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Contract of service

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brentlm
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Contract of service

Postby brentlm » Tue, 27 Mar 2018 11:27 am

Hi, I have a small startup (pte ltd) run by just me and my wife.

1. Are we considered as employees of the company where it's a must to issue a contract of service to ourselves?

2. If we are employees, I understand from MOM's website that under the Employment Act, the employer needs to pay salary at least once a month. We no not plan on drawing any salary at the moment but only pay ourselves with directors fees in certain months when the business does well. Is this arrangement workable as long as we indicate how we want to be paid in the contract of service?

Thanks in advance.

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Re: Contract of service

Postby Strong Eagle » Tue, 27 Mar 2018 11:51 am

brentlm wrote:Hi, I have a small startup (pte ltd) run by just me and my wife.

1. Are we considered as employees of the company where it's a must to issue a contract of service to ourselves?

2. If we are employees, I understand from MOM's website that under the Employment Act, the employer needs to pay salary at least once a month. We no not plan on drawing any salary at the moment but only pay ourselves with directors fees in certain months when the business does well. Is this arrangement workable as long as we indicate how we want to be paid in the contract of service?

Thanks in advance.


Here's the deal. If the pte ltd is just you and your wife, then you are the sole shareholders. And, you are the directors (at least one of you), and you are the employees of the pte ltd.

Now, in a larger company, where people might complain, you would need to issue a contract for service so that your employees would know exactly the terms they worked under. But, for you and your wife, you don't need to prepare any contracts. What are you going to do? Turn yourselves in for failure to issue contracts to yourselves?

No one will ever come and ask to see your contracts. MoM only gets involved when there is a complaint. It's the same thing with salaries. If you have employees besides yourself, then yes, you need to pay regularly because your employees could complain to MoM. But again, are you going to report yourself for not paying a salary to yourself each month? Of course not!

So, yes, your arrangement is completely workable and you don't need any contracts for service. Here is what you may need, however. Unless you know how to file directors resolutions and minutes for AGM's and EGM's then you will need a secretary. It is important that the governing of the company be in compliance with ACRA rules. For example, if you want pay directors fees, it takes a resolution at an AGM or EGM to make it legal under the companies act.

As with paying yourself monthly, or having a contract for service, you don't really need to have held an AGM or EGM since it is only you and your wife, you only need to have corporate records to show that meetings were held and that shareholders approved the actions. This is very common in virtually all self owned pte ltd's and any CPA or skilled person should be able to help you with this.

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Re: Contract of service

Postby brentlm » Tue, 27 Mar 2018 12:55 pm

Thanks Strong Eagle, your reply is very helpful.

Just to clarify, is it normal to indicate in the contact of service that we'll receive no salary and just purely directors' fees?

When it comes to filling taxes, will it appear odd to IRAS that even though I'm an employee of the company but I only get paid with director's fee? I would think that this is common practice especially for founders of start-ups where cash flow is not so stable in the first few years so i guess there is no issue?

Thanks.

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Re: Contract of service

Postby PNGMK » Tue, 27 Mar 2018 1:02 pm

brentlm wrote:Thanks Strong Eagle, your reply is very helpful.

Just to clarify, is it normal to indicate in the contact of service that we'll receive no salary and just purely directors' fees?

When it comes to filling taxes, will it appear odd to IRAS that even though I'm an employee of the company but I only get paid with director's fee? I would think that this is common practice especially for founders of start-ups where cash flow is not so stable in the first few years so i guess there is no issue?

Thanks.


It's very common. Also consider issuing yourself a loan from the company instead of fees. Get advice on whether this is classified as income or not. Director's fees are, loans (if repaid) should not be.
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Re: Contract of service

Postby GSM8 » Tue, 27 Mar 2018 1:19 pm

Strong Eagle wrote:Now, in a larger company, where people might complain, you would need to issue a contract for service so that your employees would know exactly the terms they worked under. But, for you and your wife, you don't need to prepare any contracts. What are you going to do? Turn yourselves in for failure to issue contracts to yourselves?

No one will ever come and ask to see your contracts. MoM only gets involved when there is a complaint. It's the same thing with salaries. If you have employees besides yourself, then yes, you need to pay regularly because your employees could complain to MoM. But again, are you going to report yourself for not paying a salary to yourself each month? Of course not!

