How do accounting records differ between a proprietorship and a corporation?
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A sole proprietorship is a business that can be owned and controlled by an individual, a company or a limited liability partnership. There are no partners in the business. Show
The legal status of a sole proprietorship can be defined as follows:
Self-employed, sole-proprietors and precedent partners have to prepare statement of accounts. IRAS provides guides and samples to help business owners learn more about preparing Statement of Accounts. Requirement to Prepare Statement of AccountsUnder the law, business owners have to prepare statement of accounts so that their business income and expenses can be readily determined. The information will also be useful for you to know whether your business is making a profit or a loss. In addition, you will be able to report your income in the tax return easily during tax filing period if you have prepared your statement of accounts. Guides and Working SheetsIf you need help in preparing the statements of accounts, please refer to the sample Profit & Loss Account (XLS, 33KB) and Balance Sheet (PDF, 50.4KB). You can also refer to the page on Essential Information for Self-Employed by Profession/Trade or engage an accounting professional to assist you in your tax filing. Pointers on Preparing Statement of Accounts and 4-Line StatementDescription:Pointers:Statement of AccountsStatement of accounts comprises the Profit and Loss account and Balance Sheet. If your business earns a revenue of $500,000 or more, you have to submit the statement of accounts as an attachment when you e-file your tax return, via myTax Mail (Email Us) or by post. "Certified" means signed by the sole-proprietor of the business or precedent partner, indicating that the accounts are true and correct. Assets in the Balance Sheet You must maintain a fixed assets schedule to record details of the assets used in your business. If your revenue is $500,000 or more and you are claiming capital allowances on your business asset, please submit a fixed asset schedule showing full details of the assets acquired and disposed of in the year. The details required are:
Grouping of Certain Expense Certain expenses may have been grouped together and presented as one item. For example, you may have grouped the staff salary, Central Provident Fund (CPF), Foreign Worker’s Levy (FWL) and Skill Development Levy (SDL) as one expense item in your Profit & Loss Account. It is not correct to group different expenses as one item in the Profit & Loss Account. Please state each item separately. Expense Items Subject to Statutory Rates Certain expense items such as employer’s CPF contributions, FWL and SDL are subjected to statutory rates. Such claims cannot exceed the statutory contribution rates. Amounts exceeding the statutory contribution rates are not allowable as deductions. If excess employer's CPF, FWL and SDL contributions have been included in the Profit & Loss Account, please add back the amount to the net accounting profit/loss to arrive at the Adjusted Profit/Loss. For prevailing CPF contribution rates, please refer to the CPF website. Aside from "General", expenses may also be classified as "Operating", "Miscellaneous" and "Others". If expenses are classified under "General", "Operating", "Miscellaneous" or "Others" in the Profit and Loss Account, please give a breakdown of the expenses with a detailed description of the amount applicable to each item. Please note that private and capital expenses should not be included as they are not allowable business expenses. If disallowable expenses have been included in the Profit & Loss Account, please add back the amount to the net accounting profit/loss to arrive at the Adjusted Profit/Loss. Are you planning to incorporate a company in Singapore? You are probably aware of the different company structures available to business owners. But which one's better for you if you're the sole owner of a company? Should you automatically sign up for sole proprietorship, or will a private limited company structure benefit you more even if you're the only registered owner? This article will go through the differences between a sole proprietorship and a private limited structure and the factors that will affect your choice during company incorporation.  What Is a Sole Proprietorship?A sole proprietorship is a business that is owned by a single entity. This entity can be
As the owner of a sole proprietorship, you are personally responsible for any risks and liabilities associated with the business. This means that your personal assets can be liquidated to pay off any debts or lawsuits the business may incur. In other words, the owner of a sole proprietorship is exposed to unlimited liability, and personal assets are not safeguarded. What Is a Private Limited Company?A private limited company, commonly known as Pte Ltd in Singapore, is the most popular choice of company structure. This structure is flexible and scalable because an individual or a corporation can incorporate it. Unlike a sole proprietorship, liabilities of a Pte Ltd company are only limited to its members' shares (and by members, we refer to the shareholders, owners, and co-owners of the business). Their personal assets will not be affected in case liquidation needs to be done. Local and foreign business owners can incorporate a private limited company structure with just a few regulatory requirements. What Are the Key Differences Between Sole Proprietorship and Private