After a period of operation, either due to changes in the legal environment or the need for business development, business owners may need to change their business type. Understanding the procedures and advantages and disadvantages of changing business type helps business owners make the optimal choice for their development.
This article provides guidance on how to change the type of business entity, including regulations, forms, procedures, taxes, and accounting when making such a change.
1. Regulations on changing the type of business entity
1.1. What is a change in business type?
Business type conversion is a form of business restructuring to suit the scale and development direction of the business and to ensure compliance with legal requirements. This business restructuring leads to a change in the legal type of business to meet new requirements.
To understand the advantages and disadvantages of each type of business, See the following article for more details: What type of business should I establish?
1.2. Why is it necessary to change the type of business entity?
There are many reasons, but the main ones are:
+ When a business no longer has the minimum number of members or shareholders required by business law, it is forced to convert to a more suitable business type to avoid dissolution.
+ Alternatively, if a business wants to raise additional capital, recruit new members or shareholders, or issue bonds or shares but its current business type does not meet the requirements, it must convert to a different type of business.
1.3. Conditions for converting the type of business entity
a) Conditions, procedures, and formalities:
From the time a business is established until its dissolution and cessation of operations, it always maintains a relationship with the State. This relationship allows the State to protect the common interests of the community, the legitimate rights and interests of the business itself and its members, as well as related third parties. To ensure this purpose, the State regulates the conditions, procedures, and processes for converting the form of a business.
b) Conditions for the scope of responsibility:
A limited liability company (LLC) is a type of business where members have limited liability only to the extent of their committed capital contribution. Converting to a different type of business always carries the potential impact on third parties. Therefore, requiring members to fulfill their obligations before the business undergoes a conversion is crucial.
Furthermore, to prevent the misuse of business type conversion to evade or reduce the liability of members, the law may stipulate conditions regarding the joint liability of founding members of the converted business.
c) Conditions of labor relations:
The relationship between employees and employers is a legally binding one within a business. Because of this, the law often stipulates conditions to ensure the inheritance of obligations arising from the labor relationship during a transition.
d) Conditions for conversion:
- In the case where the business wants to do it itself: The conversion is entirely at the discretion of the company's owner. Therefore, the basis for the conversion is the decision of the General Meeting of Shareholders, the Board of Members, etc., depending on the type of business;
- For cases where conversion is mandatory: The basis for conversion is that the business structure does not meet the mandatory conditions set forth by law.
2. Types of businesses that can be converted
The following cases are regulated by law regarding the conversion of business types:
Converting a joint-stock company into a limited liability company with two or more members.
- Converting a joint-stock company into a single-member limited liability company.
- Converting a limited liability company with two or more members into a joint-stock company.
- Converting a limited liability company with two or more members into a single-member limited liability company.
- Converting a single-member limited liability company into a joint-stock company.
- Converting a single-member limited liability company into a limited liability company with two or more members.
- Converting a private enterprise into a joint-stock company.
- Converting a private enterprise into a partnership company.
- Converting a private enterprise into a limited liability company with two or more members.
- Converting a private enterprise into a single-member limited liability company.
3. Procedures for converting the type of business entity
The file includes:
1. Application for business registration.
2. Company charter.
3. List of members for limited liability companies with two or more members.
4. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of individuals for members of the company; legal documents of organizations for members that are organizations; legal documents of individuals for authorized representatives of members that are organizations, and the document appointing the authorized representative.
4. Resolutions, decisions, and copies of the minutes of the General Meeting of Shareholders regarding the conversion of the company;
5. Transfer contract or documents proving the completion of the transfer in the case of share transfer; Gift contract in the case of gifting shares; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
6. Documents confirming the capital contribution of new members or shareholders.
Profile include:
1. Application for business registration.
2. Company charter.
3. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of the individual owner of the company (if individual); Legal documents of the organization owner of the company (except when the company owner is the State); Legal documents of the authorized representative and the document appointing the authorized representative.
4. Resolutions, decisions, and copies of the minutes of the General Meeting of Shareholders regarding the conversion of the company;
5. Transfer contract or documents proving the completion of the transfer in the case of share transfer; Gift contract in the case of gifting shares; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
6. Documents confirming the capital contribution of new members or shareholders;
Profile include:
1. Application for business registration.
2. Company charter.
3. List of founding shareholders for a joint-stock company.
4. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of individuals acting as founding shareholders; legal documents of organizations acting as founding shareholders that are organizations; legal documents of individuals acting as authorized representatives of founding shareholders that are organizations, and the document appointing the authorized representative.
