Transforming Sole Proprietorship into another business form

Transforming a sole proprietorship into another business form can be an essential step for growth, better alignment with the business’s development, or compliance with legal requirements. This article outlines the different types of business transformation available for sole proprietors, including the necessary conditions, procedures, and documentation for each transformation.

Transformation of a Sole Proprietorship into another business form

1. What is a Sole Proprietorship?

According to Article 188 of the 2020 Enterprise Law, a sole proprietorship is defined as follows:

– A sole proprietorship is an enterprise owned by an individual who is liable for all activities of the enterprise with all his/her assets;

– Sole proprietorships may not issue securities of any type;

– Each individual may establish only one sole proprietorship. The owner of a sole proprietorship must not concurrently be a business household owner or a general partner in a partnership;

– Sole proprietorship may not contribute capital to establish or purchase shares or contributed capital amount in, a partnership, limited liability company or joint stock company.

2. What is Business Transformation?

Business transformation refers to the process where a business changes from one legal form to another in order to better align with its scale, development, and future direction. Furthermore, transforming the business structure can prevent the business from having to dissolve due to not meeting the minimum member requirements.

The 2020 Enterprise Law allows sole proprietorships to transform into the following business forms:

2.1. Transformation of a Sole Proprietorship into a Limited Liability Company (LLC)

An LLC can be either a single-member LLC or a multi-member LLC.

A single-member LLC is owned by either an organization or an individual. The owner is liable for the company’s debts and obligations only within the scope of the company’s charter capital.
A multi-member LLC has between 2 and 50 members, who may be individuals or organizations. Members are only liable for the company’s debts within the scope of their capital contribution, except in specific cases defined in Article 47 of the 2020 Enterprise Law.

2.2. Transformation of a Sole Proprietorship into a Joint-Stock Company

A joint-stock company is a business where:

The charter capital is divided into equal shares; shareholders can be organizations or individuals.
There must be at least 3 shareholders, with no maximum limit.
Shareholders are only liable for the company’s debts and obligations to the extent of their capital contributions. Shareholders have the right to transfer their shares to others, except in cases specified in Articles 120 and 127 of the 2020 Enterprise Law.

2.3. Transformation of a Sole Proprietorship into a Partnership

A partnership must have at least two general partners who jointly own and operate the business under a common name. In addition to the general partners, the partnership may also have capital-contributing members.

General partners are individuals who are fully responsible with their personal assets for the company’s obligations.
Capital-contributing members can be individuals or organizations and are only liable for the company’s debts up to the amount they have committed to contribute.

3. Conditions for Transformation of a Sole Proprietorship into another business form

The specific conditions for transforming a sole proprietorship are outlined in Article 205 of the 2020 Enterprise Law. The conditions include:

The business must meet the requirements specified in Clause 1, Article 27 of the 2020 Enterprise Law;
The owner of the sole proprietorship must commit in writing to personally take responsibility for all unpaid debts and commit to making full repayment of the debts when they are due;
Owners of the sole proprietorships must agree in writing with the parties to the contracts not yet liquidated that the new company shall receive and perform such contracts;
The owner commits or agrees in writing with the other capital-contributing members on the receipt and employment of existing employees of the enterprise.

To carry out the transformation, the owner of the sole proprietorship need to prepare and submit the transformation dossier to the Business Registration Office, where the business registration certificate will be issued. The requirements for the application vary depending on the type of transformation. The Business Registration Office will review and issue the business registration certificate within 3 working days if the conditions are met and update the business’s legal status in the national business registration database.

4. Procedure for Transformation of a Sole Proprietorship into an LLC

4.1 Conditions for Transformation of a Sole Proprietorship into an LLC

According to Article 199, Chapter IX of the 2020 Enterprise Law, the conditions for transforming a sole proprietorship into an LLC are as follows:

The business must meet the conditions specified in Clause 1, Article 28 of the 2020 Enterprise Law.
The owner of the sole proprietorship must be the sole owner (in the case of conversion to a single-member LLC) or a member (in the case of conversion to a multi-member LLC).
The owners must commit in writing to personally take responsibility for all unpaid debts of the sole proprietorship and ensure full payment when due.
The owner must have a written agreement with the parties to unresolved contracts about transferring the execution of those contracts to the LLC.
The owner must commit in writing or have a written agreement with other capital contributors regarding the retention and use of existing employees of the sole proprietorship.