Limited Company?Now that we've defined what a sole proprietorship is and what a private limited company is, it's time we settle the debate. Here are the critical differences between the sole proprietorship vs private limited company in Singapore: Table 1: Brief Summary of Comparison of FeaturesFeatureSole ProprietorshipPrivate Limited CompanyOwnershipSingle-OwnerMinimum of 1 Director. Between 1 and 50 Shareholders. Ownership is transferableDecision-MakingOwner makes decisions directlyDecisions are made by the Board of Directors (elected by Shareholders)LiabilityNo separate legal entity. Business and owner are one and the same, therefore unlimited liabilityLiabilities are limited to amount of shares that members are holdingTax Filing RequirementsMinimal Tax Filing Requirements. Owner files a personal income tax return.Corporate tax and annual returns are filed yearly.FundingDifficulty in obtaining loans or grants due to liability.Easier to acquire loans from banks, or apply for government grantsFinancial Record PrivacyOnly owner can access financial recordsAll shareholders have access to financial recordsCorporate Income Tax (CIT) RebateCan't qualify for CIT rebatesEligible for CIT rebates once announced by government.Ease of FormationLess financial resources to get startedMore financial resources and paperwork required to get startedTax RatesPersonal income tax rate: 0 to 22% for tax residents. Flat 15% for non-tax residentsCorporate Tax Rate of 17%Profit DistributionProfits are enjoyed by the owner aloneProfits are shared in the form of dividends based on shares held by a shareholder OwnershipA sole proprietorship is owned by one person and one person alone, and the business has no separate legal identity. The owner and business are treated the same, so the owner can be named in the suit if the Singapore company is sued. Adding two or more people into this structure will convert this into a partnership structure. Private limited companies can be owned by more persons, up to 50 shareholders. A private limited company is also a separate legal entity, which affects its liability, funding, and other traits. Decision-MakingThe owner of the sole proprietorship business will make all the decisions. In contrast, a private company's decision-making process is carried out by the board of directors. These are elected by the shareholders. What this means is that there are conflicts that will possibly arise within these meetings, which could hinder the company from moving forward. This is all avoided in a sole proprietorship business structure. LiabilityA sole proprietorship has no separate legal identity, so the business owner may be held liable for a debt, lawsuits, and other causes for concern. This means that if a business cannot pay its debts, the owner's assets may be used to help pay off the debt. If the company gets into legal trouble, the owner cannot separate themselves from the lawsuit. They are just as liable as the business. In contrast, private limited company owners' and shareholders' liability is limited only to their investments in the business. This means that if a Pte Ltd company gets sued or cannot pay its debt, owners and shareholders won't have to worry about their personal assets getting dragged into the mess. As a business owner or shareholder, the business structure ensures that you are protected financially and legally. Tax Filing RequirementsSole proprietors have minimal filing requirements because the owner will only have to file personal income tax returns. You don't need to file returns annually as a business because you're a sole proprietor. On the other hand, private limited companies need to file corporate tax and annual returns and hold general meetings annually. They also have to comply with various requirements under the Singapore Companies Act. FundingSole proprietors may find it difficult to acquire more capital for the business because of their liability. They can't apply for grants unless they register as a Public Limited Company (PLC). In contrast, private limited companies can quickly obtain funding due to their separate legal identity. It's easier for them to acquire loans from the bank or external investors even because they're seen as corporate bodies. In addition, private limited companies can quickly obtain grants, including the Startup SG Equity, Startup SG Founder, and Market Readiness Assistance (MRA) Grant. You can read more about Singapore government grants in this article. Financial Record PrivacySole proprietors have more private financial records compared to private limited companies. The owner of a sole proprietorship is the only one who can access financial records. In a private limited company, all shareholders have access to the company financial information. Worst-case scenario, someone might end up leaking these financial documents to competitors. Corporate Income Tax (CIT) Rebate & SME Cash GrantSole proprietorship can't enjoy a Corporate Income Tax (CIT) rebate or SME Cash Grant. But they can enjoy a personal tax income rebate when granted by the government. Once the government announces them, private limited companies are eligible for the rebates mentioned above (CIT and SME Cash Grant). During YA 2020, CIT Rebate was 25% and capped at S$15,000. For YA 2019, CIT Rebate was 20% and capped at S$10,000. This rebate will reflect in your company's income tax computation and assessment. Side note: there was no CIT Rebate proposed for YA 2021. Ease of FormationThe sole proprietorship is easier to form compared to a private limited