Thanks SE. Appreciate all your accurate and to the point information. A few additional doubts I had related to OP's question. As you say, monthly paychecks may not be needed, but aren't timely monthly CPF contributions due based on the "notional" monthly salary? (at least for owner-employees who are Singapore citizen/PR)

Strong Eagle wrote:So, yes, your arrangement is completely workable and you don't need any contracts for service. Here is what you may need, however. Unless you know how to file directors resolutions and minutes for AGM's and EGM's then you will need a secretary. It is important that the governing of the company be in compliance with ACRA rules. For example, if you want pay directors fees, it takes a resolution at an AGM or EGM to make it legal under the companies act.

As with paying yourself monthly, or having a contract for service, you don't really need to have held an AGM or EGM since it is only you and your wife, you only need to have corporate records to show that meetings were held and that shareholders approved the actions. This is very common in virtually all self owned pte ltd's and any CPA or skilled person should be able to help you with this.

In the case of an exempt Pte Ltd where a director-shareholder has a basic understanding of tax and company filings (but is not a tax or accounting professional) and is considering being company secretary, would you know of any publicly accessible resources or websites that illustrate a typical format ACRA expects, as a guide for filing of AGM/EGM resolutions and reports?

Also, is my understanding correct that 6 months are available from the end of the first year for filing of AGM report, so a new company technically does not have to file anything for the first 18 months?

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Re: Contract of service

Postby Strong Eagle » Fri, 30 Mar 2018 11:38 am

Great questions, GSM8. I've responded below.

GSM8 wrote:Thanks SE. Appreciate all your accurate and to the point information. A few additional doubts I had related to OP's question. As you say, monthly paychecks may not be needed, but aren't timely monthly CPF contributions due based on the "notional" monthly salary? (at least for owner-employees who are Singapore citizen/PR)


Yes, there is the idea of ordinary wages and additional wages (citizens and PR's only). The point is this. If you were to pay an employee $6000 per month, every month, there would be CPF taken out amounting to about $2200 each month for employer plus employee share.

If I try to avoid monthly CPF withholding by paying wages only every other month in the amount of $12,000, then I would still only pay $2200 because CPF wages are capped at $6000. I think the CPF board doesn't like this, and such wage payment arrangements will fall under the Additional Wages category where there are no limits on contributions until an annual wage ceiling is reached.

I don't know all the details, and the additional wages ceiling is substantially larger than ordinary wages, ($102K vs $72K, if I recall), so it would seen that CPF board "encourages" people to pay monthly.

The OP would be well advised to check with the CPF board for his particular situation. For example, if periodic payments are less than $6000, then it really doesn't matter because no CPF cap has been reached. And, when I ran the calculator online, paying myself only $10,000 in two separate months, the calculator said everything was ordinary wages, and I don't think that is correct, but I don't know... the OP may have clear sailing with periodic payments.

In the case of an exempt Pte Ltd where a director-shareholder has a basic understanding of tax and company filings (but is not a tax or accounting professional) and is considering being company secretary, would you know of any publicly accessible resources or websites that illustrate a typical format ACRA expects, as a guide for filing of AGM/EGM resolutions and reports?

Also, is my understanding correct that 6 months are available from the end of the first year for filing of AGM report, so a new company technically does not have to file anything for the first 18 months?


Yes, the six month rule is correct, as I recall.

I have never seen any kind of detailed resource about what needs to be filed and when. In the end, it is all controlled by the companies act, which specifies notice periods that must be given, and the conditions under which directors can make financial decisions, and the conditions under which a shareholder meeting must be called.

I do know that certain types of business must be transacted through the use of directors resolutions. For example, there must be a formal resolution authorizing the opening of a bank account. The director creates these resolutions, no shareholder involvement required. It's a formalization of the business decisions made by the directors. A directors meeting is required to create a directors resolution.

All that is required for this is an A4 sheet of paper with company name and registration at the top. Then a sentence that says something like, "On <Date> a meeting of the directors was held for purposes of conducting the business of the company, and the following resolution was passed unanimously by the directors.

Then comes the resolution, for example, "The directors authorize the opening of a commercial bank account at UOB, in the name of the company. Larry, Curly, and Moe shall have signature authorization on the account, and can sign singly for amounts under $3000 and two or more signatures for amounts exceeding $3000.

