A proprietorship is unable to reap the full rewards of expansion. The proprietorship will, therefore, need to be changed into a private limited company. A company’s advantages, such as greater capital, limited liability, and others, can inspire you to convert. Although converting a proprietorship into a private limited company has numerous advantages, it also results in a loss of independence and a distribution of authority. Therefore, the choice must be made after carefully weighing all the relevant elements to determine if it results in the privileges anticipated.
Key difference between proprietorship and private limited company
Ownership
A proprietorship has just one owner, and the company has no other separate legal existence. The owner may be identified in the lawsuit if the Singapore company is sued since the owner and the company are treated equally.
A private limited company may have up to 50 shareholders or more. A private limited company’s liability, funding, and other characteristics are impacted by the fact that it is a distinct legal entity.
Liability
Since a sole proprietorship lacks a distinct legal identity, the business owner may be held accountable for debts, legal actions, and other issues. It means that the owner’s assets may be used to assist in paying off the debt if the business cannot pay its debts.
In contrast, the responsibility of the owners and shareholders of a private limited company is restricted to their financial involvement in the company. It means that owners and shareholders won’t have to worry about their assets getting drawn into the situation if a Pte Ltd company is sued or unable to pay its debts.
Funding
Due to their liabilities, sole proprietors could find raising additional funds for their businesses challenging. They must register as a Public Limited Company (PLC) before they may apply for funds.
Private limited corporations, on the other hand, may easily get finance because of their distinct legal identities.
Decision making
Another key difference between a proprietorship and a private limited company is the authority and decision-making aspect. The owner makes all decisions in a sole proprietorship.
However, a private corporation’s board of directors is responsible for making decisions. By the shareholders, these are chosen.
Tax filing
Since the owner will only need to file personal income tax returns, sole owners have few filing obligations.
Private limited corporations, on the other hand, are required to submit corporate tax filings and yearly reports and hold annual general meetings.
Record privacy
Compared to private limited corporations, sole proprietors have more private financial records. A sole proprietorship’s owner is the only person accessing its financial documents.
All shareholders in a private limited company have access to the business’s financial data. In the worst instance, someone can end up disclosing these financial records to rival businesses.
Steps to converting proprietorship into private limited company
- You must write a letter as the sole proprietorship’s owner confirming that you have no problems with the business name being used as the name of a private limited company.
- You must incorporate a new private limited company and state the effective transition date and the fact that the company will take over the sole proprietorship’s operations.
- All business assets, including the novation of the former business’s existing contracts, must be properly transferred to the newly created private limited company.
- As your current sole proprietorship business must be shut down within three months of forming your new private limited company, transferring assets from it to the new business must be done quickly.
- The sole proprietorship must be dissolved, and ACRA must be notified that you have switched to operating a private limited company instead of a single proprietorship.
Why should you take this decision?
One approach to incorporate a sole proprietorship business in Singapore is to change it into a private limited company, which legally separates the business from the owner and attracts more investment money.
The solo proprietor might prefer to bring partners for the enterprise or keep their assets separate from the business’s. The expansion of the current firm is the most frequent justification for changing from a sole proprietorship to a private limited company. Still, additional justifications include tax advantages, limited liability, and others.
Conclusion
Many potential private limited corporations fail to incorporate despite the owner’s intention to do so because of registration errors, and incorporation can be a time-consuming and difficult procedure. However, converting your sole proprietorship to a private limited company opens up opportunities for expansion, financing, and tax benefits in addition to offering legal protection. It’s a calculated decision that can set up your company for stability and long-term success.
