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Setting up Proprietorship/Partner - Advice needed

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technickly
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Setting up Proprietorship/Partner - Advice needed

Postby technickly » Thu, 19 Apr 2018 8:04 pm

Dear all,

been googling and searching high and low for answers, decided that this is the best place as i've read through some of the threads and I really hope some of the self-employeds/professionals here can offer some advice.

Short intro of myself, i'm 26 this year, diploma holder with no business/accounting background, or studied any business courses. I plunged into business just last month with my partner. If it helps, it's actually a Pasar Malam business. Didn't set up a company/sole proprietorship/partnership as I'm not too sure which to choose.

If 2 people are involved in the business, is it compulsory that we set up a partnership business? Is there any possibility that I can actually set up a sole proprietorship but still pay him the profits accordingly through some other means which is 50-50 sharing?

And also, if let's say I set up a proprietorship now, can i actually set up another one in the future if let's say I want to start another business which is not related to the first one? Which in short, what I'm trying to ask is can i have the following,

1. Sole proprietorship followed by 2nd sole proprietorship?
2. Partnership followed by proprietorship for 2nd business?
3. Sole proprietorship followed by a partnership for 2nd business?
4. Partnership followed by another partnership with another partner for 2nd business?

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Re: Setting up Proprietorship/Partner - Advice needed

Postby Strong Eagle » Thu, 19 Apr 2018 11:13 pm

technickly wrote:Dear all,

been googling and searching high and low for answers, decided that this is the best place as i've read through some of the threads and I really hope some of the self-employeds/professionals here can offer some advice.

Short intro of myself, i'm 26 this year, diploma holder with no business/accounting background, or studied any business courses. I plunged into business just last month with my partner. If it helps, it's actually a Pasar Malam business. Didn't set up a company/sole proprietorship/partnership as I'm not too sure which to choose.

If 2 people are involved in the business, is it compulsory that we set up a partnership business? Is there any possibility that I can actually set up a sole proprietorship but still pay him the profits accordingly through some other means which is 50-50 sharing?

And also, if let's say I set up a proprietorship now, can i actually set up another one in the future if let's say I want to start another business which is not related to the first one? Which in short, what I'm trying to ask is can i have the following,

1. Sole proprietorship followed by 2nd sole proprietorship?
2. Partnership followed by proprietorship for 2nd business?
3. Sole proprietorship followed by a partnership for 2nd business?
4. Partnership followed by another partnership with another partner for 2nd business?


Short answer - this is assuming that you are a Singapore citizen or PR... otherwise, things work quite a bit differently.

You can setup any kind of business entity you want. You can setup as many business entities as you want. Therefore in response to questions 1 thru 4 above, the answers are, "Yes, yes, yes, yes."

If two people are involved in a business, a partnership is not required. Example, you start a SP. I loan you $10,000 to get started. You agree to pay me 15 percent of the profits for the next 10 years in exchange for the loan. We sign a contract stating these terms.

But, if I'm your partner, why would I want to do that? You have complete control of the SP and there is nothing I can do if you turn out to be an idiot and ruin the business. My only recourse is to try and enforce the contract/note you signed.

OTOH, if I become a partner in the business, then the two of us have to make all the decisions together. I put in the money, you put in the operational work, we both split the profits according to the partnership agreement.

To answer your specific question, you can start a SP. You can sign a contract, legally enforceable in court, that you will pay him 50 percent of the profits. No problem at all.

Then, if you wish, you can start a brand new SP that sells ladies underwear, and it is a completely separate entity.

Be aware however, that in the world of partnerships and sole proprietorships, all of your personal assets are at risk. Let's say you completely screw up your Pasar Malam business and there is no profit to pay your partner. But, you are making money hand over fist selling ladies underwear. Your partner can sue you personally and attach the profits of your ladies underwear business because SP's provide no legal shield.

Therefore, if you're really serious about having multiple businesses and partners who will share in the profits, you might consider forming pte ltd's instead. More complicated to setup and more expensive in terms of reporting, and, if your contracts are signed in the name of the company, your partner would have no recourse to assets other than those in the company.

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Re: Setting up Proprietorship/Partner - Advice needed

Postby technickly » Wed, 25 Apr 2018 9:15 pm

First of all, thank you for the really detailed explanation.
Yes i am a Singapore citizen. Ok if i were to pay my partner 50% of the profits, how do I report the profits accordingly? Let me give an example to illustrate my question.
My sole-proprietorship business is as follows:
Whole year gross profit = $150,000
Salary each/annum = $72,000 (assuming 3k/month each)
Balance: $78,000
After deducting expenses, and claims, and all other miscellaneous, let's assume the leftover profit is 50k. So 50% profit that would be 25k each.

