Estate Settlement of Sole Proprietor Business
In Singapore, every person running a sole proprietor business needs to register with the Accounting & Corporate Regulatory Authority (ACRA) except for those who come under the list of exempted categories under section 4 of the Business Registration Act. Therefore, there are sole proprietor business owners who are registered under ACRA; there are also some trades, such as financial advisors, insurance & property agents, who do not need to register with ACRA but operate like sole proprietors. If a sole proprietor business owner dies, the estate settlement process needs to include the settlement of the business.
Legal Representative of Sole Proprietor Estate
The rightful person to deal with the estate settlement is the legal representative (i.e. personal representative) of the estate. He will call in the business assets, pay off the business liabilities, liquidate the business or transfer it to a successor (if any).
Estate Settlement of Business Assets
Cash at Bank
Because a sole proprietor does not have a separate legal entity, it is not uncommon for a sole proprietor to treat the business money as “his money” administratively, for example, having a personal account to hold business money. This is done not on purpose, but usually due to ignorance.
As mentioned in the section regarding the settlement of personal bank accounts, which will be closed upon the death of the account holder, the business account need not be closed, as there might be further business payments into and out of the business account.
Account receivables are money owed to the business where the service or product is already performed or realised by the client. These is a cash flow into the business. It is not uncommon for clients to take advantage of the death situation by NOT paying their dues (some common tactics used are: “boss not around”; “cannot locate the invoice”; “account department will revert in due course”, “I thought pay already, please check with your accounts” etc.) Therefore, the legal representative needs to place high priority in calling in the invoices that are outstanding to the business, and diligently chase after the payment.
Is the business going to be continued or not? This decision needs to be made. In most cases, it is difficult to continue a sole proprietor business. Therefore, the legal representative needs to organise an auction or sell off the business equipment or inventories.
Unrealised Insurance premium
The legal representative should be aware that some business insurance policies do refund unrealised insurance premiums back to the business.
Estate Settlement of Business Liabilities
Account payables are money owed by the business to business creditors (i.e. suppliers, vendors etc.). Unlike account receivables, account payables stakeholders will appear speedily uninvited first thing in the morning at the business to seek payment. The legal representative needs to manage the situation wisely, because priorities of payment are listed below.
Outstanding Salaries and CPFs to staff
These are statutory debts that have to be settled with second priority.
Business Tax (e.g. outstanding GST, Income tax etc.)
Outstanding tax needs to be settled with first priority.
Secured and unsecured business debts need to be settled with the stakeholder appropriately. It is not uncommon for a sole proprietor to borrow friendly loans from friends or relatives. However, if there are no official IOU notes to prove the debts, such debts are ranked at the lowest priority.
It is common for the business owner to act as personal guarantor for business loans. The legal representative needs to approach the relevant banks to arrange for the discharge of guarantor (if possible).
Bonus or Commission Due
Some sole proprietor businesses are paid bonuses and commissions on sales volume. There could be outstanding bonuses or commissions due to the deceased. The legal representative needs to settle this with the relevant business principals and agencies.
It is good practice to inform the business stakeholders of the business owner’s death and closure of the business. The stakeholders are clients, suppliers and principals so that the expectations can be managed. In situations where expectations are not managed properly, some may file law suits, whether the sole proprietor is alive or not.