5. Resolutions, decisions, and copies of the minutes of the Board of Members' meetings regarding the company's transformation;
6. Transfer contract or documents proving the completion of the transfer in the case of transfer of capital contributions; Gift contract in the case of gifting capital contributions; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
7. Documents confirming the capital contribution of new members or shareholders;
Profile include:
1. Application for business registration.
2. Company charter.
3. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of the individual owner of the company (if individual); Legal documents of the organization owner of the company (except when the company owner is the State); Legal documents of the authorized representative and the document appointing the authorized representative.
4. Transfer contract or documents proving the completion of the transfer in the case of transfer of capital contributions; Gift contract in the case of gifting capital contributions; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the law; Merger contract, consolidation contract in the case of merger or consolidation of companies;
5. Resolutions, decisions, and copies of minutes of meetings of the Board of Members of a limited liability company with two or more members regarding the conversion of operations to a single-member limited liability company model;
Profile include:
1. Application for business registration.
2. Company charter.
3. List of founding shareholders for a joint-stock company.
4. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of individuals acting as founding shareholders; legal documents of organizations acting as founding shareholders that are organizations; legal documents of individuals acting as authorized representatives of founding shareholders that are organizations, and the document appointing the authorized representative.
5. Resolutions and decisions of the owner of a single-member limited liability company regarding the conversion of the company;
6. Transfer contract or documents proving the completion of the transfer in the case of transfer of capital contributions; Gift contract in the case of gifting capital contributions; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
7. Documents confirming the capital contribution of new members or shareholders;
The file includes:
1. Application for business registration.
2. Company charter.
3. List of members for limited liability companies with two or more members.
4. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of individuals for members of the company; legal documents of organizations for members that are organizations; legal documents of individuals for authorized representatives of members that are organizations, and the document appointing the authorized representative.
5. Transfer contract or documents proving the completion of the transfer in the case of transferring capital contributions; Gift contract in the case of gifting capital contributions; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
6. Resolutions and decisions of the company owner regarding the mobilization of additional capital contributions from other individuals or organizations, and documents confirming the capital contribution of new members in the case of mobilizing capital contributions from new members;
The file includes:
1. Application for business registration.
2. Company charter.
3. List of founding shareholders for a joint-stock company.
4. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of individuals for founding shareholders who are individuals; legal documents of organizations for founding shareholders who are organizations; legal documents of individuals for authorized representatives of founding shareholders who are organizations, and the document appointing the authorized representative.
5. A written commitment from the owner of the private enterprise to assume personal liability with all of their assets for all outstanding debts and to pay the full amount of the debt when due;
6. A written agreement between the private enterprise owner and the parties to the unfulfilled contracts stating that the converted company will take over and continue to perform those contracts;
7. Written commitment or agreement between the owner of the private enterprise and other contributing members regarding the retention and employment of the private enterprise's existing workforce;
8. Transfer contract or documents proving the completion of the transfer in the case of transferring capital of a private enterprise; Gift contract in the case of gifting capital of a private enterprise; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
The file includes:
1. Application for business registration.
2. Company charter.
3. List of members.
4. Copies of the following documents:
a) Legal documents of individuals for company members who are individuals; Legal documents of organizations for company members who are organizations; Legal documents of individuals for authorized representatives and the document appointing the authorized representative.
5. A written commitment from the owner of the private enterprise to assume personal liability with all of their assets for all outstanding debts and to pay the full amount of the debt when due;
6. A written agreement between the private enterprise owner and the parties to the unfulfilled contracts stating that the converted company will take over and continue to perform those contracts;
7. Written commitment or agreement between the owner of the private enterprise and other contributing members regarding the retention and employment of the private enterprise's existing workforce;
8. Transfer contract or documents proving the completion of the transfer in the case of transferring capital of a private enterprise; Gift contract in the case of gifting capital of a private enterprise; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
The file includes:
1. Application for business registration.
2. Company charter.
3. List of members for limited liability companies with two or more members.
4. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of individuals for members of the company; legal documents of organizations for members that are organizations; legal documents of individuals for authorized representatives of members that are organizations, and the document appointing the authorized representative.