How do I report to IRAS then? I have to pay him 50% profit, but because it's a sole proprietorship, IRAS might assume that I earn a total of 50k for the whole year, but in actual fact i only earn 25k (after paying my partner the other 25k)

Hope I somehow made sense. :-k

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Re: Setting up Proprietorship/Partner - Advice needed

Postby Strong Eagle » Wed, 25 Apr 2018 9:39 pm

technickly wrote:First of all, thank you for the really detailed explanation.
Yes i am a Singapore citizen. Ok if i were to pay my partner 50% of the profits, how do I report the profits accordingly? Let me give an example to illustrate my question.
My sole-proprietorship business is as follows:
Whole year gross profit = $150,000
Salary each/annum = $72,000 (assuming 3k/month each)
Balance: $78,000
After deducting expenses, and claims, and all other miscellaneous, let's assume the leftover profit is 50k. So 50% profit that would be 25k each.

How do I report to IRAS then? I have to pay him 50% profit, but because it's a sole proprietorship, IRAS might assume that I earn a total of 50k for the whole year, but in actual fact i only earn 25k (after paying my partner the other 25k)

Hope I somehow made sense. :-k


Any percentages of profits that you pay out are simply additional expenses to your SP. Using your numbers, your P&L looks like:

Income
Sales: $150,000
Costs of Sales: $0
Gross Profit: $150,000

Expenses:
SP Salary: $72,000
Other Expenses: $28,000
Net Profit Before Distributions: $50,000

Distributions to Investment Partners: $25,000
Net Profit/Loss from SP: $25,000

You will then report $72,000 + $25,000 = $97,000 as your total income from the SP on your personal tax return.

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Re: Setting up Proprietorship/Partner - Advice needed

Postby technickly » Wed, 16 May 2018 11:35 pm

Hi there, thank you for the prompt replies once again.
Sorry may i check if the following is correct:
So I have 2 places to report to,
ACRA is for me to report my accounts.
IRAS is for me to report my personal income?

My apologies, i am really confused.

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Re: Setting up Proprietorship/Partner - Advice needed

Postby technickly » Wed, 16 May 2018 11:44 pm

Also, may i ask,

Do I have to do accounting myself? Or do i have to hire a part-time book-keeper?
Because I'm pretty confused with the accounting part. I sell about a variety of 200-300+ different type of items, and I don't run a physical shop, that's also why I don't have a cashier machine or a system to track the movement of goods.

So in that case, how do I actually calculate COGS aka Costs of Goods Sold.
For example, start of the year, I use 100k to buy goods.
Sales generated: 500k for the entire year.

At the end of the year, I have to physically go count my leftover stocks? In order to arrive at the COGS?
But my COGS will not be accurate, as a particular product, can be a cost price of $5, and maybe $4.45 at different times of the year.

Which makes me wonder how do those fruit shops do accounting?
Since durians have fluctuating prices, fruits have fluctuating prices as well, and spoil fruits that aren't sellable? They also do not have a cashier with a cashier machine. Please bear with me, I'm trying hard to figure things out and visualize the entire process. And also that's why I am here to seek help. Thanks in advance.

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Re: Setting up Proprietorship/Partner - Advice needed

Postby Strong Eagle » Thu, 17 May 2018 12:01 am

technickly wrote:Hi there, thank you for the prompt replies once again.
Sorry may i check if the following is correct:
So I have 2 places to report to,
ACRA is for me to report my accounts.
IRAS is for me to report my personal income?

My apologies, i am really confused.


ACRA is the business registration organization for the Singapore government. All businesses and companies must file an annual report of activities for the prior year, and, they must file if there has been a material change. For example, a company would have to report a new director, a SP would have to report if it was sold to another person.

ACRA requires financial reports to be filed yearly. They are pretty straightforward. The reason that ACRA requires that businesses and companies must file is so that the public at large knows who is in behind a business, and the ACRA can collect statistics about business activity.

IRAS is the tax collecting arm of the government. All forms of taxation are handled by IRAS... personal income, business income, GST, excise taxes, etc. For a sole proprietorship you fill out an additional form on your personal income tax form. Again, this additional form includes financial statements... sales, cost of sales, expenses, etc, and your balance sheet... what the assets and liabilities of the business are. If you are running a private limited, the tax form is separate from your personal tax forms.

