What to take note if buying a business from foreigner

[AppleImac]

Hi,
Am thinking of buying a operating business rather than starting from scratch.
Then faced the problem when encountered a foreigner(non-sgrean).
How do I safeguard myself from getting into unnecessary issue or debts from his company(Pte Ltd)?

Thanks

[Strong Eagle]

Like anyone else, you need to do proper due diligence. You can review financial statements but cannot know for sure. At the very least I would insist on financial statements that have been audited by a CPA. A properly audited set of financial statements would include all debts and contingent liabilities. I would want to ensure that the CPA doing the audited had been associated with the firm for at least 3 years.

You need financial statements for at least 3 years, maybe 5. You need a good cash flow statement. Where did the cash come from? Where did it go? That's the only thing that really matters.

Your other problem is what you are going to do about a director. If you don't have the right of residence, you must have a normally resident director in Singapore. If you have the right of residence, then you are OK, unless you residence permit is your EP, in which case, you cannot be a director.

[AppleImac]

Thanks for your reply.

From my understanding in the meeting, the current owner did not declare any profits for the past years running the company.Yet it claimed that it is profitable thru dividend payout. (Or propably under declare I guess)

The owner is selling this biz and going away soon.

[Strong Eagle]

Thanks for your reply.

From my understanding in the meeting, the current owner did not declare any profits for the past years running the company.Yet it claimed that it is profitable thru dividend payout. (Or propably under declare I guess)

The owner is selling this biz and going away soon.

The statement "the current owner did not declare any profits for the past years running the company.Yet it claimed that it is profitable thru dividend payout," does not make any sense.

Dividends can ONLY be paid from profits. The income statement must show a net profit that moves to retained earnings at year end closing. Dividends are paid from retained earnings.

You really need to know how to read financial statements. For example, if dividends were paid, there had to be sufficient cash in the bank to pay the dividends, and afterwards, the bank account cash should be reduced by the dividend payments. Your general ledger transactions should show this.

I wouldn't touch this business without audited financial statements and proof of deposits of dividends into the owner's bank account.

[AppleImac]

Sorry if I caused the confusion.

Just a question. Does all the small businesses usually declare "no profit" and not paying any tax?

[Strong Eagle]

Sorry if I caused the confusion.

Just a question. Does all the small businesses usually declare "no profit" and not paying any tax?

Here is the deal. There are two ways that people try to avoid tax.

For the first 3 years of operation in of a pte ltd in Singapore, there is no corporate tax on the first $100,000 of profit, and a much reduced rate on the next $100,000.

Dividends are not taxable to the person who receives them. Thus, what some people do is not pay themselves a salary, and pay dividends instead because the company profits and the dividends are not taxable.

But, IRAS doesn't like this. They know that someone managing a small business should get at least a certain amount of salary. They will come back and insist that you pay yourself.

The other way to take profit out of a business is through salary and bonuses. Example: I normally paid myself an annual salary of $96,000. I had a really good year and paid myself an additional bonus of $60,000. This reduced my profits.

But IRAS doesn't really care about this. Instead of paying corporate income tax on profits, I pay personal income tax on salary plus bonus.

So, if the owner of the company is taking a large salary out of the company so that it doesn't make a profit, you should also see this in the financial statements... money paid to the owner as salary and bonus. If this is the case, you need to decide if the money paid is sufficient for the asking price of the company.