Paid up capital increased

[laurenlee]

Thanks Strong Eagle - you're certainly wise and knowledgeable. One thing that i have been wondering is how it is possible to incorporate with only $1 when the bank requires a minimum of say $3,000 to open a corporate account? Should that not be the minimum share capital required to incorporate a company?

[BBCWatcher]

There is no bank account requirement to register a company in Singapore. Opening a bank account is optional (although likely for most companies) and comes after company registration, not before.

As it happens, Maybank Singapore offers a company account ("FlexiBiz") with a minimum initial deposit of S$1000 and no minimum balance. In principle a company's representative (CFO for example) could open a FlexiBiz account with S$1000 (in received billings for example), make a GIRO salary payment of S$1000 to somebody the next day, and keep the account open. DBS and OCBC offer company accounts ("Enterpreneur") with a minimum initial deposit of S$500, although their accounts have minimum balance requirements after 6 months (and then fees if you fall below the minimum).

[laurenlee]

Hi BBC Watcher, thanks for your clarification - yes I am aware that you don't need a bank account. However, for the sake of argument and good incorporation and accounting habits, you register a company. You open a bank account with the paid in capital (suggesting it should be the same as the min bank account requirements) then you earn some revenue, pay salary and blah blah blah.

Should you not have opened the account before you received the received billings?

[Strong Eagle]

laurenlee,

No, the amount of money in the bank is not related to share capital although it can be. If you incorporate for one dollar and open a bank account for $3000 that means you have loaned the company $2999... at least somebody has. So you balance sheet would look like:

Assets:
Cash in Bank $3000

Liabilities:
Loans Payable $2999

Networth:
Paid Up Capital $1

Total Liabilities and Net Worth: $3000

This is a pretty common scenario for small pte ltd's... minimal capitalization and shareholders loan money to the company instead of taking an equity position with shares. The thought process behind this is that it is easier to wind up a company that has no capital stock to speak of, although I have learned that the process is straight forward anyway. You would put up equity instead of a loanl if you wanted your clients to know you were well financed... paid up capital is something you can look up on Bizfile. Your company can be totally broke because you spent all the paid up capital but it would still show a $200,000 investment if that's what you initially did (we did).

And, yes, anyone with a lick of common sense will open a bank account as just about the first item of business after incorporating a company... unless you don't plan on doing anything with it or intend to run on a total cash basis.

[3PG]

This thread has been very informative to read up on paid-up capital, thanks, particularly to Strong Eagle.

I'm in the process of opening a travel agency in Singapore and have a related question around paid-up capital and networth. Their requirement is:

"
(1) A licensee shall ensure that at any time — [..] (b) where the licensee is a company, its issued and paid-up capital is not less than $100,000 and its net worth is not less than that amount.
[..]
(6) In this regulation — [...] “net worth” means [..]
(b)
in the case of a company, the paid-up capital and revenue reserves of that company deduction having been made in respect of any debit balance appearing in the profit and loss account of the company;
“revenue reserves”, in relation to a company, means the undistributed profits (or accumulated losses) resulting from the company’s operation which appear in the accounts of the company which are lodged with the Registry of Companies and Businesses together with the annual return of the company under section 197(1) of the Companies Act (Cap. 50) but does not include any reserves which are of a capital expenditure nature.
"

As I understand, what we do next is:
1. Put 100k into the bank account.
2. Update the ACRA record to reflect the 100k in paid-up capital.
3. Have a board resolution to agree and get in writing the increase in paid-up capital.
Correct?

My next question is:
1. Can we pay the directors' salaries from the 100k? (assume the answer is 'No' as that'd reduce our net worth).
2. Can we, the directors, take a loan from the 100k? (assume the answer is 'yes', as this will keep paid up capital and net worth at 100k).

Hope you'll help us shed light on what needs to be done.

[Strong Eagle]

Let me preface more detailed remarks below by saying this. Travel agency abuse has been rampant in Singapore over the decades… someone sets up shop, offers a trip, takes everybody’s money, and then disappears into the night. Or, they fail to pay their suppliers. When people try to get their money back or be paid for their services they find out there is no money to be had.

Thus, the gahmen has taken regulatory steps to try and minimize the possibility that an unscrupulous operator will screw the public, and one of the primary steps is to ensure that you have hard cash money to back up your company and to be able to issue refunds or ensure that your suppliers are paid in the case that something goes wrong.