company structure. For one thing, sole proprietors require less financial resources to get started compared to private limited companies, who require a lot more. Secondly, there’s a lot more paperwork behind forming a private limited company compared to a sole proprietorship. Tax RatesSole proprietors pay less tax compared to a private limited company. Sole proprietors only need to file individual income tax, compared to a private limited company. Sole proprietors are subject to personal income tax and only need to pay between 0% and 22% for tax residents. The higher your income is, the higher your tax rate is. For tax residents, the tax rate is capped at 22%. Meanwhile, non-tax residents pay a flat 15%. Private limited companies are subject to corporate income tax and pay a flat 17% (by the end of 2021). It’s. Profit DistributionSole proprietors enjoy the profits of the business alone when it’s doing well or suffer losses in contrast. Private limited companies share their profits in the form of dividends based on shares owned by shareholders. For private limited companies, directors may decide to defer dividend payments in case the business does not make a profit (or does not meet income expectations). Further Reading: Advantages of setting up a private limited company in Singapore What Are the Other Corporate Structures in Singapore?Accounting and Regulatory Authority (ACRA) makes other company structures available to business owners. PartnershipA partnership partly relieves the sole proprietor's limited ability to expand the business. This structure comprises two or more business owners whose partners have no separate legal existence. This means that ownership of the company through partnership cannot be separated from either partner. Partnerships can only be dissolved through death, insolvency, retirement, or incapacity of a partner. Like a sole proprietorship structure, a partnership is ideal for specific needs. There are three types of partnerships in Singapore: 1 - General partnership The general partnership is formed by two persons, up to 20 persons. Partners will pay their tax as personal income based on the share of the revenue from the partnership. 2 - Limited Partnership A limited partnership is an alternative to the general partnership structure. The difference is partner liabilities are limited to their initial investment in the partnership, regardless of whether it's capital or property. Limited partners can't participate in the business management process, so it's difficult for corporate service providers like us to recommend this structure to clients. 3 - Limited Liability Partnership Also known as an LLP, a limited liability partnership is more recent and slightly more advanced than the two mentioned above. Owners are more flexible in operating as a partnership and enjoy the benefits of a Pte Ltd corporate structure. Accountants commonly use this and law firms, architects, and other professional service providers who want to create a joint practice in their industry. Public Limited CompanyPublic Limited Company is another form of LLC (Limited Liability Company). Still, they have the option of offering their shares to the public (as opposed to a private limited company that can't). The structure will need at least 50 shareholders as a requirement for incorporation and are subject to scrutiny by the Singapore government because they raise funds from the public. PLCs are also listed on the stock exchange when they meet the financial requirements and if they choose to get listed. Closing More often than not, corporate service providers like us often end up recommending private limited company structures to our clients because of their robust legal identity and overall flexibility. They enjoy many benefits other company structures don't have access to, such as grants and rebates. It all boils down to what our clients need from us and how they want to proceed with their Singapore company registration. If you want to know more about the different company structures, or about the company formation process in general, feel free to get in touch with us. Our dedicated account managers will respond to any queries within 1 to 2 working days. How does accounting for corporations differ from accounting for proprietorships?The income statement of the sole proprietorship does not report as an expense any salary or wages for the owner working in the business. However, the regular corporation's income statement does include the owner's salary or wages as an expense.
What is the difference between a proprietorship and a corporation?As long as you're the only owner, you're automatically granted the status of sole proprietor without having to do anything. In comparison, incorporation is the legal process of forming a company. You're forming a business entity and creating a legal separation between your personal assets and the business's assets.
What accounting information does a proprietorship need?The IRS requires sole proprietors to use Profit or Loss From Business (Sole Proprietorship) (Schedule C (Form 1040)), to report either income or loss from their businesses.
What are the differences in accounting for partnerships versus accounting for corporations?As a pass-through entity, owners of a partnership file the business's income and losses on their personal tax returns. They pay tax at their personal income tax rate. Corporations require a professional accountant to file. Any income made is taxed at the corporate income tax rate.
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