Director's Fee

[SeriousQ]

When I moved my business to Singapore, I set up Private Limited based on advice of this forum.

I paid fees to Company Secretarial firm, ruling required by ACRA, but despite that, they do not help address my queries. So I have to turn to this forum for help again.

I've withdrawn 2 batches of Director's Fee for the past 2 financial year, leaving a sum of profit in the balance sheet untouched. Now I wish to withdraw ALL the profits, leaving only the required paid-up capital in the balance sheet.

I presume this is no issue as I am the only director/one-share holder?

Recently, I read about a major newspaper being sued by a Fijian photographer for millions for unauthorised use of photo. I do a lot of write-ups in my business, and while I have been careful not to use copyrighted material without permission, I fear one slip may cause company bankruptcy. If this can happen to big companies with many experts, all the more small flies must learn more to protect.

My question is if all the profits are withdrawn as director's fees from a private limited company, are they then coming under personal funds and assets which generally cannot be sued in a private limited company scenario? Say I then use all the director's fee withdrawn to buy a residence property, any chance of that having to be surrendered in case of being sued?

This is only worst-case scenario. I run my business lawfully. But business owners these days can never be too careful. We all slog real hard for success, and being sued for any unwitting mistake can be devastating. So hope someone can share.

[Strong Eagle]

You can withdraw the profits from your company in one of two ways. You can pay yourself directors fees, which are then taxable personally. Or, you can declare dividends since you are the only shareholder and the dividends are not taxable in Singapore. However, if you are American, then dividends cannot be counted in the earned income exclusion and you will have to pay US tax.

If you are not a Singapore citizen, then you should ensure that you have paid yourself a reasonable salary in directors fees or salary and not take it all in dividends. I am aware of a man who, several years ago, took advantage of the tax breaks in a pte ltd to pay zero tax either personally or corporately. His PR did not get renewed. This is a judgment call on your part as to what constitutes a reasonable salary for the work you do.

Generally, unless it could be shown that you knew, in advance, that you were going to be sued, that is, someone contacted you and threatened a law suit or actually filed one, the funds, once withdrawn from the company are yours and no longer belong to the company. Be aware, however, that, as a director, you could still be sued personally for a breach of fiduciary duty... whether or not copyrighted photos would meet the test, I don't know, but I doubt it.

With respect to the use of photos, the major newspaper must have been acting in a very blatant manner to end up with such a large judgment. Generally, if a copyrighted photo is found on a website, the usual approach is to request that it be taken down and/or that royalties be paid for it. Only if you were to ignore repeated warnings would a lawsuit crop up, and even then, there are limits to damage awards.

Singapore copyright law says you are not guilty of copyright infringement unless, "where he knows, or ought reasonably to know" that the work is copyrighted. So, if you have a process that uses due diligence to avoid copyright issues, the burden of proof would lie with the copyright holder that you knowingly used the work.

[SeriousQ]

Thank you, Super Eagle, for sharing. I may have to change my Company Secretary/Accounting agency as they seem unwilling to share any advice (despite their ad claims), which makes me quite frustrated not knowing where to turn.

My family expat but I maintain Singapore citizenship after much consideration.

Thus far, in my bookkeeping to the agency to prepare the Balance Sheet, I post Director's Fees & Director's Salary under "EXPENSES". This reduces the corporate tax as well. May I presume that Dividends are also posted similarly - under EXPENSES? Before reading this forum, I thought I had to post all profit take-outs under "Director's Fees". That would surely result in a high personal tax bracket. So to avoid this instant jump in personal income tax, I only need to take out my profits under Dividends and not Directors Fee?

I've asked this question (on profit-taking options) to many accountants but their replies have not been coherent. The last reply from the same agency I hire, was to splurge the profit on buying company equipment and to expense more if I wish to reduce corporate tax or personal income tax - a pathetic answer if you wish to preserve cash flow for future expansion or other growth needs.

Thanks for pointers on copyright as well. I dig out that article again. Title: Photographer wins $1.2 million from companies that took pictures off Twitter

They really trip up over there.

[PNGMK]

Thank you, Super Eagle, for sharing. I may have to change my Company Secretary/Accounting agency as they seem unwilling to share any advice (despite their ad claims), which makes me quite frustrated not knowing where to turn.

My family expat but I maintain Singapore citizenship after much consideration.

Thus far, in my bookkeeping to the agency to prepare the Balance Sheet, I post Director's Fees & Director's Salary under "EXPENSES". This reduces the corporate tax as well. May I presume that Dividends are also posted similarly - under EXPENSES? Before reading this forum, I thought I had to post all profit take-outs under "Director's Fees". That would surely result in a high personal tax bracket. So to avoid this instant jump in personal income tax, I only need to take out my profits under Dividends and not Directors Fee?

I've asked this question (on profit-taking options) to many accountants but their replies have not been coherent. The last reply from the same agency I hire, was to splurge the profit on buying company equipment and to expense more if I wish to reduce corporate tax or personal income tax - a pathetic answer if you wish to preserve cash flow for future expansion or other growth needs.

