Changes in conversion of type of private enterprise

According to Article 205 of the Law on Enterprise 2020, effective from 01 January 2021: From 01 January 2021, private enterprises can be converted into limited liability companies (LLCs), joint stock companies (JSCs), and partnerships. According to Article 199 of the Law on Enterprise 2014, private enterprises can be converted into limited liability companies only.

Allowing private enterprises to be converted into joint stock companies and partnerships as well is a new step forward in the Law on Enterprises, which will create foundation for enterprises to change their operating model to suit their financial position and reality.

Conditions to be met for conversion.

Under the new Law, a private enterprise can be converted into a limited liability company, joint stock company or partnership as decided by the owner of the private business if the following conditions are fully met:

  1. The registered business lines are not banned from business investment;
  2. The name of the enterprise is set according to the regulations;
  3. Valid business registration dossier;
  4. The business registration fee is fully paid in accordance with the provisions of the law on fees and charges;
  5. The owner of the private enterprise commits in writing to be personally responsible with all his/her own assets for all outstanding debts and to pay the full amount of the debt when it is due;
  6. The owner of the private enterprise enters into a written agreement with the parties of a unliquidated contract on the takeover and continued performance of such contract by the converted company.
  7. The owner of the private enterprise commits in writing or enters into a written agreement with other capital contributors on the takeover and use of existing staff of the enterprise.

Time limit for consideration and settlement from the Agency for Business Registration.

Within three business days from the application receipt date, the Agency for Business Registration shall review and grant a Business Registration Certificate if the above conditions are satisfied, and update the legal status of the enterprise on the National Database of Business Registration.

The above 3-day time limit is only true if the private enterprise’s dossier is complete and valid as prescribed by law. In fact, it might take more time and consultation and assessment from reputable lawyers as well as law firms might be required to ensure the legal certainty and sustainability of the new enterprise in the future.

Notes when converting a private enterprise into a LLC, JSC and partnership

  • The converted company automatically inherits the rights and obligations of the private enterprise from the date of issuance of the Business Registration Certificate.
  • The owner of the private enterprise shall be personally responsible with all his/her own assets for all debts incurred before the date the converted company is granted the Business Registration Certificate.

Differences between private enterprises and other types of converted enterprises

In reality, there shall be quite a difference between private enterprises and other types of converted enterprises.

Private enterprise:

Owned by an individual, and this individual is solely responsible with all his/her assets for all business activities of the enterprise. Private enterprises may not issue securities of any kind. Each individual is only entitled to establish one private enterprise. The owner of a private enterprise cannot concurrently be the owner of a business household or a general partner of a partnership. A private enterprise is not entitled to contribute capital for an establishment, or purchase of shares or capital contribution of a partnership, limited liability company or joint stock company.

One member (single-member) LLC:

An one member LLC is owned by an organization or an individual. The company owner is responsible for the company’s debts and other property obligations to the extent of the company’s charter capital.

Multi-member LLC

A multi-member LLC consists of 2 to 50 institutional/individual members. The members are liable for the enterprise’s debts and other property obligations to the extent of their contributed capital in the enterprise, unless otherwise provided.

Joint Stock Company

A joint stock company is basically a type of LLC in which (1) the charter capital is divided into several equal parts called shares; (2) the shareholders can be organizations or individuals, with the minimum number of shareholders being three and no limit to the maximum number of shareholders; (3) the shareholders are only liable for debts and other property obligations of the enterprise to the extent of their contributed capital in the enterprise;

Partnership

A partnership is a special case among types of enterprise, which requires at least two members as common owners of the company, doing business together under a common name. There may be capital contributors in the company in addition to the general partners; these general partners must be individuals, responsible with all their own assets for the obligations of the company; the capital contributors are organizations or individuals and are only responsible for the company’s debts to the extent of their capital committed to contribute to the company.