Business Will: How to Pass on Your Business to Your Successors in Singapore
We often hear about wills and estate planning with regard to distribution of wealth after one’s death. In a similar vein, business succession planning is essential in order to ensure that your business is passed on to your successors smoothly when you pass on.
A business will captures your wishes and instructions on the business succession plan.
Whether or not your business is family-owned or non-family owned does not make business succession planning more or less important. After all, the focus is on identifying and preparing successor(s) when the time for them to take over comes.
What are some of the key stages and considerations that go towards business succession planning when making a business will? Read on to find out more.
Prior to Making a Business Will
Choose a successor
Prior to making a will, you must think about who to select as your successor. The successor is the person who will lead and/or own the business when you eventually pass on. He/she may or may not be your family member(s).
Can there be more than one successor?
It is possible to have more than one successor in your will.
For instance, you may wish to pass on the ownership of your business to a family member, but give control over it to a third-party individual, such as an experienced employee, who may be more capable at running the business.
Factors to consider when choosing a successor
In choosing a successor(s), some factors which you may wish to consider include:
- Whether they possess the necessary entrepreneurial and/or managerial capabilities and skills to run the business;
- Whether they are capable of leading the business;
- Whether they have the same vision for the company as you.
Conduct a selection process
An objective and transparent selection and succession process should be conducted, to build employees’ trust such that the business will land in good hands.
Reviewing the skills and capabilities of potential successors may be done formally, such as through implementing competency assessment frameworks, or informally by hearing what the managers and employees have to say.
Through these reviews, you may find that a non-family member is more suited to be the successor of your business as compared to a family member. If so, this is when you may consider choosing a non-family member as the successor.
Making a Business Will
After choosing your successor, the next step is to make a will which expresses your instructions with regard to your business succession. Depending on the business structure of your business type, the instructions of your will may differ.
For sole proprietorships
A sole proprietorship does not have a separate legal identity and will cease to exist upon the death of its owner (i.e. you). All of its assets, such as money and property, will hence be distributed according to the instructions in your will because they are regarded as your personal assets.
Hence, when making a will, you can choose to have the business assets passed on to your intended successor, who may then continue the business under his own name.
For private limited companies
Where a private limited company is concerned, it has a separate legal identity from its owner(s). As a result, it will continue to exist when its owner(s) pass away.
The owner(s)’s ownership of the company is represented by the proportion of shares they hold in the company. Therefore if you have shares in the company, you can choose who should inherit your shares (and hence your ownership of) in your will.
The person(s) who inherit your shares will then have the rights and powers of a shareholder to, among others, have a share in the company’s profit and attend general meetings.
If you are a director of the company, you will also need to think about who should take over your directorship, and hence the management and control of the business, when you pass away. This successor can be the same person as the person you are willing your shares to, meaning that they will be both a director and shareholder of your company after your death.
It is also possible for you to choose different persons to own (as a company shareholder) and manage (as a company director) your company. For example, you may want to do this when you want a particular person to benefit from owning shares in your company after your death, but believe that another person would be more capable of managing the company then.
The shareholders (who own shares in the company) are the owners, while the directors manage and control the business. Hence, shareholders can only transfer the ownership (by transferring their shares) and directors, the management/control of the business, to their successors.
Creation of a testamentary trust for successors who are family members
Where your successors are your family members, you may wish to set up a testamentary trust which takes effect after your death.
A testamentary trust is an instrument that holds, and sets out how, your business assets are to be managed and distributed. Business assets which may be held in trust include cash, shares, investment portfolios and property owned by that business.
You may appoint a trustee to administer the trust according to your wishes, giving him the power to, among other things, maintain the business assets for minor children (if your intended successors are below 21) who may not be able to own or manage a business yet.
In such a scenario, a testamentary trust is useful in preventing assets from being mismanaged or depleted due to young age or weak financial management abilities, ensuring that your assets are properly allocated and passed on in due time.
Additionally, a testamentary trust may reduce potential family tensions/conflicts on who should receive the business assets, since you’ve already pre-arranged how the management and distribution of these assets are to take place.
After Making Your Business Will
Preparing shareholder agreements
Apart from making a will, it is also essential to prepare shareholder agreements to properly lay out how the company will be run upon your death.
A shareholder agreement is a legal document that sets out the rights and obligations of shareholders, including rules that may state how the shares of a shareholder who has passed on should be dealt with.
Having a shareholder agreement in place will ensure that there is a clearer consensus on the business succession, and prevent any potential fall-outs or disputes pertaining to, for instance, who has a controlling interest in the company.
For example, if a well-drafted provision in the shareholder agreement requires the shares to be transferred to surviving shareholders, it could help prevent the family members who are not the shareholders from striking a successful claim on the deceased’s shares.
Preparing your successor(s)
Even after your successor(s) has/have been chosen, and you’ve willed them your business and/or assets, the work does not stop. Your desire to let your business survive another generation also means that your successor(s) must be groomed and prepared to manage the business.
Preparation may take the form of formal training and education opportunities to hone your successors’ skills, with a focus on providing experiences that he/she may encounter in the future, when taking over the high position(s) in the business.
Alternatives for Passing On a Business
If there is no appropriate successor that can be identified, you may also consider instructing that the business, or the shares owned in the business, be sold in your will. The person who buys the business or shares, will take over the business as the new owner.
With all the considerations that go into business succession planning, drafting a business will may be an uphill task. If you require assistance or need advice, feel free to contact one of our wills and probate lawyers.
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