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Paid up capital increased

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Bully1
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Paid up capital increased

Postby Bully1 » Fri, 07 Feb 2014 8:33 pm

Dear Friends,
I have a Pte Ltd incorporated in 2011 in Singapore. It was only $2.00 paid up capital initially when I have completed the incorporation procedure. But lately by end of 2012, I came to a situation where I had to increase the paid up capital to $100K to show up the credibility of my company to get a certain contract from a client. Unfortunately we could not secure that contract. I have injected the paid up capital to the bank account but it was done in 5-6 different installments. We have used most of this amount for buying products for trading business through the company in 2013 and managed to earn some profit.
My concerns are,
1. Am I be able to reduce the paid up capital down to say $1000.00, since it’s of no meaning to have 100K paid up capital for a small trading company? Thereby I can get back the money?
2. Is it compulsory by regulations that the paid up capital amount have to be maintained in the bank account all the time?
3. Is the director allowed to take loan from paid up capital?
4. Is it possible to show that the capital has been consumed against salaries or any other mode? If yes how it can be reflected in P&L sheet?
Thanks in advance for all your valuable advises.

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Postby Strong Eagle » Sat, 08 Feb 2014 3:12 am

Before I proceed with answers, I need to know the following.

a) What was the authorized number of shares and share value in the original articles of incorporation and/or memorandum of association?

b) When you increased your paid up capital, did you update your business records in Bizfile to show an increase in paid up capital?

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Postby Bully1 » Sat, 08 Feb 2014 4:33 pm

Thanks for the response Strong Eagle,
a) The authorized number of shares were 2 nos. and each of them valued $1.00 in the first article.
b) Yes, I have updated the bizfile and downloaded, which shows the updated paid up capital.
Awaiting for your valuable advise.

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Postby Strong Eagle » Sun, 09 Feb 2014 12:53 am

I am not sure what you mean by "2 nos." but I'll tell you what I know.

First, the "authorized shares" is the total amount of stock that the company could release at some par value. For example, in my company, the authorized shares were 200,000.

Initially, we actually issued a total of four shares, 2 to me and 2 to my partner for a total paid up capital of $4. Later, we substantially increased our investment for the same reason you did... our clients wanted to see a company with some staying power.

Why am I writing this? You cannot issue shares in excess of the authorized shares. If you want more authorized shares, then this modification must be approved by 2/3 of the shareholders at a meeting called for this purpose. The purpose is obvious: To ensure that the existing shareholders holdings are not diluted with more stock.

For a private limited that you own, this really doesn't mean as much except that you must have all the proper paperwork filled out showing that an increase in the authorized shares was approved.

Now to answer your other questions.

1. It is difficult, but not impossible, to reduce paid up capital through a share buy back program. But you don't need to do that at all. You can still have paid up capital of $100,000 and have a company worth nothing.

2. You do not have to maintain the paid up capital. Think about it. If I were to put in $100,000 in paid up capital into my company, I would use it to get the company running. For example, I could pay a year's worth of rent at $25,000, and a year's worth of salaries at $50,000, and I would only have $25,000 actual cash left. The ONLY restriction on paid up capital is that you cannot pay dividends from it. Dividends can only be paid from profits.

3. You get into a real grey area when a director takes a company loan. It is legal but must follow guidelines. But, why would you want to do this? If it is a loan you will eventually need to pay it back. But see also my next answer.

4. It is perfectly normal and legal to have your paid up capital consumed by salaries and expenses. Instead of a loan to a director, you could pay out director's fees.

Here is an example of how it works.

Balance sheet - beginning of year

Assets
Cash in Bank - $100,000

Liabilities & Net Worth
Paid Up Capital - $100,000

P&L for the year

Income
From operations - $0

Expenses
Directors fees paid - $50,000

Net profit - -$50,000

Balance sheet - end of year

Assets
Cash in Bank - $50,000 ($50,000 was paid to director)

Liabilities & Net Worth
Paid Up Capital - $100,000
Retained earnings this period -$50,000
Total liabilities and net worth - $50,000

You can see that your net worth account is reduced whenever you make a loss, and you make a loss whenever your expenses exceed your income.