Now I haven’t looked at the details of all the regulations governing the travel agency business, and, based on what you supplied, and understanding the intent behind the laws, I would suspect that any attempt to remove cash out of the company via loans, directors salaries, etc, will be looked upon very unfavorably and may not even be legal. The government wants you to have $100,000 at least in ready cash and assets so that your customers and suppliers have some recourse should you royally screw things up.

This thread has been very informative to read up on paid-up capital, thanks, particularly to Strong Eagle.

I'm in the process of opening a travel agency in Singapore and have a related question around paid-up capital and networth. Their requirement is:

"
(1) A licensee shall ensure that at any time — [..] (b) where the licensee is a company, its issued and paid-up capital is not less than $100,000 and its net worth is not less than that amount.
[..]
(6) In this regulation — [...] “net worth” means [..]
(b)
in the case of a company, the paid-up capital and revenue reserves of that company deduction having been made in respect of any debit balance appearing in the profit and loss account of the company;
“revenue reserves”, in relation to a company, means the undistributed profits (or accumulated losses) resulting from the company’s operation which appear in the accounts of the company which are lodged with the Registry of Companies and Businesses together with the annual return of the company under section 197(1) of the Companies Act (Cap. 50) but does not include any reserves which are of a capital expenditure nature.
"

This section is telling you two things.

You must have a minimum of $100,000 in net worth at all times. If you fall below that number you are in violation of your operating conditions.

At least $100,000 of that net worth has to be in the form of direct investment into the company, ie, paid up capital. It is also saying that you can have a net worth greater than $100,000 by including retained earnings (revenue reserves), that is, the profits from a prior period that were not distributed to shareholders. This means you could not come back later and do a stock buy back that reduced your paid up capital, nor could you hold an AGM that would reduce your shares such that paid up capital is less than $100,000.

Gory Accounting Details

In the travel business you are going to collect money now for services that you will provide in the future. Let’s say that in July you sell me and the wife a package for $10,000 for a trip that we will take in October. You sell my friend Sam a $5,000 package in July, to be taken November.

You might be tempted to report income in July that shows you to be wildly successful, ie

Income
Trip payments: $15,000
Cost of sales: $0.00 (you haven’t had to pay for the trip you promised)
Gross Profit: $15,000

Then your balance sheet would look like

Assets
Cash in Bank: $115,000 (your paid up capital plus the travel fees you collected)

Liabilities
None: $0.00

Net Worth
Paid Up Capital: $100,000
Retained Earnings: $15,000 (assumes you didn’t take any profits out of your company)
Total Net Worth $115,000

Total Liabilities and Net Worth: $115,000

Since your net worth is more than $115,000 you could theoretically take the $15,000 out of the company in cash, still leaving you with a net worth of $100,000 and giving you a tidy $15,000 in your pocket, even though you have done absolutely nothing to earn the money.

However, if you actually tried to report your business activities this way, ACRA and STB is going to come down on you very hard. Under Generally Accepted Accounting Principles (GAAP), you cannot recognize revenue until you have earned it, and expenses must always be matched to the revenue earned by the expenses. So, let’s use the same example as above, and in addition, you make a $5,000 payment to your tour supplier to ensure that he will perform the tour that you have sold to me.

So now your income statement has all zeros in it. You haven’t earned any of the money you got, nor have you had expenses even though you paid your supplier $5,000.

Income
Trip payments: $0.00
Cost of sales: $0.00 (you haven’t had to pay for the trip you promised)
Gross Profit: $0.00

Your balance sheet now reflects

Assets
Cash in Bank
Cash from paid up capital: $100,000
Cash from trip sales: $15,000
Prepayment to trip supplier: -$5,000
Net Cash in Bank: $110,000

Prepaid Trip Expenses: $5,000
Total Assets: $115,000

Liabilities
Reserves for trips that are owed to people: $15,000

Net Worth
Paid Up capital: $100,000

Total Liabilities and Net Worth: $115,000

Now do you see that even though you have taken in cash and made a prepayment for an upcoming trip, you have an income of zero, hence no profit, hence no retained earnings. Now you can see that you could not take any money out in the form of directors fees or dividends because you would violate the $100,000 minimum net worth requirement.

