“Go big or get beaten!” the mantra for every business idea. But did you know - You may end up packing your bags (while aiming big) when things are just at step 1?
From experience, we want to highlight some important things people don’t consider before jumping the incorporation (registering a company) bandwagon. Note that this has been written from a corporate compliance perspective and is a technical read.
1. Issued and Paid up capital
Apart from the usual checklist revolving around incorporating (registering) a Company – eg: Choosing Company Name, registered office, Directors etc – a very important component is the Capital.
Share capital / Capital is the actual money/ value that will be pumped into the Company at the time of registration.
What you should not do:
Don’t declare a high issued capital.
For eg: $100,000 issued share capital when you intend to pump in only 10,000 which is technically referred to as paid up capital
It is good compliance practice to declare the true and fair value for the Company at all times. That said, its best to register the Company with 10,000 that you actually intend to pay in and later when the Company has investments coming in, the share capital can be increased.
Interesting Tit bit:
Share premium is termed as the price paid over and above the face value of shares.
Singapore has done away with the concept of “Share Premium”. So the capital invested will be treated as “paid up capital” (no sub category of capital paid in).
2. Shareholders
When registering the Company – you need to declare the initial shareholders (usually details of the owners) of the Company. These are people who will be actually investing into the company (whether in cash or in kind) and in return hold a share in the Company. So, for all practical reasons – its best to keep the shareholding simple at the time of registering the company.
What you should not do:
Include details of friends, family or even acquaintances who have no idea whatsoever about your company or that they will be legally liable to invest into the Company – without first having a formal agreement (preferably) in writing eg: Shareholders agreement etc.
Consider this:
For eg: “A” intends to register the company with 10,000 paid up capital and wants to include his friend “B” in a 50-50 shareholding.“B” has no idea that he will be legally liable to contribute to 5,000 as part of the deal.
It’s best not to include individuals who have not promised/ agreed to investment (especially in cash) into your company at the time of registering the company. Simply because legally – a shareholder in the company will be called upon to pay for the shares where cash consideration is applicable. You don’t want to ruin your relationships based on a financial commitment people did not know they had.
3. Shareholding percentage
If you intend to declare 2 (two) shareholders at the time of registering the Company (limited by shares) – the shareholding percentage should be clearly defined in shareholders’ agreement / constitution document etc.
What you should not do:
Declare a clean 50-50 shareholding between the 2 shareholders in the Company.
Consider this:
For eg: “A” and “B” are intended to be the 2 shareholders in the Company with a 10,000 paid share capital with a 50-50 shareholding (i.e they pay 5,000 each for their share in the share capital and they participate 50-50 in terms of the profits of the Company).
When there is a dispute in the Company – a 50-50 shareholding will only create a deadlock for the company (and its decision). A Company once registered will be a perpetual entity (independent of its shareholders/ owners). So it’s important to formulate what the terms of disagreement and preferably have a 51%-49% break up or even a higher % shareholding to the main controlling party/decision maker.
4. Your company’s constitution (charter) document
Constitution document is the charter document of the company. I would consider this document to be the DNA of the company – simply because the bylaws can be defined intricately for each company.
What you should not do:
Opt for the standard (default) Constitution document.
Consider this:
For eg: “A” is a single shareholding individual who opts for the default constitution document.
The default constitution document may not give you the flexibility to pass a resolution by circulation or to e-sign documents.
If you feel the need to have a greater flexibility/ tighten certain clauses in the constitution; opt for a bespoke constitution document.
5. Choosing your service provider
When you want to register your business entity – it’s better to ensure you have got it right the first time rather than face issues / bear the consequences of a wrong declaration. That’s why choosing a service provider to help you register the company is a very important decision.
What you should not do:
You may intend to save costs at the time of registration, but may end up compromising on the quality of service.
Consider this:
For eg: “A” incorporated the Company with the issued capital of 100,000. But he could only pay 10,000 towards the paid up capital. The consequences of such an action is not explained at the time of set up.
In this instance – it is dangerous for the Shareholders to be in – because once the capital is declared in the company (especially at the time of registration) – the shareholders will be liable to pay that at some point. An experienced service provider will be able to guide you and help you navigate around the compliance requirements – so you can actually aim to go big with your idea (and not end up in the dead lock)!
About us
Our Chartered Secretarial and compliance team comes with over a decade plus of work experience handling incorporation, ongoing compliance including funding rounds for growing businesses including funded start-ups. The thoughts collated here are from real life experiences. We have even seen instances of companies losing out potential investment due to decisions that were made without thinking forward.
We are here if you’d like to chat more, feel free to drop us a line to chat more.