Thanks for pointers on copyright as well. I dig out that article again. Title: Photographer wins $1.2 million from companies that took pictures off Twitter

They really trip up over there.

I'd suggest that if you're business grows your move away from the 'services' providers and hire professionals to manage your company with you.

[Strong Eagle]

Thank you, Super Eagle, for sharing. I may have to change my Company Secretary/Accounting agency as they seem unwilling to share any advice (despite their ad claims), which makes me quite frustrated not knowing where to turn.

My family expat but I maintain Singapore citizenship after much consideration.

Thus far, in my bookkeeping to the agency to prepare the Balance Sheet, I post Director's Fees & Director's Salary under "EXPENSES". This reduces the corporate tax as well. May I presume that Dividends are also posted similarly - under EXPENSES? Before reading this forum, I thought I had to post all profit take-outs under "Director's Fees". That would surely result in a high personal tax bracket. So to avoid this instant jump in personal income tax, I only need to take out my profits under Dividends and not Directors Fee?

I've asked this question (on profit-taking options) to many accountants but their replies have not been coherent. The last reply from the same agency I hire, was to splurge the profit on buying company equipment and to expense more if I wish to reduce corporate tax or personal income tax - a pathetic answer if you wish to preserve cash flow for future expansion or other growth needs.

Thanks for pointers on copyright as well. I dig out that article again. Title: Photographer wins $1.2 million from companies that took pictures off Twitter

They really trip up over there.

Dividends are recorded NOT as an expense. I'll use a very simple income sheet and balance statement to demonstrate.

End of Year P&L

Income: 10,000 (credit entry)
Expense: 6,000 (debit entry)
Net Profit: 4,000

Balance Sheet, End of Year (assumes no other assets)

Assets:
Cash in Bank: 4,000 (debit entry)

Liabilities and Net Worth
Retained Earnings: 4,000 (credit entry)

Now, you issue a directors resolution on Jan 1 for dividends to be paid on March 1.

Assets
Cash in Bank: 4,000

Liabilities
Dividends Payable: 4,000 (credit)

Net Worth
Prior Retained Earnings: 4,000
Dividends to be paid: 4,000 (debit)
Current Retained Earnings: 0

Now, you actually pay the dividend out.

Credit cash for 4,000 - new balance = 0
Debit Dividends payable for 4,000 - new balance = 0

So, you see there is no expense entry. If you wanted to pay directors fees, then that would be an expense so that your P&L would look like this.

End of Year P&L

Income: 10,000 (credit entry)
Expense: 6,000 (debit entry)
Directors Fee Expense: 4,000
Net Profit: 0

With a net profit of 0, there would be no retained earnings to be added to the balance sheet.

You need to pay corporate income tax on net profit of the company. Corporate tax rates are 17 percent, and depending upon how large your company is and how long it has been in business, you may pay substantially less.

So, if your profit is large and you take it as directors fees, your personal income tax rate could go as high as 20 percent. You need to do the math on your income to see which gives you the better tax advantage. Singapore's relatively flat personal income tax probably gives the advantage to a salary unless your income is extremely large.

I really don't know how Singapore operates when looking at dividends versus getting paid a salary but I can tell you how it works in the USA. Both salary and dividends are subject to income tax. However, dividends are not subject to social security tax. So, some people try to escape social security tax by paying a very low salary then paying large dividends.

The US government will not allow this if the salary paid doesn't meet certain standard minimums. For example, if you were running a company with 20 employees, bringing in 6 million in revenue per year, the IRS would want to see that your salary was in line with others running that size business... so you would not be allowed to pay yourself $20,000 and then take another $150,000 in dividends. You might have to pay yourself $100,000 and take $50,000 in dividends.

I suspect Singapore has similar rules in place to stop tax avoidance but I've not researched it.

[Strong Eagle]

Thank you, Super Eagle, for sharing. I may have to change my Company Secretary/Accounting agency as they seem unwilling to share any advice (despite their ad claims), which makes me quite frustrated not knowing where to turn.

My family expat but I maintain Singapore citizenship after much consideration.

Thus far, in my bookkeeping to the agency to prepare the Balance Sheet, I post Director's Fees & Director's Salary under "EXPENSES". This reduces the corporate tax as well. May I presume that Dividends are also posted similarly - under EXPENSES? Before reading this forum, I thought I had to post all profit take-outs under "Director's Fees". That would surely result in a high personal tax bracket. So to avoid this instant jump in personal income tax, I only need to take out my profits under Dividends and not Directors Fee?

I've asked this question (on profit-taking options) to many accountants but their replies have not been coherent. The last reply from the same agency I hire, was to splurge the profit on buying company equipment and to expense more if I wish to reduce corporate tax or personal income tax - a pathetic answer if you wish to preserve cash flow for future expansion or other growth needs.