So now we get to October and I take my trip. Now you get to recognize your revenue and expenses.

Income
Trip payments: $10,000 (what I previously paid you for the trip)
Cost of sales: $5,000 (what you previously paid your supplier up front)
Gross Profit: $5,000

And now your balance sheet looks like this:

Assets
Cash in Bank
Cash from paid up capital: $100,000
Cash from trip sales: $15,000
Prepayment to trip supplier: -$5,000
Net Cash in Bank: $110,000 (unchanged since you had no cash transactions)

Prepaid Trip Expenses: $5,000
Prepaid expense applied to revenue generation: -$5,000
Net prepaid expense: $0.00

Total Assets: $110,000

Liabilities
Reserves for trips that are owed to people: $5,000 (you still have the other trip to deliver)

Net Worth
Paid Up capital: $100,000
Retained earnings: $5,000
Total Net Worth: $105,000

Total Liabilities and Net Worth: $110,000

Now you have $5,000 in profit that you can distribute however you see fit, and as you can see, that profit number actually reflects what you earned for the trip.

As I understand, what we do next is:
1. Put 100k into the bank account.
2. Update the ACRA record to reflect the 100k in paid-up capital.
3. Have a board resolution to agree and get in writing the increase in paid-up capital.
Correct?

My next question is:
1. Can we pay the directors' salaries from the 100k? (assume the answer is 'No' as that'd reduce our net worth).
2. Can we, the directors, take a loan from the 100k? (assume the answer is 'yes', as this will keep paid up capital and net worth at 100k).

Hope you'll help us shed light on what needs to be done.

Now that you see how your accounting needs to be done, I’ll answer your last couple of questions as follows.

If you are a startup company you are going to have to put a lot more than $100,000 into the company because you have all sorts of startup expenses. You have to have at least $100,000 in paid up capital by law and you must always have at least $100,000 in net worth at all times. Let’s say that you estimate you will need another $100,000 for rent, advertising, salaries, etc. Then you must put an additional $100,000 in paid up capital OR loans to the company made by somebody or some entity.

Your memorandum of incorporation ought to allow for a lot more shares to be issued than $100,000 worth so you have the option of putting money into the company by equity or by debt. For example, you might authorize a total of 500,000 shares at $1 but only actually sell $100,000 worth. And yes, once you have sold shares, you must report the shareholders and holdings to ACRA through BizFile.

If you want to change total shares, it must be at an AGM/EGM where shareholders approve total shares to be issued because of the potential to have shares diluted with the issuance of additional shares. Directors cannot authorize additional shares.

As to your questions:

1. Can we pay the directors' salaries from the 100k? (assume the answer is 'No' as that'd reduce our net worth).

You are correct, you cannot pay directors salaries because it would reduce your net worth. But note that you cannot pay ANY expenses out of the paid up capital for the same reason… it reduces your net worth... unless your paid up capital is a lot more than $100,000, in which case you can spend paid up capital until you reach the $100,000 minimum.

2. Can we, the directors, take a loan from the 100k? (assume the answer is 'yes', as this will keep paid up capital and net worth at 100k).

The answer is technically “yes” for an exempt private limited company because loans are not prohibited. However, you can clearly see that to put $100,000 in and immediately loan it all back out is a clear violation of the intent of the STB… they want you to have ready cash. I would bet money that STB has a restriction which prevents travel agents from pulling off this trick.

In any event, because you cannot guarantee that the loans are going to be paid back, GAAP would require you to set up a liability account for bad loans, in which case you would violate net worth requirements. You, know, if you’re going to loan your brother-in-law $50,000 you might as well kiss it goodbye right now, and factor it into your financials. It would look like this.

Assets
Cash in Bank: $50,000
Loans Receivable: $50,000
Total Assets: $100,000

Liabilities
Reserve for bad loans: $50,000

Net Worth
Paid Up capital: $100,000
Retained earnings: -$50,000
Total Net Worth: $50,000

Total Liabilities and Net Worth: $100,000

So… you can see that the above is a paper transaction… and it accurately reflects the status of loans the company has made and is probably a requirement of STB… otherwise the capital requirements become a joke if you can just loan it all back out.

[Strong Eagle]

So... 3PG, are you still planning on opening your travel business?