5. A written commitment from the owner of the private enterprise to assume personal liability with all of their assets for all outstanding debts and to pay the full amount of the debt when due;
6. A written agreement between the private enterprise owner and the parties to the unfulfilled contracts stating that the converted company will take over and continue to perform those contracts;
7. Written commitment or agreement between the owner of the private enterprise and other contributing members regarding the retention and employment of the private enterprise's existing workforce;
8. Transfer contract or documents proving the completion of the transfer in the case of transferring capital of a private enterprise; Gift contract in the case of gifting capital of a private enterprise; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
Profile include:
1. Application for business registration.
2. Company charter.
3. Copies of the following documents:
a) Legal documents of the individual acting as the legal representative of the business;
b) Legal documents of the individual owner of the company (if individual); Legal documents of the organization owner of the company (except when the company owner is the State); Legal documents of the authorized representative and the document appointing the authorized representative.
4. A written commitment from the owner of the private enterprise to assume personal liability with all of their assets for all outstanding debts and to pay the full amount of the debt when due;
5. A written agreement between the private enterprise owner and the parties to the unfulfilled contracts stating that the converted company will take over and continue to perform those contracts;
6. Written commitment or agreement between the owner of the private enterprise and other contributing members regarding the retention and employment of the private enterprise's existing workforce;
7. Transfer contract or documents proving the completion of the transfer in the case of transferring capital of a private enterprise; Gift contract in the case of gifting capital of a private enterprise; Copy of the document confirming the legal inheritance rights of the heir in the case of inheritance according to the provisions of law;
4. Tax and accounting procedures when changing the type of business entity.
4.1. Tax procedures when changing the type of business entity
Based on the provisions of the Tax Administration Law: “Taxes declared for annual settlement and settlement up to the time of dissolution, bankruptcy, cessation of operations, termination of contracts or reorganization of the enterprise. In the case of conversion of the type of enterprise (excluding privatized state-owned enterprises) where the converted enterprise inherits all tax obligations of the converted enterprise then No tax return filing required. "Up to the point of making a decision on the business transformation, the business shall file its final tax return at the end of the year."
Therefore, when converting a business type and the receiving entity inherits all tax obligations of the business before the conversion (for example, converting from a Limited Liability Company to a Joint Stock Company or vice versa), the business does not need to file a tax return up to the time of the conversion decision; the business only needs to file an annual tax return as prescribed.
In cases where the entire tax obligation is not inherited, for example, when a sole proprietorship changes its business type to a limited liability company, the company does not inherit all tax obligations and therefore must file a final tax return.
4.2. Accounting procedures when changing the type of business entity
For businesses applying the accounting regime for small and medium-sized enterprises (Circular 133/2016/TT-BTC)
When changing ownership or business type, the accounting books must be closed and financial statements prepared in accordance with the law. In the first accounting period after the change, the business must record accounting entries and present financial statements according to the following principles:
1. For accounting records reflecting assets, liabilities, and equity: The entire balance of assets, liabilities, and equity in the old company's accounting records is recorded as the opening balance in the new company's accounting records.
2. For the Statement of Financial Position: The entire balance of assets, liabilities, and equity inherited from the old enterprise before the conversion is recorded as the opening balance of the new enterprise and is presented in the "Beginning Balance" column.
3. For the Statement of Income and the Statement of Cash Flows: Figures from the time of conversion to the end of the first reporting period are presented in the “This Period” column, while the “Previous Period” column presents the figures from the “This Period” column of the immediately preceding period's report. The enterprise must explain in the notes to the financial statements the reasons why the figures in the “Previous Period” column are not comparable to the figures in the “This Period” column (if any).
For businesses applying the corporate accounting system (Circular 200/2014/TT-BTC)
When changing ownership structure, businesses must close their accounting books and prepare financial statements in accordance with the law. In the first accounting period after the change, businesses must record accounting entries and present financial statements according to the following principles:
1. For accounting records reflecting assets, liabilities, and equity: The entire balance of assets, liabilities, and equity in the old company's accounting records is recorded as the opening balance in the new company's accounting records.
2. For the Balance Sheet: The entire balance of assets, liabilities, and equity inherited from the old business before the conversion is recorded as the opening balance of the new business and is presented in the "Beginning Balance" column.
3. For the Statement of Income and the Statement of Cash Flows: Data from the time of conversion to the end of the first reporting period are presented in the “This Period” column. The “Previous Period” column presents cumulative data from the beginning of the reporting year to the time of ownership conversion.