Unlimited liability is the primary drawback of sole proprietorship. All the assets and liabilities of the business belong to the sole proprietor personally. There exist some certain of risks of their business and personal assets. Business creditors can make a claim on all assets of the sole proprietor in order to meet any outstanding claims against the business. Besides, in a sole proprietorship, there are no business taxes which must be paid by the owner, such as payroll taxes. Also there is no tax exemption and rebates available. Charge earnings base on personal income tax rates and incentives offered to companies is denied.
The main advantage of sole proprietorship is less tax. The owner of Botak will be taxed on the business profit based on the individual tax rate even if no drawings are made. Because the income of individual absolutely less than the company's income. Incorporated companies pay tax at 17%, however, personal tax rate is 20% if chargeable Income above $320,000 and tax rate less than tax rate of Incorporated companies if chargeable Income below $320,000.
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The sole proprietor can also create some retirement account that funds are tax-exempt until it is revoked.
The owner's unabsorbed CA and loss to be transferred to his wife can be deducted and then to carry back the balance of his unabsorbed loss to his and his wife's.
Loss and current year donations can be used against the owner's other income to approved institutions of public character to arrive at the assessable income. The amount carried forward can be utilized in subsequent years without shareholdings'test.
If Botak has a factory on other place for fishing and planting, then capital allowance of plant & machinery and industrial building and registered car for business and also electrical and electronic equipment can still be claimed, unabsorbed carried forward and no shareholdings'test.
Under the Singapore tax laws, Botak needs to make a claim for the following reliefs if it is eligible. Botak can claim $1000 of earned income relief if the age of the owner below 55 years, $6000 of earned income relief if the age of the owner between 56 and 59 years and $4000 of earned income relief if the age of the owner is 60 years & above.
The owner can claim $2000 if the owner (if the owner is a male) is married living with his wife as long as his wife's income is less than $4000.
Besides,$4000 of qualifying child relief(QCR) (per child) or $5500 of handicapped child relief (HCR)(per child) for the first, second and the third child and $2000 of child born on or after 1 Jan 1988 for the fourth child.
Working mother child relief (if the owner of Botak is a mother) is also a part of tax relief. The standard is 15% on mother's earned income for first child, 20% on mother's earned income for second child and 25% for third child and 25% for fourth child and 25% for fifth and subsequent child.
What is more, owner can claim maximum of $5000 for life insurance and CPF contributions, however it capped at the lower of Insurance premiums paid in the preceding year or7% of capital sum assured on death.
Maximum of $5500 for course fees and maximum of $6360 or $4080 for foreign maid levy based on twice the levy paid in the previous year on one foreign maid are also can be claim by owner.
Of course, the owne(if the owner is male) can claim $1,500 of Non-KAH and $3,500 of KAH of No in-camp training in previous years for NSman or $3000 of Non-KAH and $5000 of KAH of attended in-camp training in previous years for NSman.
According to the Companies Act (cap.50), an incorporated company is a legal entity that apart from its owners. Several aftermaths come from this separate legal personality. And its assessment is made separate from the shareholder's other income. Shareholder can assess after the company declares a dividend.
There are some disadvantages of incorporated business. There is no earned income relief until dividend is received.
The main advantage of incorporated business is that Botak (a newly incorporated company with no more than 20 shareholders) can qualify for full tax exemption on the first $100000 of normal chargeable income(excluding Singapore franked dividends)and 50% of the next $100000 for each of the first 3 years consecutive years of assessment. Of course, the company should be a tax resident for that relevant Y/A and is incorporated in Singapore (other than a company limited by guarantee).
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In addition, with effect from Y/A 2006, companies may deduct current year unutilised capital allowances/trade losses of up to $100000 against the assessable income for the immediate preceding Y/A if there is no substantial change in the ultimate shareholders and their shareholdings (the shareholdings test). The carry-back for unutilised capital allowances must also meet the same business test. For example, if there have trade losses of the company in year 2010 or if the company is given capital allowances for YA 2011, the immediate preceding YA would be YA 2010.
Owner also can claim Carry-forward relief. Carry-forward relief means last day of the YA in which the capital allowances/ trade losses and donations were given/ incurred and the first day of the YA in which the capital allowances/ trade losses and donations are to be deducted.
In Singapore, for Year of Assessment (YA) 2012, SMEs (including registered business trusts) with no more than 10 million will receive a one-off, non-taxable SME Cash Grant to help companies offset the high costs which may persist in the business slowdown. The SME Cash Grant is fixed on 5% of total revenue for YA 2012 and no more than $5,000.
Expenses incurred should be deducted as long as the taxable income is chargeable in Singapore ignore whether a company invests in Singapore or outside Singapore. Therefore these expenses of Botak can be deducted if these expenses that are incurred to produce Singapore income.
