When you are a sole proprietor, you undertake the challenges of owning and managing a business alone. Let’s take a look at some of the challenges faced.
First, let’s understand what a Sole Proprietorship is. It is often regarded as the easiest form of business setup. A Sole Proprietorship is formed the moment the owner registers his business with ACRA. It is also the easiest form of business to administer as the proprietor does not need to prepare financial reports or file annual returns with ACRA. The management of a sole proprietorship is also simple as the owner is usually the sole decision maker. The owner will usually receive all the profits of the business too.
A Sole Proprietor is not a legal entity (which means it cannot sue or be sued in its own name and it cannot own or hold any property).If the owner is a resident individual, the profit will be taxed on the owner based on a progressive tax rate of 0% to 22%. If the owner is a non-resident individual, the profit will be taxed at the flat rate of 22%. If the owner is a company, the profit shall be taxed at a flat rate of 17%.
The death of the individual owner will cause the business to cease. Any person that choose to continue the business after the death of the owner may subject himself to legal lawsuit from the beneficiaries.
An example of a typical Sole Proprietor
For the past five years or so, Mr. Tan has been reporting a turnover in the range of $800,000 to $950,000. He is not registered for GST yet as he still falls short of $1 million turnover requirement for compulsory registration. But he has been feeling increasingly concerned about GST registration and has also been considering if he should continue to operate as a Sole Proprietor. However, his main concerns about changing his business setup include the food licenses and Halal certificates that he has already obtained under the sole proprietorship. Also, there is the concern of how his suppliers may respond to his not operating as a Sole Proprietor. They may decide to reduce the credit terms he is currently being given.
For the past five years or so, Mr. Tan has been reporting a turnover in the range of $800,000 to $950,000. He is not registered for GST yet as he still falls short of $1 million turnover requirement for compulsory registration. But he has been feeling increasingly concerned about GST registration and has also been considering if he should continue to operate as a Sole Proprietor.
However, his main concerns about changing his business setup include the food licenses and Halal certificates that he has already obtained under the sole proprietorship. Also, there is the concern of how his suppliers may respond to his not operating as a Sole Proprietor. They may decide to reduce the credit terms he is currently being given.
The above setup is a very typical form of business setup in the food supply industry. Other than the concerns that were mentioned above, there are also other issues that he may face.
Other areas of concerns:
- Business Losses and UNLIMITED LIABILITY
The liability of the business is the Sole Proprietor’s liability. And the liability in a Sole Proprietor is UNLIMITED! This means that Mr. Tan’s personal assets are liable and can be seized to pay off his business loss or liability.
Problems that a Sole Proprietor may face upon Voluntary or Involuntary Retirement:
- Business INTERRUPTION
Unless there is already plans put in place for a Successor, there will usually be interruption to the business upon the death, total permanent disability and retirement of Mr. Tan.
- All assets will be FROZEN
This means no one will have any access to any of assets of Mr. Tan. This includes both personal and business assets.
- CHEQUES SIGNATORY may be a PROBLEM
As Mr. Tan may likely be the sole signatory to the business bank account, no one will be able to sign any cheque for payment, although money can still be deposited into the account.
- CREDITORS start chasing for payment
Mr. Tan may be given credit terms by his suppliers. With all assets frozen, time of payment may exceed the credit terms given. Creditors may start charging interest on outstanding payment.
- DEBTORS may delay payment
With Mr. Tan out of action, debtors may drag payment for a long time. Eventually, it may even be a write-off! Even if debtors pay on time, there is no way for money to be withdrawn from the business account.
- CONTRACTUAL obligations continue
The business orders and contracts that were brought in by Mr. Tan will still have to be fulfilled.
- CONTINGENT LIABILITY may become Confirmed Liability
Mr. Tan may have to fulfill his obligation as personal guarantee.
- LEASE of rental place may continue/terminate
Both situations can pose a problem. If the lease continues, it means the rental payment must continue even if one has decided to cease the business. On the other hand, if it terminates, the business cannot be continued even if someone wants to take over
- OPERATING expense & HIRE PURCHASE
These include phone lines, internet connection, equipment and machines. These payment obligations will continue as they usually come with contract terms
- EMPLOYEES may leave
Without any confidence that they can continued to be paid, employees may start seeking alternative employment. This can cause even more interruptions
- BUSINESS Debts = PERSONAL Debts = REDUCTION in Personal Estate
Business debts are considered as the Sole Proprietor’s own personal debts. It is not unusual for owners to use their personal assets to settle business debts. This will bring about a reduction in Personal Estate, leaving behind a smaller estate to the beneficiaries.
- DELAY in Estate Distribution
Because a person is a Sole Proprietor, the Public Trustee will not handle the estate. If no WILL has been written or no Estate Planning has been done, this will generally cause a delay in the Estate.
If you find yourself in a similar position as Mr. Tan – fret not – there are solutions available to address the concerns of operating a sole proprietorship. You need detailed planning to ensure that:
- Liabilities are limited
- Business continues with little interruption
- Payments can still be made to Creditors
- Ready cash available to settle any obligations of the business
- Contractual obligations can be fulfilled
- Employees’ confidence is instilled
- Value of Personal Estate is preserved
- Delay in Estate Distribution is minimised
It’s never too late to make plans to protect your business, yourself and your loved ones. Start today!
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