Regarding Director Remuneration

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When setting up a new private limited company alongside an existing partnership, it's essential to correctly account for director remuneration. Even if the new company cannot immediately pay directors, the owed amounts must be disclosed as a liability in its accounts to ensure transparency. This director remuneration needs to be authorised by a board resolution, adhering to company law and accounting standards, regardless of salaries drawn from the partnership.

Ramit

Ramit (Querist)

24 March 2025 Two partners running a partnership firm from 5 years, recently they open another company which is Pvt Ltd.
They both withdraw amount from partnership firm in form of salary every month.
Is it necessary to show director remuneration in books of accounts of Pvt Ltd because it cannot pay now?

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

25 March 2025 Even if the Pvt Ltd company cannot pay the remuneration immediately, it is crucial to disclose the amount owed to the directors as a liability in the company's financial statements. This ensures transparency and provides a true and fair view of the company's financial position. It is very important that the director remuneration is authorized by board resolution. This resolution will document the approved amount of remuneration. It is a requirement under company law and accounting standards.
The fact that the partners are already drawing salaries from the partnership firm does not exempt the Pvt Ltd company from its obligation to account for director remuneration. The nature of the services provided by the directors to the Pvt Ltd company will determine whether they are entitled to remuneration.
Accounting standards generally require companies to follow the accrual basis of accounting. This means that revenue and expenses are recognized when they are earned or incurred, regardless of when the cash is received or paid.

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Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

30 September 2025 Good luck....

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