There is nothing that prevents you from paying directors fees even when you make a loss.

Hope this helps.

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Postby Bully1 » Mon, 10 Feb 2014 12:44 pm

Thanks for the valuable advise Strong Eagle.

One correction I would like to make here about the Authorized Shares is that the concept of Authorized share is not in place anymore according to ACRA. I do not know when it was amended, but I read it in ACRA's web.

What I mean about "2 nos." is that we have issued a total of 2 shares, 1 to me and 1 to my partner for a total paid up capital of $2.00. (Same as you did)

Could you post some links for standard templates of P&L and Balance sheet? Because the sheet which I am currently using looks not that efficient, which was created by our accountant.

Thanks.

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Re:

Postby Sporkin » Mon, 06 Jun 2016 5:30 pm

Resurrecting an old thread here, I find myself in need of some clarification involving paid-up capital and other things involving startups.

@Strong Eagle: I need your advice if you would be so kind, your help would be much appreciated.
I was approached by a start-up with a claimed paid-up capital of 2 mil USD, they offered me a pretty good package, this comes at a time where income stability for me is rather important for the next 6 months and I'm concerned that they pull the rug from underneath me.

Pertaining to your point 3, what stops the directors from pulling all out from this and loaning themselves the paid up capital and subsequently declaring insolvency shuttering the company? Or pay themselves directorship fees to the tune of the entire capital?

I suppose there is more than one way to lose the job, they are dealing with unviable tech banking on next gen infrastructure to be viable, as it is very much R&D could they jolly well fire me if there is a sense that their 'key' tech is never going to be viable?

Thanks in advance.

Strong Eagle wrote:I am not sure what you mean by "2 nos." but I'll tell you what I know.
<snipped<
3. You get into a real grey area when a director takes a company loan. It is legal but must follow guidelines. But, why would you want to do this? If it is a loan you will eventually need to pay it back. But see also my next answer.

4. It is perfectly normal and legal to have your paid up capital consumed by salaries and expenses. Instead of a loan to a director, you could pay out director's fees.

Here is an example of how it works.

Balance sheet - beginning of year

Assets
Cash in Bank - $100,000

Liabilities & Net Worth
Paid Up Capital - $100,000

P&L for the year

Income
From operations - $0

Expenses
Directors fees paid - $50,000

Net profit - -$50,000

Balance sheet - end of year

Assets
Cash in Bank - $50,000 ($50,000 was paid to director)

Liabilities & Net Worth
Paid Up Capital - $100,000
Retained earnings this period -$50,000
Total liabilities and net worth - $50,000

You can see that your net worth account is reduced whenever you make a loss, and you make a loss whenever your expenses exceed your income.

There is nothing that prevents you from paying directors fees even when you make a loss.

Hope this helps.

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Re: Paid up capital increased

Postby Strong Eagle » Thu, 09 Jun 2016 11:49 am

Paid up capital is mostly a red herring and meaningless in evaluating the financial condition of a company.

Extreme example 1: I put 2 million USD into a Singapore company... that's SGD 2.7 million. The balance sheet is simple... 2.7 million in cash in the bank, 0 in liabilities, 2.7 million in net worth.

I immediately pay myself a bonus on SGD 2 million. Reduce cash by 2 million, expense 2 million in bonues. Now, I have an income statement with 0 revenue, 2 million in expense, net loss of 2 million, applied to the capital account, and a networth of 700K... but I still have paid up capital of 2.7 million. Does paid up capital tell you anything? No?

Or... instead of the above scenario, three directors each loan themselves 800K, Now, cash is drained by 2.4 million but there is now a new asset, loans due for 2.4 million, so there is no change in net worth... 2.7 million... but in reality, there's only 300K cash in the bank and a rather questionable set of receivables. Of course, paid up capital is still 2.7 million... so once again, it's a meaningless number.