So, yes, you have two places to report to: ACRA... report business activities, and IRAS... report business income for tax purposes.

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Re: Setting up Proprietorship/Partner - Advice needed

Postby technickly » Thu, 17 May 2018 8:46 am

technickly wrote:Also, may i ask,

Do I have to do accounting myself? Or do i have to hire a part-time book-keeper?
Because I'm pretty confused with the accounting part. I sell about a variety of 200-300+ different type of items, and I don't run a physical shop, that's also why I don't have a cashier machine or a system to track the movement of goods.

So in that case, how do I actually calculate COGS aka Costs of Goods Sold.
For example, start of the year, I use 100k to buy goods.
Sales generated: 500k for the entire year.

At the end of the year, I have to physically go count my leftover stocks? In order to arrive at the COGS?
But my COGS will not be accurate, as a particular product, can be a cost price of $5, and maybe $4.45 at different times of the year.

Which makes me wonder how do those fruit shops do accounting?
Since durians have fluctuating prices, fruits have fluctuating prices as well, and spoil fruits that aren't sellable? They also do not have a cashier with a cashier machine. Please bear with me, I'm trying hard to figure things out and visualize the entire process. And also that's why I am here to seek help. Thanks in advance.


In short, does it have to be very accurate? Can i just estimate the COGS?

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Re: Setting up Proprietorship/Partner - Advice needed

Postby Strong Eagle » Thu, 17 May 2018 11:01 am

technickly wrote:Also, may i ask,

Do I have to do accounting myself? Or do i have to hire a part-time book-keeper?
Because I'm pretty confused with the accounting part. I sell about a variety of 200-300+ different type of items, and I don't run a physical shop, that's also why I don't have a cashier machine or a system to track the movement of goods.

So in that case, how do I actually calculate COGS aka Costs of Goods Sold.
For example, start of the year, I use 100k to buy goods.
Sales generated: 500k for the entire year.

At the end of the year, I have to physically go count my leftover stocks? In order to arrive at the COGS?
But my COGS will not be accurate, as a particular product, can be a cost price of $5, and maybe $4.45 at different times of the year.

Which makes me wonder how do those fruit shops do accounting?
Since durians have fluctuating prices, fruits have fluctuating prices as well, and spoil fruits that aren't sellable? They also do not have a cashier with a cashier machine. Please bear with me, I'm trying hard to figure things out and visualize the entire process. And also that's why I am here to seek help. Thanks in advance.


You can do all the accounting yourself. Or, you can hire an accountant or a bookkeeper to keep the records for you.

You sound like you don't know very much about accounting at all. You should do two things. Hire an accountant to setup a chart of accounts for your business and teach you the basics of posting transactions, and second, buy an accounting package to keep track of your entries... it will greatly simplify your business.

Next, you want a cash register, or at the very least, you will want sequential invoices so that your sales are properly documented. You mention the durian sellers... you can bet they don't record at least some cash sales and IRAS is always looking for ways to catch these cheaters. If you deal a lot in cash, you will a proper sequential invoicing system, or a proper cash register with tracking so that if you are audited, you can prove up your sales. It really depends on how honest you are. Some people try to screw the system and avoid their fair share. I'd turn them in after a warning.

As to inventory and cost of goods sold, there are several ways of handling this. The most common methods of valuing inventory so that you can assign a cost of goods sold to each sale are: LIFO (last in, first out), FIFO (first in first out), and dollar cost averaging. The most commonly used method is dollar cost averaging.

Let's say that at the beginning of the year you buy 1000 widgets for $1000. Six months later you buy 1000 more widgets for $2000. Now in the first six months of the year, you sell 800 widgets, and in the second six months of the year you sell 900 more.

Under LIFO, your cost of goods sold for the first six months would be one dollar each, and in the second six months, your cost of goods sold would be two dollars each (last in, first out). So, your total cost of goods sold would be $800 + $1800 = $2600, and you have an end of year inventory of 300 widgets.

Under FIFO, your cost of goods for the first six months would be again one dollar each, but the second six months is different. You still have 200 widgets in stock from your original order. So, of the 900 widgets you sell 200 would have the original one dollar cost while the remaining 700 widgets have a two dollar cost. Your total cost of goods sold is $800 + $200 + $1400 = $2400, so you can see this method lowers your cost per item, thereby increasing your profit.