Thanks for pointers on copyright as well. I dig out that article again. Title: Photographer wins $1.2 million from companies that took pictures off Twitter

They really trip up over there.

I'd suggest that if you're business grows your move away from the 'services' providers and hire professionals to manage your company with you.

I'm with PNGMK on this one: You need a better accountant/secretary... and and a good CPA can do that and should be able to explain all the options. It sounds like you have real morons serving you. And if you are large enough to hire one internally, get a knowledgeable person that can also act as bookkeeper.

As a sole owner, there are only two ways to get the profits out of your company: You pay yourself a salary or directors fees, or you take dividends.

If you really want to expand and diversify, and are fearful of consequences like copyright violations, then you need to create a holding company. When I first started by business in Singapore, my pte ltd's in Malaysia, Thailand, and Australia were wholly owned by my Singapore pte ltd.

But I realized that left by Singapore company vulnerable to lawsuits from the other companies because all my cash was in Singapore. So, I created a holding company that owned all four companies. While Singapore law gets complex with holding companies (to stop fraudulent activities), this action essentially insulated my Singapore company from actions taken against my other companies.

You might search for a knowledgeable CPA about this topic as a way to insulate those corporate activities you think are most at risk for a lawsuit. For example, you could create a publishing pte ltd that takes your work from the main company, adds the photos (as part of a publishing effort), then puts it up on the web. That way, if you did get sued, only the publishing company would have assets at risk... so long as you can prove up arms length transactions.

I'd be interested in seeing what you are publishing. Will you PM me with your website URL's?

[SeriousQ]

Strong Eagle, grateful for taking time to detail the dividend illustration which I actually set out on excel following your credit/debit guide, and fully understood how it works now. it's like a light suddenly come upon darkness, after all these years of being led down the blind alley.

I've also check on your suggestion for separating the publishing arm. It didn't occur to me to solve it this way because it was a non-profit platform I set up on requests of folks I meet in the course of running the primary business, but seeing as how things can go astray quite drastically, yes, that's the solution. Since pte ltd fees costs under $1000 annually, it's something I can easily afford for peace of mind. Wl pm you the website.

PNGMK & Strong Eagle, definitely no choice but to change agencies. I've just spotted an omission in the past Bal Sheets. Had paid a year ahead but already searching for a good one. Do PM me in case you have reliable CPAs.

[SeriousQ]

Strong Eagle, re. "Will you PM me with your website URL's?", how many posts to effect PM function? --

"This feature is restricted until you have made more posts in the forum"

There may be more posts I can contribute as I run through the threads.

[sundaymorningstaple]

Your PM function is fully activated upon reaching 5 posts. So, one more post should do it.

[aster]

The US government will not allow this if the salary paid doesn't meet certain standard minimums. For example, if you were running a company with 20 employees, bringing in 6 million in revenue per year, the IRS would want to see that your salary was in line with others running that size business... so you would not be allowed to pay yourself $20,000 and then take another $150,000 in dividends. You might have to pay yourself $100,000 and take $50,000 in dividends.

The UK gov't went after a couple who ran their own Ltd company and paid themselves mainly via dividends. They made a case that the salary+dividends were optimally structured to pay the least amount of tax possible.

I can't remember if they blocked the accounts, but there was even mention of their house being at risk in all this. Either way, it didn't matter as the court blasted the case out the window and the goons who thought they would shake the couple down for extra money and fines got ripped for going after honest citizens who have followed the law to the letter.

[SeriousQ]

The US government will not allow this if the salary paid doesn't meet certain standard minimums. For example, if you were running a company with 20 employees, bringing in 6 million in revenue per year, the IRS would want to see that your salary was in line with others running that size business... so you would not be allowed to pay yourself $20,000 and then take another $150,000 in dividends. You might have to pay yourself $100,000 and take $50,000 in dividends.

The UK gov't went after a couple who ran their own Ltd company and paid themselves mainly via dividends. They made a case that the salary+dividends were optimally structured to pay the least amount of tax possible.

I can't remember if they blocked the accounts, but there was even mention of their house being at risk in all this. Either way, it didn't matter as the court blasted the case out the window and the goons who thought they would shake the couple down for extra money and fines got ripped for going after honest citizens who have followed the law to the letter.

Wish the govt bodies concerned made this more specific. I did enquire this same topic with several govt bodies but replies were non-specific with no one willing to give a ballpark figure or scale. They didn't object when I asked if salary could be at a minimum with the pay-out in director's fee at a maximum. One define director's fee as fees paid only to sit on board meetings and look after company affairs, while another says it all depends on the company how the allocation should go. Looks like I've got to recheck again. I once thought this should be down in the govt bodies' guidelines, found none and so email them in order to get a more definitive advice. However, in response to my email, the reply came via phone call.. the personnel wouldn't email. They have tape-recordings of all calls but not sure how that helps in case scenario above occurs.

No wonder some say in business you have to watch front-side, back-side as surprises comes from everywhere.