One of the areas of estate planning involves the passing of business interest to the heirs. The question is whether the business is to be inherited by the heirs and for them to continue the business or the business is to be sold and the proceeds received by the heirs. If the business is to be inherited by the heirs, then the business owner may want to consider creating a testamentary trust or a living trust for the business to remain within the family. However, if the business owner would prefer his heirs not to be involved in the business for a number of reasons, then it would be suitable for him to consider a Business Value Protection plan. What is Business Value Protection? In short it involves buy-sell agreement and the ancillary documents such as trust and power of attorney. Some authors describe it as "premarital agreement" between business owners. This means that the business owners are to sell their business interest to the other business owners upon the occurrence of certain events such as death, retirement, disabilities or life threatening illness. What type of business structure is suitable for Business Value Protection (BVP)? Only partnerships and private limited companies are suitable to be involved in BVP. Though some authors would include a sole proprietor business, I am of the opinion that it is possible but very difficult to implement as it contains too many uncertainties. Let's example the basic structures of a partnership and private limited company.
PARTNERSHIP
What is a Partnership?
A partnership is defined in s. 3(1) Partnership Act 1961 as "the relation which subsists between persons carrying on a business in common with a view of profit". So a partnership is a relationship between the parties, it is not an organization in its own right with separate legal personality. Therefore unlike a company, a partnership cannot by itself make a contract, employ people, commit crimes or even be sued. How many partners can a partnership have?
A partnership will have between 2 and 20 members, the upper limit being 20 in general. When a partnership has more than 20 members, the Companies Act 1965 stipulates that it must be registered as a company. However, this does not apply to a partnership formed for carrying on business requiring the partners to posses stipulated qualifications. This would provide for example, lawyers and accountants to continue to provide their services under a partnership.
Who bears the liabilities and debts? The partners themselves are personally liable for all of the debts of the partnership. If the partnership assets are insufficient to discharge its liabilities, the partners must contribute towards those assets until the liabilities are discharged. The liability of the partners to pay the partnership's debts is unlimited and cannot be limited.
Where the partnership is involved in any legal suit whether as the plaintiff or as the defendant, it is taken in the name of the partners, not in the name of the partnership itself. However, for procedural purposes under the Order 77 Rules of High Court 1980, it does allow a person to sue and be sued using the firm's name, but in substance a suit by a partnership is a suit by the members collectively, and a suit against such a partnership is a suit against the members. How long can a partnership last and be dissolved? A partnership will last so long as the partner wants it to.. Upon dissolution, there must be a settlement of partnership accounts. A partnership is dissolved upon happening of a terminating event specified below: | a. | Dissolution by expiration of notice: this happens under s. 34 Partnership Act 1961. It states that the partnership is dissolved when |
| a. | i. | if entered into a fixed term, by expiration of that term; | | | ii. | if entered into for a single adventure or undertaking, by the termination that adventure or undertaking; or | | | iii. | if entered into for undefined term, by any partner giving notice of the other or others of his intention to dissolve the partnership. |
b. | Retirement: under s. 28 Partnership Act 1961, the retiring partner can provide notice to retire at any time. | c. | Dissolution by operation of law | d. | Dissolution by bankruptcy, death or change: under s. 35 Partnership Act 1961, subject to any agreement between the partners, every partnership is dissolved upon death or bankruptcy of any partner. However, the partners may agree that death or bankruptcy shall not affect dissolution but it does not prevent the personal representative of the deceased partner to have the partnership wound up and the deceased's share paid over to the personal representative. In the case of bankruptcy, the solvent partners cannot have an agreement affecting the claims of the bankrupt partner's creditors. An agreement made between all the partners prior to such bankruptcy and providing that each partner's interest in the partnership assets is to cease, in the event of that partner's bankruptcy may be held invalid as an attempt to evade the bankruptcy laws. | e. | Dissolution by the court: for a variety of reasons, the partnership can be dissolved by the court. Such reasons can be due to mental infirmity of one of the partners, permanent incapacity, willful or persistent breach of the partnership agreement or conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner(s) to carry on the business in partnership with him and loss-making business. |
What are the advantages of partnership?