Under dollar cost averaging, your first six months costs will again be one dollar each (your average cost per widget). In the second six months, your widgets are now 200 at one dollar in inventory plus 1000 at two dollars just purchased. Your average cost for widgets is ($1 * 200) + ($2 * 1000) = $2200 / 1200 = = $1.83. Your total cost of goods sold using this method is $800 + $1647 = $2447.

You generally use dollar cost averaging when you buy inventory frequently, like purchasing durians every week. This averages out the price changes from week to week, so that over the course of a year, you've got a pretty accurate cost of goods sold. Again, this is a very common approach for many businesses because it evens out the average cost of goods sold, even when purchase price varies from month to month.

You use LIFO when you expect your inventory value to depreciate over time. This way, the inventory that is left on hand is the stuff you purchased at a cheaper price. For example, anything perishable or likely to go out of style fairly quickly would be valued in this manner.

And finally, FIFO represents your truest cost of good sold because it more or less matches up, time wise, your purchases of goods and sales.

All of these methods are permitted under GAAP (generally accepted accounting principles). However, you should consult with an accountant as to what is best for you because, as you can see, your costs, and therefore your profits, will vary upon the method chosen.

Most companies keep track of their inventory on paper only... current on hand + purchases - sales = new inventory on hand. Your inventory is an asset on your balance sheet and must be reported. Periodically, you will do a physical inventory... retail stores do this frequently because of shop lifting shortages... they need to know where they are. Other companies might only do this every two or three years, or when the stuff on the shelves doesn't seem to match up with what's in the inventory report.

For your example of the durian seller, spoiled fruit is inventory shrinkage. Let's say you have 300 durians in inventory with a cost of $1 each. Your asset value of your inventory is $300. Now, 40 of them go rotten before you can sell them. You have an expense item of $40 for rotted fruit (a debit) and a $40 reduction in your inventory (a credit) so that your durian inventory is now worth only $260.

Finally, you can see that you don't figure out how much you made on every sale, rather, at the end of each month you figure out your total sales, then apply one of the methods above to report cost of goods sold.

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Re: Setting up Proprietorship/Partner - Advice needed

Postby technickly » Thu, 17 May 2018 2:53 pm

Ok thank you so much for the detailed reply, I've a better idea on what to do now.
Anyway because I order goods from other countries, the currency fluctuations, how do I consider these currency fluctuations on top of cost prices?

For example, the same product can be 10Ringgit, at the exchange rate of 3.03
And 2 months later, the same product can be 15 Ringgit, at the exchange rate of 2.80.

And also shipping charges, and GST, do i take into consideration into the cost prices? Or should they be calculated differently under costs incurred by the business?

I hope I'm not asking too much

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Re: Setting up Proprietorship/Partner - Advice needed

Postby Strong Eagle » Thu, 17 May 2018 10:00 pm

technickly wrote:Ok thank you so much for the detailed reply, I've a better idea on what to do now.
Anyway because I order goods from other countries, the currency fluctuations, how do I consider these currency fluctuations on top of cost prices?

For example, the same product can be 10Ringgit, at the exchange rate of 3.03
And 2 months later, the same product can be 15 Ringgit, at the exchange rate of 2.80.

And also shipping charges, and GST, do i take into consideration into the cost prices? Or should they be calculated differently under costs incurred by the business?

I hope I'm not asking too much


I will preface my answer with, "You are beginning to ask questions very specific to your business. You need to engage a CPA to get proper answers, as you will want to ensure that you are following GAAP for your circumstances. Failure to do so may result in audits and dis-allowances of expenses."

I see no reason why you need to worry about currency fluctuations. You pay at an exchange rate at the time you pay for the invoice. In your example above, for one purchase you COGS would be 3.03, for the next, 2.80. That's life.

If you did need to worry about currency fluctuations, for example, a series of time payments payable in the foreign currency, then you maintain a currency exchange rate expense account. Again, this topic is too complex to discuss here and you should be speak to an accountant if you are paying for goods on a time payment plan.

You can include shipping charges, insurance, storage charges, etc as part of your COGS. You do not include taxes within your COGS, instead, treating it as an "other expense" item. If you collect GST, any taxes you collect and must remit would be offset by any GST you paid so it's a wash anyway. In general, taxes are not part of COGS. And again, check with an accountant for your particular situation.


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