If you are thinking of converting your sole proprietorship or Limited Liability Partnership business to a private limited company in Vietnam, you may have several questions in mind. Should you take the step of converting? Is it really going to provide an advantage? Are there any major drawbacks or risks? Is the procedure complicated or simple? This guide attempts to answer many of the questions that may be on your mind.
In most cases, converting your sole-proprietorship or Limited Liability Partnership to a private limited Vietnam company is a wise decision. Such a change can help you to expand your business, protect your assets, limit the liability you risk, enjoy corporate tax incentives, attract investors and recruit high quality talent. In many other jurisdictions, a private limited company is also referred as Limited liability company, PLC, Corporation, Pvt Ltd, and so on. In Vietnam, a private limited company is often referred as Pte Ltd.
A private limited company is a business entity registered under the Vietnam Companies Act, Chapter 50. It has a separate legal personality and members have limited liability. Private limited companies pay corporate tax on their profits and the shareholders receive dividends which are tax free. A private limited company offers protection of personal assets and has high credibility and standing in the market.
The statutory and legal aspect of converting a sole proprietorship or Limited Liability Partnership to a private limited company in Vietnam is relatively straightforward and most of the complexity will likely arise from issues associated with transferring the business matters of your sole proprietorship or Limited Liability Partnership to the Pte Ltd Company.
Advantages of converting to Vietnam Pte Ltd.
There may be several reasons that are prompting you to convert your sole proprietorship or Limited Liability Partnership to a private limited company in Vietnam. At this point, to reaffirm your decision, let us first review the key advantages as outlined below.
As a sole proprietorship you currently confront the following issues:
- No separate legal entity - In the eyes of the law and the public, you are one and the same with the business. As a result you have complete control over the business and its operations, but you are financially and legally responsible for all debts and legal actions against the business.
- Unlimited liability - Creditors may sue you for debts incurred and can also obtain a court order to claim against your personal assets, including your property. If you are engaged in a business where even an inadvertent action can result in damages to others, you face the risk of complete personal financial ruin.
- No corporate tax benefits or incentives - Taxes are determined at your personal income tax rate. Hence, with an increase in profits there will be an increase in taxes as well. You cannot use some of the tax breaks that are available to small businesses.
- Limited capital - If the business is having financial difficulties, you may not be able to get public funds. No clean legal mechanism exists for you to bring in investors as equity contributors. The only way for you to raise funds is by getting a loan. Otherwise capital is limited to your finances and the profits generated by the business. Thus, business expansion is difficult.
- No perpetual succession - The business no longer operates with your retirement or demise. Since its legal existence is tied with you, your demise will result in the end of the business entity.
- Low public perception - Since only one person is accountable for all business deals, outsiders perceive a sole proprietorships as a small “mom-and-pop” type of operation. Outsiders find it difficult to do large-scale business deals with you. This entity is the least preferred for serious business as nobody would be willing to lend you large credit or large sums of money. It is also difficult to attract high-caliber employees, or senior level executives who usually look for owning a share of the business.
The situation with an Limited Liability Partnership is slightly different than that for a sole proprietorship. As an Limited Liability Partnership, you enjoy a separate legal identity and its ensuing benefits, however, you are still exposed to certain drawbacks such as:
- From a tax perspective, Limited Liability Partnership are treated as partnerships and profits are treated as part of each partners’ personal income and are taxed at personal income tax rates. These rates are typically higher than those for a private limited company.
- In the course of the business of an Limited Liability Partnership, if a partner becomes liable to any person or company through his acts of commission or omission, the Limited Liability Partnership is liable to the same extent as the partner. Therefore claims can be made against an Limited Liability Partnership to the full extent of its assets.
- As a partner you are personally responsible for liabilities that arise as result of your wrong doing. Claims for liabilities can be made against you and your personal assets.
To get more detailed information about various types of business entities along with their advantages and drawbacks, refer to Vietnam Sole Proprietorship Registration overview.
Drawbacks of converting to Vietnam Pte Ltd.
