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one man private limited need secreterial services ?

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newtofl
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one man private limited need secreterial services ?

Postby newtofl » Sat, 29 Apr 2017 5:00 pm

Hi
i am starting a one man private limited (aka i am 100% shareholder and director - same person). i am a consultant, and will not have a physical address office (since i will be at my client site most of the time)

i am puzzled over shareholder vs directorship fees. i was told i can pay myself minimal (salary every month) , then have everything credited as shareholder fees (and not director fees) - since shareholder fees is not taxable ?

2nd , since my operating model is very simple (client pays me a flat rate every month , and i dont pay office rent, this is a OMS model, and i dont have any more coy expanses) -> is secreterial services really needed ? do i need help in filing those ACRA , IRAS, payslip stuff etc ?

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Re: one man private limited need secreterial services ?

Postby Strong Eagle » Sat, 29 Apr 2017 10:28 pm

newtofl wrote:Hi
i am starting a one man private limited (aka i am 100% shareholder and director - same person). i am a consultant, and will not have a physical address office (since i will be at my client site most of the time)

i am puzzled over shareholder vs directorship fees. i was told i can pay myself minimal (salary every month) , then have everything credited as shareholder fees (and not director fees) - since shareholder fees is not taxable ?

2nd , since my operating model is very simple (client pays me a flat rate every month , and i dont pay office rent, this is a OMS model, and i dont have any more coy expanses) -> is secreterial services really needed ? do i need help in filing those ACRA , IRAS, payslip stuff etc ?


  1. If you have only a single director, you are required by the Companies Act to have an outside secretary. Even if this rule weren't in place, you'd be wise to have an outside secretary unless you know how to keep minutes books, prepare directors resolutions, and file reports with BizFile. Failure to follow all the rules regarding filings could cost you.

  2. You must have a physical registered office address for your pte ltd in Singapore and that address must be open to the public at least 5 hours per business day or you must post your office hours in a way that the public knows what they are. You can use the address of your home but the Companies Act requires that every pte ltd have a physical address for the serving of papers, summonses , tax notices, etc.

  3. There are no such thing as shareholder "fees". Shareholders receive dividends from the net profits a company has earned. Let's take a couple of examples. Your company has total revenues of $100,000 and you pay yourself a salary of $100,000 which is taxable to you personally. There is no net profit and hence; no dividends.

    If you have that same $100,000 in revenue and pay yourself nothing, then you have $100,000 in net profit, which you can distribute as dividends to the shareholders, and which are not subject to personal income tax.

  4. Be aware, however, that IRAS is well aware of this scam. If you attempt to pay yourself nothing (or very little), IRAS may come back on you. They know the salaries of all sorts of different jobs, and if you are a managing director and servicing clients, yet earning no salary, they will get you for the taxes you tried to avoid plus penalties.

  5. Be aware also, applicable to citizens and PR's, that you can pay yourself directors fees or a salary for work performed. Directors fees are not subject to CPF. If however, you pay yourself solely with directors fees to avoid CPF contributions, you will find yourself in hot water again. Unless you can prove that you performed directors duties only (and obviously you can't since your are servicing your client), you will again be deemed guilty of scamming the system.

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Re: one man private limited need secreterial services ?

Postby newtofl » Mon, 01 May 2017 10:36 pm

hi Strong Eagle,
thanks for the clarifications. So am i right to say that i can actually split my total revenue in such a way whereby i 1) monthly decent pay -> CPF and income tax , 2) director fees -> only income tax and 3) shareholder profits -> no income tax and no CPF ?

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Re: one man private limited need secreterial services ?

Postby newtofl » Mon, 01 May 2017 11:13 pm

oh, and it the above is possible - i will assume my tax rate will be at (1) + (2) = the amount i get from my salary and director's fees , just that i only need to compute CPF contribution from my monthly salary (item 1) ?

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Re: one man private limited need secreterial services ?

Postby Strong Eagle » Mon, 01 May 2017 11:13 pm

newtofl wrote:hi Strong Eagle,
thanks for the clarifications. So am i right to say that i can actually split my total revenue in such a way whereby i 1) monthly decent pay -> CPF and income tax , 2) director fees -> only income tax and 3) shareholder profits -> no income tax and no CPF ?


Yes, that is exactly right. I set a base salary for myself that ensured CPF contributions were max'ed out. I paid directors fees when I made a lot of money. In my case, as a US citizen, dividends paid would have been taxable in the USA at a much higher rate than earned income, and thus I never took that route.

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Re: one man private limited need secreterial services ?

Postby Strong Eagle » Mon, 01 May 2017 11:14 pm

newtofl wrote:oh, and it the above is possible - i will assume my tax rate will be at (1) + (2) = the amount i get from my salary and director's fees , just that i only need to compute CPF contribution from my monthly salary (item 1) ?


