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How does share capital work?

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aster
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How does share capital work?

Postby aster » Wed, 23 Nov 2011 11:48 pm

Is it ok to start a new company, inject a decent amount of share capital into it, and then have it work off that (paying wages, fees, etc.)? If the worst happens, can you close a company once you have spent the share capital on such expenses?

I'm only asking because in certain nations the share capital is apparently untouchable, so you can never spend the money on anything because you always have to have that amount in the bank no matter what. Seems strange to me, but I've heard that's how it works in certain countries...

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Postby Strong Eagle » Thu, 24 Nov 2011 5:38 am

Not so in Singapore. To wind a company down in Singapore, you must certify that you are not shutting down with outstanding liabilities.

I'm not sure that your view of other countries is accurate. What would be the point of raising cash through stock sales to fund a company if you couldn't spend the money building the company? Every pro forma I've ever seen includes a break even analysis... this means that you expect to burn cash until you become profitable. It's your 'burn rate' that determines how long you can stay alive until revenues exceed expenses.

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Postby aster » Tue, 29 Nov 2011 4:16 am

Strong Eagle wrote:Not so in Singapore. To wind a company down in Singapore, you must certify that you are not shutting down with outstanding liabilities.


You mean I can't spend the share capital, even if I'm the one who put in every penny?

Let's picture this scenario, I pump 100k SGD into a new company's share capital (wholly owned by myself) and then that money is spent on wages (or other expenses). I'm hoping to turn it into a profitable business, but if I don't and the 100k goes down the drain then instead of pumping more money into the company I decide to call it a day and close down the operation.

What exactly is wrong with this scenario? How can I invest 100k if I am not allowed to use/risk it? I'm fully prepared to lose the 100k if things don't go as planned, but I am willing to take that business risk.

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Postby Strong Eagle » Tue, 29 Nov 2011 7:21 am

aster wrote:
Strong Eagle wrote:Not so in Singapore. To wind a company down in Singapore, you must certify that you are not shutting down with outstanding liabilities.


You mean I can't spend the share capital, even if I'm the one who put in every penny?


I didn't say this at all... just the opposite. All I said is that if the company has outstanding liabilities, those who are owed money must agree to the winding down because once the company is gone, there is no recourse for the collection of liabilities. Spending share capital is a completely different thing from owing other people/companies money.

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Postby aster » Wed, 30 Nov 2011 5:36 am

Whew, just wanted to make sure it's ok to use the share capital (all coming out of my pocket) for wages and other company expenses, and then shut down in case things don't work out (with no debts owed of course, but the share capital used up).



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