Then, it's signed and dated, and presto! You've got a piece of paper that any bank in town will honor to open an account.

What I don't know is the scope of activities that must be covered by such resolutions since my CPA was my secretary in reality, even though I was secretary in name. For example, I never filed a directors resolution to hire an employee or set her pay but did sign lots of other resolutions, all of which I forget... except maybe I signed one accepting the audited financial reports of the company.

Other actions required approval of the shareholders. In this case, there must be a minimum notice period of the meeting, with the items to be considered in the meeting. There are rules for waiving minimum periods as well. The meeting can be an AGM or EGM. Format again is undefined but the contents are: When, where, subject matter to be covered. You might find this in the companies act.

Again, there is a whole scope of corporate activities that require shareholder approval and damned if I know what everyone of them is. But, I can give you a few examples. Directors pay and bonuses must be approved by share holders. So must any change in stock and ownership. Same for creating subsidiaries and certain kinds of financial transactions.

Minutes must be kept at the meetings and their content is specified as well. Who was there, who chaired the meeting, resolutions presented and the outcome of the votes. Shareholders resolutions are usually written up separately, just like a directors resolution, and referred to in the minutes. Would say something like, "At an EGM conducted on <Date> after formal notice was given, shareholders approved by a unanimous vote a resolution titled, "Resolution to award directors fees for fiscal year 1837." Then comes the verbiage about how much and when and under what conditions.

All of this crap is filed in the corporate minutes book, which is theoretically available for public inspection. Unless your company gets sued, no one will ever ask to see your corporate minutes book, and if you don't have it, you can lose your corporate shield for actions taken. That is to say, you don't need to file the contents of your corporate minutes book with the ACRA or anyone else.

Most government reporting is done online and is pretty self explanatory. You file your report on the IRAS BizFile website... synopsis of financial reports, directors, shareholders, outstanding debts, company condition, lawsuits, questionable financial transactions. You fill in the blanks and check the boxes. Ditto for your tax return but you best have a reasonable understanding of accounting to properly file the financials that go with the tax return.

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Re: Contract of service

Postby johnkcp » Sun, 01 Apr 2018 8:54 pm

brentlm wrote:Hi, I have a small startup (pte ltd) run by just me and my wife.

1. Are we considered as employees of the company where it's a must to issue a contract of service to ourselves?

2. If we are employees, I understand from MOM's website that under the Employment Act, the employer needs to pay salary at least once a month. We no not plan on drawing any salary at the moment but only pay ourselves with directors fees in certain months when the business does well. Is this arrangement workable as long as we indicate how we want to be paid in the contract of service?

Thanks in advance.



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Re: Contract of service

Postby GSM8 » Mon, 02 Apr 2018 11:22 am

Many thanks for the detailed post sharing your experience on this, SE. Minor additions from my side (without quoting your entire reply).
1. I've heard from others too that CPF doesn't like ordinary wage varying from month to month but that some variation can be attributed to commissions. However, if one has an idea of likely cash flows/expenses, IRAS accepts reasonable tax planning strategies (e.g. dividends vs personal earnings)
2. Appreciate the informative tips on what typically needs to be filed in the company's record books vs with ACRA. So, as I understand then, while exempt private companies (EPC) need not have audited accounts or submit anything beyond an annual summary report to ACRA, they are still obliged to maintain all the declarations/AGM/EGM/shareholder records per companies act, just like a larger Pte Ltd.

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Re: Contract of service

Postby Strong Eagle » Tue, 03 Apr 2018 11:30 am

GSM8 wrote:So, as I understand then, while exempt private companies (EPC) need not have audited accounts or submit anything beyond an annual summary report to ACRA, they are still obliged to maintain all the declarations/AGM/EGM/shareholder records per companies act, just like a larger Pte Ltd.


That is correct. Audited books are only required of an exempt pte under limited circumstances, for example, if you're part of a government program doling cash to your company. I found that banks want audited books if you have the expectation of getting corporate credit cards or you want to factor receivables.

As for the minutes book, yes, it is a technical requirement specified by the companies act. OTOH, I am familiar with more than a couple of single shareholder pte ltd's whose official minutes were a complete shambles, and mostly non-existent. It won't really matter unless an action is filed against the company. Then you'll have to work like crazy to reconstruct the events and dates.


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