You really need to see 3 to 5 years of financial statements. What is the operating loss/revenue? What is expense ratio against revenue? Where are the expenses allocated? Big salaries? Bonuses? Payments to vendors?

What about the balance sheet? What is the cash and relatively liquid securities situation? This is what really matters to you... do they have the money? Are the revenues from the income statement sufficient to keep the money rolling in?

What is the quality of non cash assets? Company can look good but if loans are not collectible, if valuations of intellectual property are excessive, then its all bullshit.

How large are the liabilities with respect to assets?

Bottom line... if they are willing to open the financial kimono then maybe you can make a great decision... but paid up capital is a useless metric.

The reality, though, is that if you were to go to work for my company, I'd tell you to f*ck off if you wanted to see my financials. I'm straight up about my revenues and expenses. I'm straight up about the risks you take on, and part of the compensation package I'm willing to give you is in part to incorporate those risks. I can guarantee nothing... I might fail... I can only say that I have a deal working, I need you to make the deal work, we both profit if the deal works, and we're both f*cked if it falls apart.

Most important to you, then, is to assess the integrity of the people offering the job... that's really all there is in small business.

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Re: Paid up capital increased

Postby Sporkin » Thu, 09 Jun 2016 2:06 pm

Thanks for the response Strong Eagle, this new information casts yet another shadow of doubt into the whole deal. AFAIK they have only been incorporated last Nov, and have 5 people and absolutely no income, so their financial statements wouldn't help much.

Honestly in light of what you have mentioned, the risk for this move is greater than i can stomach, I believe they operate with the best of intentions, just that at this point I am in a vulnerable position and i shouldn't gamble with what i cannot afford. That's life i suppose, you can't control when opportunity knocks, it just depends on your state of undress as to whether you can answer the door.



Strong Eagle wrote:Paid up capital is mostly a red herring and meaningless in evaluating the financial condition of a company.

Extreme example 1: I put 2 million USD into a Singapore company... that's SGD 2.7 million. The balance sheet is simple... 2.7 million in cash in the bank, 0 in liabilities, 2.7 million in net worth.

I immediately pay myself a bonus on SGD 2 million. Reduce cash by 2 million, expense 2 million in bonues. Now, I have an income statement with 0 revenue, 2 million in expense, net loss of 2 million, applied to the capital account, and a networth of 700K... but I still have paid up capital of 2.7 million. Does paid up capital tell you anything? No?

Or... instead of the above scenario, three directors each loan themselves 800K, Now, cash is drained by 2.4 million but there is now a new asset, loans due for 2.4 million, so there is no change in net worth... 2.7 million... but in reality, there's only 300K cash in the bank and a rather questionable set of receivables. Of course, paid up capital is still 2.7 million... so once again, it's a meaningless number.

You really need to see 3 to 5 years of financial statements. What is the operating loss/revenue? What is expense ratio against revenue? Where are the expenses allocated? Big salaries? Bonuses? Payments to vendors?

What about the balance sheet? What is the cash and relatively liquid securities situation? This is what really matters to you... do they have the money? Are the revenues from the income statement sufficient to keep the money rolling in?

What is the quality of non cash assets? Company can look good but if loans are not collectible, if valuations of intellectual property are excessive, then its all bullshit.

How large are the liabilities with respect to assets?

Bottom line... if they are willing to open the financial kimono then maybe you can make a great decision... but paid up capital is a useless metric.

The reality, though, is that if you were to go to work for my company, I'd tell you to f*ck off if you wanted to see my financials. I'm straight up about my revenues and expenses. I'm straight up about the risks you take on, and part of the compensation package I'm willing to give you is in part to incorporate those risks. I can guarantee nothing... I might fail... I can only say that I have a deal working, I need you to make the deal work, we both profit if the deal works, and we're both f*cked if it falls apart.

Most important to you, then, is to assess the integrity of the people offering the job... that's really all there is in small business.