Correct.

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Re: one man private limited need secreterial services ?

Postby newtofl » Wed, 03 May 2017 10:44 pm

ah yes , thank you very much for the answers. getting clearer now.

Some other questions - i am considering getting a partner (50/50 share , and as a director). i was told that if one was to get a monthly salary , he/she needs a formal letter of employment from the company ?

his role will be more passive in nature , acting as an advisor. so my take is that i issue myself a letter of employment (to get the monthly salary -> CPF and income tax) , then we will split whatever that remains as director fees (income tax) and shareholder dividend (no tax , no cpf) . He has no monthly salary (and no letter of employment) as he is an advisor.

is the above possible ?

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Re: one man private limited need secreterial services ?

Postby Strong Eagle » Thu, 04 May 2017 1:31 am

newtofl wrote:ah yes , thank you very much for the answers. getting clearer now.

Some other questions - i am considering getting a partner (50/50 share , and as a director). i was told that if one was to get a monthly salary , he/she needs a formal letter of employment from the company ?

his role will be more passive in nature , acting as an advisor. so my take is that i issue myself a letter of employment (to get the monthly salary -> CPF and income tax) , then we will split whatever that remains as director fees (income tax) and shareholder dividend (no tax , no cpf) . He has no monthly salary (and no letter of employment) as he is an advisor.

is the above possible ?


You've asked a complex question. First, what do you mean by 50/50 share? Are you proposing that each of you hold 50 percent of the shares and thus, are each entitled to 50 percent of the dividends? By law, dividends must be uniformly distributed on the basis of a per share dividend and the number of shares held. Is this your intention?

Unless you plan on issuing a second class of stock (quite unusual for an exempt pte ltd), you also run into problems of governance. With each owning 50 percent, how are you going to get a majority vote at a shareholder's meeting if you each have 50 percent. You may think you won't have a falling out but the legal fact is that if your partner does not agree, you'll never have a majority vote at a AGM or EGM. Consider a 51/49 split so you retain shareholder power.

Or are you talking about some other kind of 50/50 share? For example, you might agree to split profits 50/50 as bonuses to each person. Or, you might agree that your salaries will always be equal. This ties in with your question about employment contracts.

Employment contracts are not required by law, unless your articles of association require them. But, you are going to want an employment contract to spell out salary, bonuses, fees, expense reimbursement, etc. You are also going to want to specify what happens upon exit of you or your partner.

Why do you want to setup your partner as a director? You do realize that in doing so, the company is now officially governed by a board of directors and you cannot limit the powers of the directors as they have been specified in the companies act. Therefore, you have exactly the same situation as with 50/50 shareholders. You can name yourself as managing director, which implies that you run the company but unless the other director agrees with your moves, you will be stymied. So, again, why set the partner up as director?

You can setup your partner as a director/employee of the company, in which case the director is referred to as an executive director. In this case, you would have an employment contract, and the director could be paid a combination of salary, bonuses, and fees.

You can also setup an independent, outside, or non-executive director (they all mean the same thing). In this case, the director does not work for the company and receives only fees for director work performed. This is unusual in an exempt pte ltd and much more common in large public companies. For example, a large shareholder might want their own independent director on the board to keep tabs on the executive directors' decisions. Or the board might request that a senior manager from a bank sit on the board.

Outside directors can also be shareholders, may be required to be shareholders, and can receive their compensation as shares in the company.

Either way, if you plan on setting up a new director, your company secretary must setup resolutions for the appointment of a director, and a resolution that specifies the remuneration a director will receive (you should already have set this up for yourself... a resolution for compensation... your original directorship would be setup in the articles of association). These must be approved at a AGM/EGM... yes, I know you are the only shareholder right now, but if you don't do it this way, you are in violation of the companies act and your corporate shield could be waived.

And speaking of shareholders: If your articles of association don't already have provision for the issuance of additional shares over and above what you own right now, you're going to need a directors' resolution that allows for additional shares in the company so that it can be voted upon in an AGM/EGM. For example, my company's incorporation documents allowed for the issuance of one million shares, with 200,000 at a dollar a piece being originally issued. This also allowed us room to sell to angel investors without needed to modify anything.

My view is that unless you have no choice you don't want to give away shares in your company and you don't want to make someone else a director.

What's the point in giving away shares? In an exempt pte ltd, almost all share agreements include language that a shareholder cannot sell her shares to an external person without first offering them to existing shareholders. And, exempt pte ltd shares are very ill-liquid... nobody wants to buy them anyway.