While converting to a Vietnam private limited company will mitigate most of the issues outline above, there are some drawbacks to such a conversion. These are:
- The administrative burden of operating a pte ltd company is heavier.
- Closing a company is more complex and complicated.
- Private limited companies must follow more stringent rules and regulation as set out in the Vietnam Companies. For most common compliance issues.
Steps Involved in Converting a Sole Proprietorship or Limited Liability Partnership to a Private Limited Company in Vietnam.
The sole proprietorship or Limited Liability Partnership is a completely separate legal form from a company and the law does not provide any process for conversion from one form to the other. Instead, what needs to be done is:
- Incorporate a new company. At the point of incorporating the company, you will indicate that the company is going to take over the business of the sole proprietorship or Limited Liability Partnership. You must indicate the date of termination of the business - which can be postdated up to 3 months.
- You will need to transfer the business assets and any existing contracts over to the newly incorporated private company from the old entity.
- The final step is to terminate the sole proprietorship or Limited Liability Partnership and inform the Company Registrar that you have ceased to carry on business as a sole proprietorship or Limited Liability Partnership.
Step 1 - Incorporate a Private Limited Company.
The first step involved in incorporation is approval of your business name. According to Vietnam law, no two entities can have the same business name. If you wish to incorporate a Vietnam company Pte Ltd using the existing business name, you must submit a No Objection Letter to the Company Registrar. The letter must explain why you want to retain the business name and also state whether it is owned by the same person. You must also undertake to cease the old business within 3 months of the date of incorporation of the company.
Step 2 - Transfer Business Matters from existing business to new Pte Ltd company.
Once you have incorporated the private limited Singapore company, the next step is to transfer the business matters belonging to the existing sole proprietorship or Limited Liability Partnership business to the new company. Note that your existing business must be closed within 3 months of incorporating the Pte Ltd company. This step will likely take the most time. Some of the items that will require transfer include:
- Assets - The net assets taken over by the Pte Ltd company can be converted as paid up capital. As such an agreement and resolutions are required. You will have to pay any outstanding dues to the creditors before transferring your assets.
- Bank Accounts - You must close all banks accounts maintained by the sole - proprietorship firm or Limited Liability Partnership and open a new bank account under the Pte Ltd company. You must inform customers and other relevant people - bodies about the change and also advise them to issue all cheques in favour of the Pte Ltd company as the firm is no longer in operation.
- Office Lease - If you are renting an office for your business, you will need to re-sign the lease agreement under the Pte Ltd company.
- Contracts - Service Agreements - You will need to re-sign existing business contracts - service agreements under the new entity.
- Licences - permits - You will have to get new licenses or permits. You should seek the advice of the agency issuing the licenses or permits on their validity. It is generally advisable to seek advice from a professional firm if you are uncertain as to what should be done.
It is strongly advised that you explore and plan the above matters before making a final decision to convert your Sole Proprietorship or Limited Liability Partnership into a Private Limited Singapore Company.
Step 3 - Terminate the Sole- Proprietorship or Limited Liability Partnership.
Once the company is incorporated, the sole-proprietorship firm must be terminated within 3 months from the date of incorporation. This should be followed by a Notice of Cessation issued to Accounting and Corporate Regulatory Authority confirming the closure of the sole proprietorship within 3 months from the date of incorporation of the private limited company.
Limited Liability Partnership.
Once you have successfully transferred all matters of the Limited Liability Partnership business to Pte Ltd company, you can choose to strike off or wind up the Limited Liability Partnership. Striking Off is a less complicated procedure than winding up.
More room for expansion.
In conclusion, the structure of a private limited Vietnam company is more complex than a sole proprietorship or Limited Liability Partnership, but it offers better liability protection, usually has a lot more room for expansion and is more attractive to investors. While it might cost more to start a private limited company, the ends may justify the means if you can handle the extra work and complexity of the structure.
Converting a Sole Proprietorship or a Limited Limited Liability Partnership to a Private Limited Company in Vietnam requires some careful planning and execution. It is highly recommended that you seek professional help if you plan to convert your existing Vietnam business into a Pte Ltd company.