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Re: Paid up capital increased

Postby sundaymorningstaple » Thu, 09 Jun 2016 3:17 pm

Sporkin,

"That's life i suppose, you can't control when opportunity knocks, it just depends on your state of undress as to whether you can answer the door."

Well said.

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Re: Paid up capital increased

Postby Strong Eagle » Thu, 09 Jun 2016 10:36 pm

It is indeed the level of risk that you can stomach that matters. If you need a guaranteed revenue stream then more traditional employment is the answer.

If 5 guys have ponied up 2 million USD, I'd guess they would be serious about trying to make things work, and I'd say the possibility of shenanigans would be low. There's not much to be gained to putting money in a company, then loaning it back, except for Thailand, and on paper, where a million Baht is required for a work permit.

OTOH, it is a startup, and there are risks that need to be evaluated. When I started my company with my biz partner, he had a Rolodex of business associates as large as Batam Island... our chances of gaining business were good. And, we hired other expats who had started their own businesses, only to discover that without that big Rolodex, it was impossible to get work.

If the opportunity/salary they were offering was really good, then I'd explore their business plan with them in detail... the markets, the sales plan, gross margins, etc, as opposed to financials. You can find out if their plans for spending 2 million to make even more are realistic, and maybe you do want to be part of that game.

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Re: Paid up capital increased

Postby Strong Eagle » Thu, 09 Jun 2016 10:36 pm

sundaymorningstaple wrote:Sporkin,

"That's life i suppose, you can't control when opportunity knocks, it just depends on your state of undress as to whether you can answer the door."

Well said.


Great line, Sporkin. Gonna have to use that one.

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Re: Paid up capital increased

Postby Sporkin » Fri, 10 Jun 2016 8:44 am

Wow coming from you, I must be on form!
sundaymorningstaple wrote:Sporkin,

"That's life i suppose, you can't control when opportunity knocks, it just depends on your state of undress as to whether you can answer the door."

Well said.

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Re: Paid up capital increased

Postby sundaymorningstaple » Fri, 10 Jun 2016 8:50 am

Everybody has at least one epiphany moment and it should be acknowledged when it happens! ;-) :lol:

Seriously, a proper wordsmith couldn't have done it better I don't think. :cool:

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Re: Paid up capital increased

Postby Sporkin » Fri, 10 Jun 2016 8:56 am

I'm open to risk just not within the upcoming 6-months time-frame, housing + baby coming, i rather sort that out first before adding something else to the mix.

I'm meeting the folks there later for a chat, I have a fair understanding of the tech side of things, the business side not so much. I would like to get involved somewhere in the future just not now, perhaps they can engage me as a part-time consultant for now.

Well weekend's upon us all, cheers.

Strong Eagle wrote:It is indeed the level of risk that you can stomach that matters. If you need a guaranteed revenue stream then more traditional employment is the answer.

If 5 guys have ponied up 2 million USD, I'd guess they would be serious about trying to make things work, and I'd say the possibility of shenanigans would be low. There's not much to be gained to putting money in a company, then loaning it back, except for Thailand, and on paper, where a million Baht is required for a work permit.

OTOH, it is a startup, and there are risks that need to be evaluated. When I started my company with my biz partner, he had a Rolodex of business associates as large as Batam Island... our chances of gaining business were good. And, we hired other expats who had started their own businesses, only to discover that without that big Rolodex, it was impossible to get work.

If the opportunity/salary they were offering was really good, then I'd explore their business plan with them in detail... the markets, the sales plan, gross margins, etc, as opposed to financials. You can find out if their plans for spending 2 million to make even more are realistic, and maybe you do want to be part of that game.

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Re: Paid up capital increased

Postby Sporkin » Fri, 10 Jun 2016 9:00 am

A broken watch is right twice a day, unless it broke at beer o'clock then its right forever :)

Cheers!

sundaymorningstaple wrote:Everybody has at least one epiphany moment and it should be acknowledged when it happens! ;-) :lol:

Seriously, a proper wordsmith couldn't have done it better I don't think. :cool:


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