So... you give me shares... I really have nothing but a claim on dividends, which may or may not ever occur, especially if you are the only director and majority shareholder. And as I noted earlier, if your intent is to avoid personal taxes on salary, even your partner is going to run into problems as a passive advisor.

If you make someone a director, I've already stated the problems associated with same. It sounds like your partner wants to supply advice, then participate in the profits instead of drawing a salary. In this case you would want to draw up an employment contract specifying how profits are computed and split. if your partner wants part of the profits as dividends, then make sure she has less than 50 percent of the stock so you retain control.

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Re: one man private limited need secreterial services ?

Postby newtofl » Thu, 04 May 2017 9:55 pm

whoa.... i didnt know it will get so complicated. Really appreciate the advise Giant Eagle. You hit the nail on the head , for the last para

It sounds like your partner wants to supply advice, then participate in the profits instead of drawing a salary. In this case you would want to draw up an employment contract specifying how profits are computed and split. if your partner wants part of the profits as dividends, then make sure she has less than 50 percent of the stock so you retain control.


in that case , i am thinking of
a) 55/45 in my favor , then have a legal contract between us saying how the shareholder dividend are split.
b) draft at an AGM, how much director fees should be allocated to each one of us (and then of course the remainder will be the shareholder divided in 55/45 as per item a)
c) i will get a letter of employment indicating my monthly salary , while he gets nothing -> just item b and a above

-> does the above make more sense ?

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Re: one man private limited need secreterial services ?

Postby Strong Eagle » Thu, 04 May 2017 11:20 pm

You can do what you have suggested, but there are still complications. Read more of my responses below.

newtofl wrote:whoa.... i didnt know it will get so complicated. Really appreciate the advise Giant Eagle. You hit the nail on the head , for the last para

It sounds like your partner wants to supply advice, then participate in the profits instead of drawing a salary. In this case you would want to draw up an employment contract specifying how profits are computed and split. if your partner wants part of the profits as dividends, then make sure she has less than 50 percent of the stock so you retain control.


in that case , i am thinking of
a) 55/45 in my favor , then have a legal contract between us saying how the shareholder dividend are split.


Unless you have two different classes of stock, then a 55/45 allocation of stock means that dividends dividends must also be split 55/45. Example. You have 1000 shares of stock. You own 550, partner owns 450. You have $1000 in profit and declare a dividend of $1 per share. You get $550 in dividends, partner gets $450. This is a matter of law. You cannot change this.

If you want a different breakdown for distribution of dividends, you must issue a second class of shares with different drawing rights. This is much more complicated and you will require a CPA to get the second share class setup, and a good secretary to administer share dividends.

Note also that if you are planning on giving your partner 45 percent of the company shares, then this is a director expense to your company, and a personal income item to the partner. The share value is at least your net worth figure on your balance sheet divided by the number of shares outstanding.

Often, shares sell for more than book value because of the promise of company growth or future profits. Once you and your partner establish a share value, she will have to report it to IRAS. For example, you have 1000 shares outstanding. Your net worth account is $5,000. This means each share has a $5 book value. If you give 450 shares to your partner, she will need to report (5 * 450) $2,250 in income.

b) draft at an AGM, how much director fees should be allocated to each one of us (and then of course the remainder will be the shareholder divided in 55/45 as per item a)


Again, I have no idea why you want your partner to be a director because she will have equal powers with you under the law. In other words, by making your partner a director, she will have as much management authority and responsibility as you, and if she decides she doesn't like what you are doing, and blocks it, your only recourse is the courts. You could get a pre-signed, undated letter of resignation but this also might have issues.

If you are intent on including the partner as director, you have two choices.

  1. You may make the partner an employee of the company. In this case you would draw up an employment contract and you can specify no salary and just directors fees as compensation. You would specify how the directors fees would be calculated and paid. If you choose this solution, then you must file an IR8A every year for your employee. You also register your partner with BizFile as an executive director.

  2. You can contract to have the partner engage as an outside director under a contract for services. Again, you specify how directors fees are calculated and paid. Under this scenario, the partner is responsible for taxes on fees paid. If you go this route, your partner must be a citizen, PR, or capable of procuring their own EP. You also register your partner with Bizfile as an outside director.

If you don't make your partner a director, then you essentially also have two choices, as above. Your partner can be an employee, whose only compensation is based on profits, or you can establish a contract for services, and treat the partner as an arm's length contractor.

Either way, your choice has no bearing on the issuance of shares and payment of dividends.

c) i will get a letter of employment indicating my monthly salary , while he gets nothing -> just item b and a above

-> does the above make more sense ?


You will want an employment contract stating ALL of your remuneration... monthly salary and directors fees (and how calculated), expense reimbursement, etc.

You really want a good corporate secretary to help you set all this up.


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