Business in Singapore can be structured broadly into sole proprietorship, partnership and private limited company.
Sole proprietorship is usually the preferred choice of initial business setup due to the lower setup cost and ease of management. Many business owners also perceive sole proprietorship as the safest way to start a business; they only see the risk of losing their time, effort and a small setup fee. This perception may be true initially, but many business owners are unaware that the business risk they take increases significantly as their business grows.
All it takes is one wrong business decision and all the wealth they have built up over the years could be wiped out overnight, if they choose to continue to run their business as a sole proprietorship. Some of the disadvantages of a sole proprietorship setup are as follows:
- Business owner’s personal estate is exposed to the business risk; creditors are placed in front of the business owner’s family members in the event of a claim on the estate;
- The sole proprietorship is the business owner; in the event of death of the business owner, all existing business contracts are terminated. Penalties may have to be paid and potential rewards may have to be forgone.
For a partnership setup, the partners have the same disadvantages as a sole proprietor. The business risk is the personal risk that the partners take.
Unlike the sole proprietorship or partnership setup, a private limited company has some advantages. Business risk in a private limited is limited to the paid-up capital of the business. The business entity is treated like a separate entity with a “life” of its own. Private limited companies do not “die” when the shareholders die. In the event of a creditor claim on a private limited, the business owner’s personal estate are secured. However, it does share some common problems as a sole proprietorship or a partnership in the event of business succession. The common problems are:
- No existing proper agreement with regards to the procedure and funding available on the withdrawal of capital and share of accumulated profits upon the “retirement” of the partner or shareholder, resulting in loss to retiring and remaining shareholders; and
- Conflicts and disputes amongst partners or shareholders (even amongst family members) resulting in the need for one or more partners or shareholders to leave the business.
Regardless of the type of business setup, it is important to have a contractual business succession plan agreed by all the partners/shareholders. A contractual business succession plan will offset the major disadvantages associated with the different types of business setup, and provide the following benefits to various parties involved in situations such as:
- Ensure that the estate has the fair value of the business that they have invested over the years; and
- Ensure that there is a ready buyer with the cash to buy over his interest in the company.
- Ensure that deceased interest will not be sold to third party; and
- Ensure that fund is available to purchase the interest of the deceased.
- Enable business to continue without any disruption; and
- Enhance the confidence of the debtor and creditor.
With a business succession planning put in place to provide the fund necessary to buy over the interest of the retiring/deceased owner, it is a win-win situation for the company and the buyer/seller. To the company, the departure of the retiring or deceased owner will not threaten the continuation of the business. To the buyer/seller, the insurance proceeds will provide the funds to purchase or sell the interest of the retiring or deceased owner.
I hope this has been an informative read and can help you plan your business for success!
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