain of paperwork for taxes. And among all business structures, sole proprietorship is also the easiest to start.
Being a sole proprietor gives you the unlimited power to decide for the business. It is very hands on in terms of operations, which means you truly get to shape the business’ direction and future. Lastly, if you fail, it’s easier to dust yourself off, and try again with a new venture.
But unlimited freedom comes at a price, and a rather high one, at that. Sole proprietors are liable for everything. The business’ losses and debts are the owner’s losses and debts. And while tax filing is a breeze, sole proprietors do not enjoy the tax benefits granted to companies. In Singapore, that means paying up to 22 percent of your income in taxes, whilst companies enjoy a flat, stable rate of 17 percent. Some grants are also only granted to companies registered as private limited companies, like the Startup SG Equity grant.
Pros and Cons: Private limited company
While tax requirements are harder to file for companies, benefits abound after the pipes have been set. Private limited companies enjoy a 3-year tax free run under the Tax Exemption Scheme, and a substantial chunk less in taxes for subsequent years under the Partial Tax Exemption.
Liability is diffused amongst shareholders — each shareholder’s liability is limited to how many shares they have in the company. Private limited companies also enjoy other financial boons, as most grants require that awardees are private limited companies. Consequently, it’s easier to find the budget to scale and grow faster.
There are more cooks in the kitchen in private limited companies. You cannot make decisions as freely as a sole proprietor. Since more people are affected in how you run the business, directors and CEOs are required to report to, if not run their decisions by, their shareholders. And while private limited companies have more financial support behind their sails, they also incur more operational costs. Companies are also bound by stricter rules both in compliance, and in termination. For instance, the country’s Companies Act is a long list mandating how companies should conduct business. Companies have to file annual returns, and have annual general meetings. Termination, in the event of failure, takes significantly more time and money in legal proceedings than in a sole proprietorship.
U Ventures can help you make the decision — and even after. Whether it’s incorporation or handling the whole conversion, our consultants can provide you with professional advice fit for your needs. Send us your questions here, or call us at (65) 6735 8135.