You will be able to name the signals that make a company worth its extra cost and admin.
Most people who incorporate do it for one of two reasons. Some do it too early, because a company sounded more professional and a friend said it saves tax. Others do it too late, after a client dispute or a contract they could not sign as an individual. Neither group decided in advance what would make a company worth it. This lesson gives you that list, so the change happens when the signals say so and not when someone at a networking event does.
None of these signals means you must incorporate. Each is a reason to sit down with an accountant and check.
Lesson 5.2 showed that a sole proprietor carries every business debt personally. For a lot of freelance work, the risk is small: a design job that goes wrong usually means a redo or a refund. For other work, one mistake can be expensive.
Watch for changes like these. Your contracts are getting larger, so a dispute would involve more money. You start work where an error could cause a client a real loss, such as advising on systems, money, safety or legal matters. You take on long contracts with penalties for delay. You start holding stock, signing leases or buying equipment on credit.
Take Arjun, an IT contractor, with figures made up for the example. For years he did small fixes for a few hundred dollars each. Then a client offers him a S$90,000 contract to move their customer database to a new system. If that project goes badly wrong and the client claims damages, a sole proprietor's personal savings are exposed, so the size of the contract alone has changed his risk.
Remember the limits from lesson 5.2: a company's protection does not cover a personal guarantee, and it is not a substitute for good contract terms and insurance. Lesson 6.3 covers both. Often the right answer to rising risk is all three together.
Sometimes the decision is made for you by who you work with.
Some clients, especially larger companies and some government buyers, prefer or require suppliers to be companies, and a sole proprietorship may not be enough for their procurement process. If you keep losing work you could otherwise win because of your structure, that is a signal.
Bringing in other people is another. If you plan to hire staff, a company gives you a clearer structure for payroll and contracts. If you plan to take on a co-owner or an investor, a company lets you divide ownership into shares, which a sole proprietorship cannot do.
You will hear that companies pay less tax. Sometimes the total can be lower, once profits reach a certain level, because corporate tax rates and personal tax rates work differently and companies may get exemptions on part of their profits. But the comparison is never just one rate against another.
To compare properly, you need the corporate tax on the company's profit, the tax on whatever you pay yourself as salary or director's fees, the CPF on any salary, and the cost of running the company: an accountant, a company secretary, filings and possibly a corporate service provider. Those costs come every year whether the company makes money or not.
At low profits, the extra costs usually outweigh any tax difference. At higher profits, the balance may tip the other way. Where it tips for you depends on current rates, your other income and how you want to be paid, which is exactly what an accountant can work out for you. This course does not give you a profit figure to aim for, because any such number would depend on rates that change.
Changing structure is not a form you fill in on a slow afternoon. It means a new legal entity, new contracts, possibly new bank accounts, and a different tax and CPF position. Make the decision with an accountant who works with small businesses, and go in prepared. Questions like these get you a much better answer than "should I incorporate?":
At my current and expected profit, what would my total tax and CPF be in each structure? What would running a company cost me each year, in fees and in my own time? How should I pay myself from a company, given my CPF and housing goals? What would I need to change in my contracts, invoices and bank accounts?
Bring your net trade income from module 4, your cost estimates and your liability notes from lesson 5.2.
Mei's three signals, written in her own words, read: "a single contract worth more than three months of my income", "two clients in a year who will not work with me as a sole proprietor", and "my accountant tells me the yearly saving would cover the company's running costs with room to spare". She will check them at each annual review.
Yours should be specific enough that you would know when one has happened. Think about your own work, the size of contracts you take and the clients you want, and then write your three.
Write the three signals that would make you consider incorporating and the date you will next check them.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).