4.2 Documents required for Transformation of Sole Proprietorship into LLC

As per Article 26 of Decree 01/2021/ND-CP, the documents required for transforming a sole proprietorship into an LLC include:

Application for business registration.
Articles of association for the new company.
List of creditors and unpaid debts (including taxes), debt repayment deadlines, list of current employees, and list of unresolved contracts.
List of members (for multi-member LLCs), a valid copy of personal identification documents for individual members, or a valid copy of the business registration certificate for organizational members.
Commitment letter from the sole proprietor regarding personal responsibility for all unpaid debts.
Written agreement regarding the transfer of unresolved contracts to the new LLC.
Agreement or commitment between the sole proprietor and other members regarding the retention of employees.

4.3 Procedure for Transforming a Sole Proprietorship into an LLC

Step 1: Submit the transformation dossiers to the Business Registration Office.

Step 2: The Business Registration Office will review and issue a business registration certificate within 5 working days, if all conditions are met.

Step 3: Notify relevant authorities within 7 working days after the new business registration certificate is issued. The legal status of the business will also be updated in the national business registration database.

4.4. Post-Transformation Procedures for a Sole Proprietorship to LLC

After the transformation, the company needs to complete the following steps to ensure the new business form operates smoothly:

Publish the updated business registration information on the National Business Registration Portal within 30 days from the issuance of the new certificate.
Re-make company seals and notify the Business Registration Office about the new seal design and quantity.
Register VAT invoices or notify the issuance of new VAT invoices based on the updated business information.
Notify all relevant partners, customers, insurance companies, banks, etc., about the change in business form.

5. Procedure for Transforming a Sole Proprietorship into a Joint-Stock Company

Step 1: Prepare the transformation Application

The application must include:

Business registration application.
Articles of association of the joint-stock company.
A valid copy of personal identification documents.
List of creditors and unpaid debts, including taxes.
List of current employees.
List of unresolved contracts.
Commitment letter from the sole proprietor regarding personal responsibility for unpaid debts.
Written agreement for the transfer of unresolved contracts to the new joint-stock company.
Agreement or commitment regarding the retention of employees.
Transfer agreement or documents proving the transfer of capital of the sole proprietorship; gift agreement in case of capital donation from the sole proprietorship; a copy of the document confirming the legal inheritance rights of the heir in case of inheritance according to the law.
Document from the investment registration authority approving the contribution of capital, purchase of shares, or purchase of capital contributions by foreign investors or foreign-invested economic organizations in accordance with regulations.

Step 2: Submit the Transformation Application

After completing the application, submit it to the Business Registration Office.

Step 3: Business Registration Office review

Within 3 working days, the Business Registration Office will review the application and issue a business registration certificate if conditions are met. The business status will be updated in the national database.

6. Procedure for Transformation of a Sole Proprietorship into a Partnership

6.1 Required Documents for Transformation of a Sole Proprietorship into a Partnership

Application for business registration.
Articles of association.
List of creditors and unpaid debts.
List of current employees and unresolved contracts.
Personal identification documents for individual members.
Written commitment from the sole proprietor regarding personal responsibility for all debts.
Written agreement on the transfer of unresolved contracts.

6.2 Conversion Procedure for Transformation of a Sole Proprietorship into a Partnership

Step 1: Prepare the necessary documents corresponding to the type of business entity being transformed.

At this stage, documents for establishing a partnership company need to be prepared.

Step 2: Submit the documents to the Business Registration Office in the district where the company is located.

The sole proprietor or an authorized person may carry out the business registration procedures through one of the following methods:

Step 3: Receive the result of the administrative procedure.

Within 3 working days from the date of receipt of the documents, the Business Registration Office will review the documents and issue a Business Registration Certificate if the transformation conditions are met. The legal status of the business will then be updated in the National Business Registration Database.

8. Responsibility for Debts After Conversion

After the transformation, the owner of the sole proprietorship is still personally responsible for all debts incurred before the transformation date. According to Clause 3, Article 205 of the 2020 Enterprise Law, the converted company will inherit all rights and obligations of the sole proprietorship from the date the business registration certificate is issued. The sole proprietor remains liable for all debts arising before the conversion date.

Transforming a sole proprietorship into another business entity, whether an LLC, joint-stock company, or partnership, offers flexibility and opportunities for expansion. By understanding the transformation process and meeting the legal requirements, business owners can ensure a smooth transition while securing long-term success.

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