For a founder who is first setting up operations, the first financial statement recommended to review would be cashflow statement – the source of funds, from operations, to financing to investing – is crucial. He or she would start paying ownself salary once cashflow is consistent, and reached a stable stage of development or have raised external funds via share equities, government grants or loans. Though it’s not mandatory in paying a salary, it is recommended to do so for tax planning purposes, whether it’s for your company corporate tax or personal tax.
Paying salary offers a business expense deduction, which can reduce the corporate tax liability and personal tax bracket will be lower vs if the company is making a big profit. For example, first $20,000 personal earned income is non taxable.
Paying CPF to director/employee, allows oneself to contribute to CPF savings – as well as treated as an allowable deductible.
It is important to regularly review compensation as the startup evolves, balancing personal financial needs with the company’s growth.
Once the company has entered a stable stage of growth, reviewing profitability and the ability to reinvest for growth is crucial.
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