Can LLP Convert to Sdn Bhd in Malaysia?

Selecting the appropriate business structure is a pivotal decision for entrepreneurs in Malaysia. This choice significantly influences their liability, tax obligations, and capacity to secure financial resources. Limited Liability Partnership (LLP) and Private Limited Company (Sdn Bhd) are prevalent options, each presenting distinct advantages and drawbacks.

With businesses evolving, the prospect of transitioning from LLP to Sdn Bhd may arise. This article offers a comprehensive guide to facilitate this strategic transformation, providing insights into the legal aspects, outlining four key steps to incorporate Sdn Bhd, discussing three key considerations, and highlighting potential advantages. For more information, refer to 6 Key Things Businesses Must Know About Company Registration in Malaysia. 

Legal Aspects of Converting LLP to Sdn Bhd

Regulatory Requirements

Distinct frameworks regulate both LLP and Sdn Bhd. LLP is governed by the Limited Liability Partnerships Act 2012, while Sdn Bhd falls under the Companies Act 2016. Currently, there is no provision for a direct conversion from a Limited Liability Partnership (LLP) to a Private Company (Sdn Bhd), necessitating a transfer of assets and liabilities.

Here is a screenshot from the LLP booklet from SSM.

Legal Implications of the Transition LLP to Sdn Bhd 

If you decide to dissolve your LLP and establish a new Sdn Bhd, then transferring all assets and liabilities from the LLP to the newly formed Sdn Bhd is advisable. This transition includes real estate, intellectual property, equipment, and other tangible and intangible assets. All existing contracts and agreements must be updated to reflect the new company structure.

3 Key Considerations During the Transition LLP to Sdn Bhd 

a. Employee Transition

Managing the transfer of employees during the LLP conversion to Sdn Bhd is crucial for maintaining business continuity and compliance with employment laws in Malaysia. Communicating with employees about the transition process and its impact on their employment terms is essential. This transparency helps to alleviate concerns and ensure a smooth transition.

Additionally, all employment contracts must be reviewed, updated, and transferred to the new entity to reflect the change in business structure. This step ensures that the new Sdn Bhd is legally compliant and that employees' rights and obligations are preserved during the transition from LLP to Sdn Bhd.

b. Stakeholder Communication

Clear communication with stakeholders during the conversion from LLP to Sdn Bhd is essential for a smooth transition. This includes regular updates on the transition's progress and addressing any concerns that may arise. Key stakeholders, such as clients, suppliers, and employees, should be informed to ensure they understand the changes.

Additionally, it is crucial to renegotiate and update all customer and supplier agreements to reflect the new company structure. The business can foster trust and minimise disruptions during the transition by proactively managing these communications and updates.

c. Timing and Coordination

Careful planning and coordination of the timing of the transition from LLP to Sdn Bhd are essential to minimise disruptions to business operations. The business can ensure continuity and maintain operational stability by implementing the transition in phases. Additionally, preparing for potential challenges through robust contingency planning is crucial.

Having backup plans allows the business to respond swiftly to any issues that may arise, ensuring a smoother transition process and reducing the risk of unforeseen complications. This proactive approach to timing and coordination helps maintain the efficiency and stability of business operations throughout the transition period from LLP to Sdn Bhd.

4 Key Steps for Converting LLP to Sdn Bhd

1. Preparation and Planning

Thorough preparation and planning are essential before transitioning from an LLP to an Sdn Bhd in Malaysia.

a. Internal Decision-Making

The partners' agreement must collectively dissolve the LLP and proceed with the conversion to an Sdn Bhd company in the general meetings. This decision-making process involves a comprehensive review of the business's strategic objectives and an assessment of the potential benefits and implications of the transition.

b. Professional Advisors

Engaging with professional advisors is crucial during the preparation phase. These advisors provide expert guidance on navigating the complexities of regulatory compliance and effectively planning the transition. They assist in reviewing regulatory requirements, facilitating asset transfers, addressing tax implications, and ensuring compliance with corporate governance standards.

