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Paid-up capital is normally paid in cash. A shareholder provides funds at the time of company set-up by depositing the amount into the company bank account. The amount will be available to be spent on company operations.
However, there will be instances when expenses might be already incurred before setting up the company. Can you use noncash consideration to increase the paid-up capital of the company then? Read this article to find out.
An entrepreneur interested in manufacturing food items, he bought an instrument / machinery for his business. He then experimented with it for over six months. After that period, he discovered that his food products can actually be processed much faster and in higher quality through such equipment. Later on, he decided to set up his company with his ideas.
The thing here is that he has spent a few of months and shelled out money with his experiment. Hence, all of these must be logically accounted as capital of the company. Now, the question is: how can this be accomplished?
Yes, you can use noncash consideration at the time of company incorporation to increase the paid-up capital of your company. This would be taken into consideration after the valuation of the assets. When you incorporate your company with ACRA, you will see the following options upon paying the capital:
Suppose that the acquisition value of the said food equipment is S$15,000, which he probably used for about 9 months to 1 year. The depreciation charge at a prevailing depreciation rate might be 33%; therefore, it would be S$5,000. Then, the net capital value in this case would be S$10,000, which can be capitalized through share capital paid in consideration other than cash.
There are two things to be followed here:
Obnoxious claims complicate the valuation process. For example, a programmer developed a software for six months. He then claimed that his average hourly rate is S$300, and the software is to be valued at S$300,000 in accordance with certain calculations.
Another example is an employee claiming his great idea about a specific product has a great potential. Due to the fact that he built the product at his own capacity and he is bringing his invention to the company, its worth must be considered S$2,000,000 and the capital value must be kept accordingly.
Unfortunately, these kinds of claims are hard to justify. They also usually result in disagreements between the service providers and promoters.
Unless the valuation is justified, we will not be able to add it as a consideration other than cash. A justified valuation means that a proof from a third-party invoice is shown and a depreciation calculation is fulfilled. Lastly, a proper accounting method must be applied to this valuation.
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