Estate Settlement of a Partnership
A partnership is formed when 2 or more persons come together to set up a business. Similar to a sole proprietorship, the business is formed as soon as the partners’ company name and intention are approved by ACRA. Partnership is governed by the Partnership Act (Cap 391) in Singapore.
Upon the death of any one partner, a business partnership will have to shut down. The deceased person’s share in the partnership will then be included as part of his estate for the purpose of estate settlement.
Similar to a sole proprietor, a partnership has no separate legal entity. The estate settlement of account receivables, payables and business debts is similar to the estate settlement of a sole proprietorship. The write-up below will highlight the estate settlement issues peculiar to partnerships.
Settlement of Capital Contribution
Each of the partners is required to contribute some form of capital to the business. The ratio of contribution might not necessarily be the same between each partner. Therefore, when one partner dies, the deceased person’s estate legal representative needs to settle the capital from the surviving partners. This is not an easy task especially if there is no partnership agreement done amongst the partners when the business was started.
Secondly, the capital might be non-existent if the partnership is insolvent as a result of the partner’s death, if he/she was the key-man of the business.
Settlement of Profit Allocation
Profit of the partnership up to the date of death of the partner is due to his estate. The legal representative needs to settle this with the surviving partners. Unless the profit allocation is spelled out in a legal partnership agreement, the profit shall be shared equally among all partners.
Settlement of Partnership Debts
This is the most difficult and sensitive of all. If the partnership debt is not settled properly, it is meaningless to talk about the settlement of capital contribution and profit allocation. Under the law, all partners are jointly and severally liable for the partnership debts. Each partner is responsible for ALL the debts of the partnership.
While partners may share profits in equity proportions, this is not true for losses and debts. The partners do not share the debts in the same ratio in which they share profits. Every partner is liable up to the FULL amount of the partnership’s debts. Therefore, the legal representative needs to place first priority in settling the partnership debts together with the surviving partners.
As a partnership is not a separate legal entity, the partnership debts can spread into the personal assets or estate of the deceased partner.
The legal representative needs to be mindful that the estate of the deceased partner is only liable for the partnership debts up to the point of his death. Any debts or liabilities incurred by the surviving partners after the death of the partner cannot be charged to his estate.
Points to pay attention to:
- By law, when a partner dies, the surviving partners are not allowed to continue the partnership in its original state unless it is specifically allowed in the partnership agreement.
- If the surviving partners continue the partnership without prior arrangement as provided for in a partnership agreement, the legal representative of the deceased partner can sue the surviving partners for any losses which are incurred after the deceased partner passes away.