• Mishu 

• JMT Corporate Advisory Sdn Bhd 

• iComSec

2. Formation of the New Sdn Bhd

The formation of the new Sdn Bhd involves several key steps to incorporate the company legally and ensure compliance with regulatory requirements. For more information about Sdn Bhd registration, refer to Step-by-Step Guide on Registering a Sdn Bhd Company in Malaysia.

a. Registering a New Sdn Bhd

The process begins with filing the documents with the Suruhanjaya Syarikat Malaysia (SSM). This includes submitting the company’s constitution, particulars of directors, and shareholders. Registering your new company name with SSM and preparing the company agreement outlining its governance framework and shareholder rights is essential. For more information, refer to SSM guidelines for the incorporation of local companies. 

b. Appointment of Directors and Shareholders

Formalising the roles and responsibilities of directors and identifying initial shareholders is a critical aspect of company formation. This ensures clarity and transparency in the management structure of the new Sdn Bhd. Additionally, all statutory requirements must be met, including obtaining business licenses and permits and adhering to corporate governance standards.

3. Transfer of Assets and Liabilities

Transferring assets and liabilities from the LLP to Sdn Bhd requires careful planning and execution to ensure a seamless transition.

a. Asset Transfer Procedures

Agreements must be executed to transfer various assets, including real estate, intellectual property, equipment, and other tangible and intangible assets. Conducting a thorough valuation of assets helps determine fair transfer pricing and ensures accuracy in the transfer process. You may engage with professionals to assist you on this matter.

• Crowe

• Cheng & Co Group 

b. Handling Liabilities

Existing liabilities and debts of the LLP must be transferred to the new Sdn Bhd, with creditors notified and agreements updated accordingly. Debt restructuring may be necessary to align debt terms with the new company's financial structure. Regulatory compliance is paramount throughout this process, with all transfers complying with Malaysian laws and regulations, including tax implications.

4. Closing the LLP

The final step in the transition process involves formally closing the LLP to complete the conversion to an Sdn Bhd.

a. Dissolution Procedures

Following the formal process to dissolve the LLP is essential, including filing a cessation notice with SSM. For more information, refer to the Guideline For Declaration Of Dissolution In A Voluntary Winding Up Of A Limited Liability Partnership

Below is a screenshot of the supporting document needed for the dissolution of the LLP.

This involves settling all financial obligations, submitting final financial statements and reports to relevant authorities, and notifying stakeholders, including banks, suppliers, customers, and employees, of this dissolution. The dissolution process is completed by ensuring all outstanding obligations, including final tax filings, employee compensation, and legal claims, are settled before the LLP officially closes. For example, there is a statutory submission to LHDN for tax clearance, and keeping statutory records and accounting records is vital if future verification by authorised authorities is needed.

For more information, refer to the LHDN-Guideline Tax Clearance Letter Application For Companies, Limited Liability Partnerships (LLP) And Labuan Entities (Labuan Companies & Labuan LLP). 

4 Benefits of Converting from LLP to Sdn Bhd

a. Expansion and Scalability Needs

As businesses grow, they often require a structure that supports more significant operations, easier capital raising, and enhanced credibility. An Sdn Bhd is typically better suited for scaling up due to its ability to attract investors and manage more significant, complex operations.

b. Attracting Investors and Raising Capital

Investors generally prefer the structure of an Sdn Bhd due to its limited liability, clear shareholding structure, and better governance standards, which make it easier to raise funds and expand the business.

c. Legal and Tax Considerations

Limited Liability Partnership (LLP) and Private Company (Sdn Bhd) provide limited liability to their shareholders, shielding them from personal liability for the company's debts and obligations. However, Sdn Bhd often enjoys more advantageous tax treatment, particularly for larger enterprises. Companies can leverage corporate tax incentives and deductions by operating as Sdn Bhd, leading to substantial tax savings. Additionally, shareholders in an Sdn Bhd benefit from limited liability protection, where their liability is restricted to the extent of their shareholdings, safeguarding their assets

d. Improved Credibility and Business Image

An Sdn Bhd is generally perceived as more established and reliable, which can benefit dealings with clients, suppliers, and other stakeholders. This enhanced credibility can lead to more business opportunities and partnerships.

Conclusion

Transitioning from an LLP to a Sdn Bhd in Malaysia is a strategic move offering numerous benefits, including easier capital raising, improved business credibility, and favourable tax treatment. While the process involves several steps and legal considerations, careful planning and consultation with legal professionals can facilitate a smooth transition. By understanding and executing the key steps outlined in this article, businesses can effectively make the switch and position themselves for enhanced growth and success.