Depreciation allowances are given for capital expenditures incurred on the acquisition of plant and machinery used for the purposes of a trade or business. Five-year writing-down allowances are available for expenditure incurred on research and development under an approved cost-sharing agreement.
Assume Botak trading between two countries besides Singapore. For example, Botak buy commodities from China and then sell these commodities to USA. This relates to double tax. Because Botak earned foreign income may be paid tax twice -in foreign country and in Singapore, so Botak can claim double-tax relief. However, if the income is a profit then Botak can incorporate now. Opposite, if the income is a loss then Botak should incorporate later because these losses can against other income now.
Take out a big dividend instead of salary to get around this is the best way for him personally to get money out of the company. It wouldn't have enough money to pay tax as it has been taken out to you. Of course, there are two options to choose. The first one is non-deductible by corporation. Whether or not the corporation can deduct this pay out based on the money that is taken out of a corporation. Loans from corporation (If done properly), entertainment expenses (If you do a significant amount of legitimate business entertaining for which the corporation pays) and constructive dividend pay outs (this is a very inefficient way since it is taxable to the shareholder, and usually not deductible by the corporation) are three methods in the first option. Obviously, the first method is not applicable for Botak. The other one is deductible by corporation. There are two methods of this option. Directors' Fees need pay himself. I think Salaries, bonuses and commissions is a common and good way for Botak as corporation pay you and the income is taxable to you, and deductible by the corporation. If the owner of Botak know the corporation will have too high of a profit, pay him a nice bonus.
Business expenses that the cost for trading or business generally can be deducted when a profit flow into the business.
The reasons that salary can be only deducted for employers are the Employment Act or the command by the Court. Compensation usually directly regain from the staff, instead of payroll deduction. The amount deduction should not exceed 50% of the total salary on the premise any one salary period. Absence from work, damage or loss of goods entrusted to the staff for safekeeping, loss of money that an employee should is responsible for, where the damage or loss is directly due to his carelessness or absence should be allowed. In addition, cost of meals treat on employee and house accommodation or entertainment and services that employer offered and accepted by the employee should be allowed. The restore lending, loans or adjustment of overpayments of salary, payment for income tax and CPF contributions and contributions to retirement programme or reserved funds or any other programme to be required by employee on paper should be allowed. What's more payments to any registered co-operative society enclosed herewith the written permission by the employee and any other objective that the Minister for Manpower probable approved based on application now and then also should be allowed.
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Capital allowances are deductible expenses for the wear and tear of the fixed assets purchased and used in the trade or business. These can be deducted from the profits of the company. The car expenses can be deducted based on actual mileage if Botak purchase a car for carrying out its business.
The house can be transferred at market value. The owner can choose s24 and the house (asset) will be supposed to be transferred at TWDV and thus Botak can claim capital allowances. The company can also consider renting the assets from the sole proprietor because the rent expenses can be deducted if the rental is at fair value. The owner will tax on the rental income at the personal rate. It should provide something particularly for bad debts and write-off bad debts before the transfer as the new company could not be allowed to claim. Inventory will be identified to be transferred at market value and any regard as profit will be taxed on the owner. It can also be transferred at cost if the company is carrying on business in Singapore and the inventory is a trading expense. Botak will be taxed on the business profit based on the individual tax rate. The profit of the business get rid of the relevant exemption will be taxed at the corporate if the business is transferred into a company. Any dividends that the company paid and received by the owner will be exempt.
Also, Botak may be able to deduct expenses for the business use of his house. For example, repair and maintenance of his house for business use.
Because Botak's business is to purchase tropical fishes and plants and then sell to others, therefore Botak generally must value inventory at the beginning and end of each tax year to determine the cost of goods sold then some expenses may be occur such as freight and storage. These expenses can be deducted from profits.
Generally, Botak can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
In general, losses can be used against the company's other income for taxation purposes rather than the shareholder's income in Singapore. Nonetheless, the loss is obliged to be deducted on the condition of a statutory income in the first available year and follows the "proceeding year" basis. Company can carried forward the amount of unutilized losses indefinitely to offset the company's income in subsequent years based on shareholders' test under section 37(12) and 23(4) of the Singapore Income Tax Act. The company can use the losses when the shareholding did not change or change a little. We should know that company can consider late claims in special situation and should claim all the loss.
Also, capital allowances besides the same requirement as losses carried forward, test business continuity is required.
There are several qualifying conditions to claim unutilised capital allowances.
When there is no change in the shareholders and company's principal activities or change little on shareholders and their shareholdings up to the relevant days, company can claim unutilized capital allowances.
The claim for unutilised losses, capital allowances, donations brought forward and the unutilised amount to be carried forward for subsequent YAs should appear in tax computation.