| | |  | Partnership is easy to get off the ground. |
| It provides a wider capital base compare to a sole proprietorship. In a partnership, partners pool their capital and work together in business. |
| If you need to operate a business where different skills can be utilized, partnership is an excellent arrangement. Each partners can contribute to the business be it specific knowledge, skills or strong contacts. | | | |
What are the disadvantages of partnership? | | | | | You will have to be liable for debts of the partnership even if it is caused by the actions of other partners. With unlimited liability, each partner is also liable to use their private resources to meet the partnership's debts. |
| At personal level, you face the risk that partners may not be able to work together. Nobody can guarantee that disagreements will not occur. | | Even though a partnership provides a wider capital base compare to a sole proprietorship, the capital for expansion may still be limited unless additional partners are brought in. | | Generally, there is lack of succession in a partnership. A partnership ends if any one of the partners resigns or dies. |
PRIVATE LIMITED COMPANY What is a company? A company is a legal entity that is separate and distinct from its members and shareholders. When a company is formed, it is said to have become "incorporated" and is capable of owning property, making contracts, employing people and being sued or of suing. The death or incapacity of one or more of its members will not have any effect, unlike sole proprietorships or partnerships, as companies have continuity of succession. There are three types of companies:
| A company limited by shares where the members personal liabilities are limited to the par value of their shares, |
| A company limited by guarantee where the liabilities of the members will be restricted to the amount each agrees to contribute to the assets of the company in the event of dissolution or liquidation; and |
| An unlimited company where there is no limit to the member's liabilities. |
Company limited by shares is the most common type of company structure in Malaysia. Companies limited by shares falls into two categories - Public limited companies and Private limited companies (or "Sendirian Berhad"), which cannot sell shares to the general public. For BVP, only private limited companies and partnerships will be suitable.
What is the minimum number of members? A company must have a minimum of two members. However, a private limited company is limited to have only 50 members whilst a public limited company has no limit. The 50 members limit for a private company does not include the employee or its subsidiaries. The ability to hold property: A company may own property but the members of the company do not own the company's property. What about the members' liability for debts? The members are not liable for the debts of the company though they may lose what it has invested in the company through the subscription of its shares as an investment. Mode of taking legal proceedings: A company must sue in its own name to enforce its rights and the members have no right to do so on behalf of the company. A company must be sued in its own right to enforce liabilities owed by it; the members may not be sued in the alternative. Duration and dissolution: Once a company is incorporated it may be dissolved in accordance with the provision and process set-out in the Companies Act 1965. What are the advantages of a company? | | |
| The separate legal person of a company exists independently of the members. |
| A limited company has limited liability for shareholders. |
| In the event of failure of the business, shareholders are protected against the loss of more than the nominal value of their shareholding. |
| It provides greater capital potential than sole proprietorship and partnership. Most companies have ease in securing finance for growth. | | | |
What are the disadvantages of a company? | | |
| There are considerable legal procedures involved in setting up a company and possible high cost of incorporation. This includes the procedures incurred in publishing the various financial accounts of the company. |
| Small limited companies may have difficulties to borrow as extensively as desired, precisely they have limited liability thus banks and financial institutions may be unable to recover their funds if the business fails. |
| The growth of private limited companies may be limited as they cannot offer shares to the general public thus pass-through of losses to investors is not available. Private limited companies quite often restrict the right of members to transfer their shares which is contained Articles of Association of the company or sometimes by way of shareholder's agreement. |
In the next article, we will examine the problems that occur with a BVP plan and the advantages of having one. This is an article prepared by Azhar Iskandar Hew, General Manager, Rockwills Trustee Berhad Rockwills Trustee Berhad provides a wide range of Private Trustee and Estate Planning services, including Business Value Protection Trust. Rockwills Trustee is part of the Rockwills International Group and is an associate company of Rockwills Corporation Sdn Bhd, the No. 1 Professional Will Writing Company in Malaysia. Azhar can be reached at 03-77811993 or at azharhew@rockwills.com |
