Complete Guide to Registering a Small Company (Under 5 Employees): A CPA’s Financial and Tax Strategy Blueprint
In recent years, the startup wave has been thriving, with many freelancers, micro-startup teams, and studios scaling up their operations to establish formal corporate entities. Among all startup cases, “small companies with fewer than 5 employees” account for the vast majority. Many founders often ask: “With such a small team, should I set up a sole proprietorship/partnership business or a corporate entity? How should we plan our finances and taxes to avoid losses?”
As a practicing Certified Public Accountant (CPA), this article will break down the essential tips for setting up a small company under 5 employees across three core pillars: financial planning, labor & health insurance setup, and tax filing!
1. Sole Proprietorship/Partnership vs. Corporation: Which Is Best for a Small Team?
Before deciding to incorporate, most micro-entrepreneurs face their first dilemma: choosing between a **Business Registration (Sole Proprietorship/Partnership)** and a **Corporate Structure (Limited Liability Company / LLC or Corporation)**:
| Comparison Item | Business Registration (Sole Proprietorship / Partnership) | Corporate Structure (LLC / Corporation) |
|---|---|---|
| Legal Liability | Unlimited liability (If the business fails or incurs debt, the owner’s personal assets are at risk) | Limited liability (Capped at capital contribution, protecting personal assets) |
| Tax Structure | Profits are directly merged into the owner’s personal individual income tax (exempt from corporate income tax) | Subject to a 20% Corporate Income Tax first; remaining distributed dividends are then included in individual shareholders’ income tax |
| Image & Business Expansion | Commonly used for local eateries or small retail; lower trust level when dealing with large enterprises | Professional image, advantageous for securing government grants, B2B enterprise partnerships, and financing |
CPA Recommendation: If your team plans to seek financing, expand capital, secure large B2B enterprise orders, or attract investors in the future, it is strongly recommended to establish a corporate structure to enjoy limited liability and a professional image.
2. Financial Essentials: Labor & Health Insurance Misconceptions for Small Teams
Many people assume that “if a company has fewer than 5 employees, it doesn’t need to enroll employees in labor insurance.” This is a common regulatory misconception! We must distinguish between Labor Insurance, Employment Insurance, and National/Labor Pension:
- 1. Labor Insurance: According to the Labor Insurance Act, companies employing 5 or more workers are mandatory insurance units. For companies with fewer than 5 employees, while not mandatory, they can voluntarily apply for labor insurance through the Bureau of Labor Insurance upon request by employees or willingness of the employer.
- 2. Employment Insurance: As long as a company employs 1 or more employees (even just 1), it is mandatorily required to establish an insurance unit and enroll employees in employment insurance (covering unemployment benefits, parental leave allowances, etc.). This differs from the 5-employee threshold of labor insurance—do not overlook this!
- 3. National Health Insurance (NHI): As long as 1 or more employees are hired, the company is a mandatory insurance unit and must register to enroll both employees and the business owner.
- 4. Labor Pension (New System – 6%): Whenever employees are hired, regardless of headcount, the employer must monthly contribute no less than 6% of each employee’s monthly salary into their labor pension account.
💡 How Should the Business Owner’s Health Insurance Be Registered?
For chairpersons of an LLC or directors of a corporation who are actively working, they generally must enroll in NHI through their own company as a business owner. There are specific wage bracket regulations for their insured amount (which cannot be lower than the highest insured salary among their employees). This cash flow and cost must be precisely calculated when drafting financial budgets in the early stages of a startup.
3. Tax Essentials: Corporate Income Tax, Individual Income Tax, and Business Tax Strategy
Once a company is established, it will face three primary tax burdens:
1. Business Tax (Value-Added Tax / VAT, Filed Bimonthly)
The standard business tax rate is 5%. A company collects business tax by issuing uniform invoices to clients while also gathering legal vouchers (such as office rent, purchase invoices, and equipment) to claim “input tax” credits against “output tax.” Therefore, obtaining legal vouchers for daily operating expenses is the first step for micro-companies to reduce tax burdens.
2. Profit-Seeking Enterprise Income Tax (Corporate Income Tax, Filed Annually in May)
If a company’s annual net profit is NT$120,000 or less, it is exempt from corporate income tax; for amounts exceeding NT$120,000, the excess is taxed at 20%. However, common startup expenses like salaries, rent, utilities, and office supplies can be recognized as legitimate costs and expenses to lower the company’s taxable profits.
3. Earnings Distribution and Individual Income Tax
When the company’s remaining earnings after paying the 20% corporate tax are distributed to shareholders (owners), they are included in the shareholders’ personal individual income tax return for that year (benefiting from an 8.5% tax credit, capped at NT$80,000 per household). If earnings are retained within the company instead of distributed, a 5% retained earnings tax applies.
Conclusion
Although company setups under 5 employees are small in scale and flexible in structure, they require strict compliance regarding mandatory labor & health insurance, voucher acquisition, and tax reporting. By establishing correct financial and tax architectures right from the startup phase, you can not only legally save on taxes and protect personal assets, but also lay the most solid foundation for future rapid growth!