Question:
Hi, my name is Tony. I have founded Tan Tissue Sdn Bhd with Linda, my wife. We have been manufacturing tissue rolls and packs for 30+ years. The following is a list of details relating to the family business:
a. I own 80% shareholdings of Tan Tissue Sdn Bhd. My wife owns the other 20%.
b. We have two sons namely, Harry and Howard.
c. Harry runs Tan Tissue Sdn Bhd as its General Manager.
d. Howard is working as a medical doctor in a private hospital in Singapore.
e. The company manufactures all tissue rolls and packs from one factory.
f. I’m currently the sole registered owner of the factory.
g. I do not receive rental income from my company, Tan Tissue Sdn Bhd.
I intend to bequeath the factory equally to Harry and Howard upon my passing. Thus, my question is, ‘Should I write a will to fulfill my intentions of doing so?’
Answer:
Yes, you can do so. Tony is able to distribute his ownership of the factory evenly to Harry and Howard by stating his intention through a written will. Over here, I will highlight a main factor that Tony needs to consider before he nominates his sons to be beneficiaries of his factory.
Can the Business Continue to Operate from the Factory?
Why is this a consideration?
First, we need to understand that the factory is Tony’s personal asset as it is not owned by Tan Tissue Sdn Bhd. They are owned separately. Here, let us say, Tony passes on and he succeeded in leaving behind the factory equally to both Harry and Howard, making them joint-owners of the factory. Some questions:
1. Is it possible for Howard to ask for rental income from Tan Tissue Sdn Bhd?
2. What if Howard and Tan Tissue Sdn Bhd could not agree on the rent terms?
3. What if Tan Tissue Sdn Bhd defaults rent payments to Howard?
If Howard is not agreeable to the lease terms of the factory with Tan Tissue Sdn Bhd, it is very likely for the company to discontinue its business activities and in fact, be evicted from the factory. This is because the factory could only be let to Tan Tissue Sdn Bhd if all joint owners agree to the lease terms of the factory. As a result, this will cause inconveniences and financial loss to Tan Tissue Sdn Bhd.
For instance, they include Tan Tissue Sdn Bhd:
1. Not having a secure or suitable premise to operate from.
2. Incurring higher rental expenses to lease a new business premise.
3. Business disruptions from moving in / moving out … etc.
What About Harry Buying Over Howard’s Ownership of the Factory?
Yes, Harry can effectively secure the business premise of Tan Tissue Sdn Bhd via acquisition of Howard’s ownership of the factory. But, the question is, ‘Can they agree to the price and terms of this transaction?’ If they can, great. But, what if, they just could not come into a mutual agreement?
This situation is possible as Harry, who is a representative of Tan Tissue Sdn Bhd in this transaction, will want to buy over Howard’s ownership of the factory at a lower price. Meanwhile, Howard, as the seller, may ask for a much higher price. If an agreement could not be made, Harry’s predicament of securing a business premise for Tan Tissue Sdn Bhd would persist in the future.
Can Both Harry and Howard Sell Off the Factory?
Yes, they can, only if both of them are agreeable to the transaction terms of the factory. Otherwise, the factory could not be disposed of to a third party as all of the joint owners, Harry and Howard, must agree to it in order for its transaction to be proceeded. By now, if you are Tony, you should realise how complicated it is for Harry and Howard to effectively administer the factory, as a result of their differences in objectives and preferences.
The level of complexity will increase significantly if any of the two brothers pass on prematurely, especially if the deceased sibling fails to write himself a will. To put it into perspective, let us say, Howard passes on prematurely without a will, his ownership of the factory shall then be distributed based on the Distribution Act 1958 where the formula is as follows:
Let us say, if Howard has a family consisting of his wife and a son, his interest in the factory would then be distributed ¼ to his mother (Linda), ¼ to his wife and ½ to his son. It complicates things even further for the factory’s number of joint owners will increase from two (Harry and Howard) to four (Harry, Linda, Wife & Son of Howard).
So, What is Best for the Factory?
Personally, if I am Tony, I will write a will where I will nominate:
1. Tan Tissue Sdn Bhd to be the beneficiary of my factory.
2. Harry and Howard to be shareholders of Tan Tissue Sdn Bhd.
By doing so, Tan Tissue Sdn Bhd will have a permanent business premise, which will save Harry and his team a lot of headache and financial losses which can be associated with the reallocation of its operations. Besides, the factory would no longer face any administrative problems arising from having joint owners and it will not be frozen in the estate distribution process because Tan Tissue Sdn Bhd is a corporation (almost immortal unlike humans) that solely owns the factory.
Harry and Howard could then manage the affairs of the factory as shareholders of Tan Tissue Sdn Bhd.
Conclusion:
Do you run a business or businesses with your personal assets?
If so, it would be ideal to have a proper estate plan in order to ensure a smooth and seamless transition of the ownership of personal and business assets, thus, minimising unnecessary business disruptions and allowing your beneficiaries to take over your assets, increase and soar new heights with it.
Your situation could be more personal and complicated and as such, requiring a qualified estate planner to craft out an effective succession plan. Here, if that is you, you may begin by filling up the details below to book yourself a 30-minute consultation session with our estate planning consultant:
