Similar to how we should do estate planning as individuals so that we can ensure that our assets, such as cash, properties and investments are allocated in accordance with preference when we are no longer around, business owners also need to do business succession planning to guard against the risk that a business owner may pass on.
This can be especially important for businesses with multiple owners or shareholders.
The first thing to know is that what happens to a business when its owner passes on is subject to how it was incorporated.
Sole Proprietorship
A business set up as a sole proprietorship is owned by the individual who sets it up. A sole proprietorship does not have a separate legal entity from its business owner. Thus, when the business owner of a sole proprietorship passes on, the business ceases to exist, and its assets form part of the business owner’s estate.
For example, suppose an individual owns a hawker business and his business has kitchen equipment. This equipment is considered a personal asset and forms part of his estate when he passes on. If he has a valid will, his estate (including the kitchen equipment) will be allocated by his will. Otherwise, it will be distributed in accordance with the Intestate Succession Act.
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Partnership
A partnership is a business that at least two partners own. In Singapore, the maximum number of partners in a general partnership is 20. Like a sole proprietorship, a partnership is not a separate legal entity from the business owners.
Under the Partnership Act, if a partner dies, the business ceases to exist unless there is an agreement between the owners that states otherwise.
Limited Liability Partnership (LLP)
Unlike a sole-proprietorship, a Limited Liability Partnership (LLP) is seen as a separate legal entity from its owners. This means the business can sue or be sued as an entity, or acquire assets on its own.
Under the Limited Liability Partnership Act, a partner of an LLP shall cease to be a partner in the LLP upon death. However, the representative of the partner who has passed on is entitled to receive from the LLP an amount equal to the former partner’s capital contribution to the LLP and his right to share in the accumulated profits (if any) of the LLP after the deduction of losses of the limited liability partnership.
Private Limited Companies
In general, most private limited companies issue shares to their shareholders. Companies also have a constitution that states what happens to shares upon a shareholder’s death.
If your company adopts the model constitution, it will state that shares can be transferred upon a shareholder’s death. If the shares are held individually by the person, then the shareholder’s legal personal representative can claim them.
However, if the shares are held jointly, the company can only recognise the deceased’s survivor or survivors as having any title to the deceased’s interest in the shares.
Suppose an individual owns 30% of the shares in the company. Then, the 30% shares will be given to the individual’s legal personal representative. However, if those shares were held jointly with someone else, then the shares will belong to the other person upon the individual’s death.
What Happens Next Is Also Subject To Any Other Agreements Or Company’s Constitution
The various scenarios that we briefly explained in this article are general guidelines on what could happen upon a business owner’s death. However, they are also subject to any agreement that a business owner may have made with his/her partners and what is stated in the company’s constitution if it differs from the model constitution.
Typically, business succession requires early planning involving instruments such as a trust, buy-sell agreement, or shareholder agreement. For any existing business owner unsure of what may happen to their business upon the death of either themselves or their business partners, getting advice from your company secretary or a legal adviser who is knowledgeable in this area may be a good idea.
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