What Happens When A Business Owner Passes On?

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 to 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 that have more than one owner or shareholder.

The first thing to know is that what happens to a business when its business owner passes on is subject to how it’s incorporated in the first place.

Sole Proprietorship

A business that is 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 simply 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 as personal assets and form part of his estate when he passes on. If he has a valid will, his estate (including the kitchen equipment) will be allocated in accordance with his will. Otherwise, it will be distributed in accordance with the Intestate Succession Act.

Partnership

A partnership is a business that is owned by at least two partners. In Singapore, the maximum number of partners in a general partnership is 20. Similar to a sole proprietorship, a partnership is not a separate legal entity from the business owners. 

Under the Partnership Act, in the event of a death of a partner, 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 will issue shares to its shareholder/shareholders. Companies will also have a constitution that states what happens to shares upon the death of a shareholder.

If your company adopts the model constitution, it will state that transmission of shares can be made upon the death of a shareholder. If the shares are held individually by the person, then the legal personal representative of the shareholder can claim the shares.

However, if the shares are held jointly, then the company can only recognise the survivor or survivors of the deceased 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 legal personal representative of the individual. However, if those shares were held jointly with someone else, then the shares will belong to the other person upon the death of the individual.

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 the death of a business owner. 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.

If you are an existing business owner and unsure of what may happen upon the death of either yourself or your business partners, it may be a good idea to get advice from either your company secretary or a legal adviser who is knowledgeable in this area.

Read Also: How To Choose The Right Legal Entity To Start A Business In Singapore

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