11 February 2021
Hi, This is a question for Indian Start up set up as Private limited Company. If few founders are not shareholders or directors or employees of the company but they are rendering various services to the company then how do we pay them? Do we have ask them to raise Professional Service Invoice and then we apply section 194J TDS and Pay them? Or we have to make Employment Agreement with them?
Second can I pay Sitting Fees for meeting as well as Professional Services to my Directors/Share holders of the Company?
09 July 2024
In the context of Indian startup setup as a Private Limited Company, here are the considerations regarding payments to founders and directors/shareholders:
### Payment to Founders Providing Services:
1. **Service Agreement or Consultancy Agreement:** - If founders are providing services to the company, it's appropriate to have a Service Agreement or Consultancy Agreement in place. - The founders can raise Professional Service Invoices based on the agreed terms in the agreement.
2. **TDS (Tax Deducted at Source):** - As per Section 194J of the Income Tax Act, 1961, payments made for professional or technical services are subject to TDS. - Ensure that TDS is deducted at the applicable rate (currently 10% for professional fees) from the payments made to the founders against their invoices. - The TDS deducted must be deposited with the government within the stipulated timelines.
### Payment to Directors/Shareholders:
1. **Sitting Fees for Meetings:** - Directors can be paid sitting fees for attending board meetings or committee meetings of the company. - This is governed by the Articles of Association of the company and the resolution passed by the board. - Sitting fees are treated as a taxable income for the director and TDS under Section 194J might be applicable, depending on the nature of the payment (consider consulting with a tax advisor for specific cases).
2. **Professional Services:** - If directors/shareholders provide additional professional services to the company beyond their role as directors (e.g., consulting services), they should raise invoices for these services. - Similar to founders, TDS under Section 194J may apply on payments made for these services.
### Important Points to Consider:
- **Documentation:** Always have clear agreements (Service Agreement, Consultancy Agreement, Employment Agreement, etc.) outlining the scope of work, terms of payment, and TDS implications.
- **Compliance:** Ensure compliance with TDS provisions and other statutory requirements while making payments to founders, directors, or shareholders.
- **Tax Advisor:** It's advisable to consult with a tax advisor or chartered accountant to ensure proper compliance with TDS regulations and to handle specific scenarios unique to your company's situation.
By following these guidelines and ensuring proper documentation and compliance, you can effectively manage payments to founders and directors/shareholders of your startup company.
CAclubindia
