Lee Ai Hsian discusses the issues on conversion to a limited liability partnership.
 
In the previous issue of LEGAL INSIGHTS, we discussed the main features of the Limited Liability Partnerships Act 2012 ("Act") which is expected to come into operation later this year. We also discussed the main features of a limited liability partnership (“LLP”) and the procedures for the formation of the same.
 
The Act permits a conventional partnership or a private company to be converted to a LLP. In this second of a two-part article, we will discuss the procedures by which the conversion is to be carried out and the issues that may arise in relation to such conversion.
 
References in this article to a “Part”, “Schedule” or “Section” are references to a Part, Schedule or Section respectively of the Act.
 
CONVERSION TO LLP
 
The provisions on conversion of a conventional partnership or a private company to a LLP are contained in Part V of the Act. In the context of Part V, “convert” refers to the transfer of the properties, interests, rights, privileges, liabilities, obligations and undertakings of a conventional partnership or private company, as the case may be, to a LLP.
 
Conversion from conventional partnership
 
Section 29(1) permits a conventional partnership to be converted to a LLP provided that the LLP shall comprise all the partners of the existing conventional partnership and no other person.
 
As part of the conversion process, the conventional partnership is required to lodge with the Registrar of LLPs (“Registrar”) a statement signed by all its partners stating, inter alia, that as at the date of the application, the conventional partnership appears to be able to pay its debts as they become due in the normal course of business (Section 31(1)(a)(iii)).
 
A professional practice, such as a firm of Chartered Accountants or Advocates and Solicitors, which seeks a conversion to a LLP is also required to lodge an approval letter from its governing body with the Registrar (Section 31(b)). 
 
Conversion from private company
 
A private company that seeks to be converted to a LLP must satisfy the conditions set out in Section 30(1), namely that:
 
(a)     there is no security interest subsisting over its assets at the time of application; and
 
(b)     the partners of the LLP comprise all the shareholders of the private company and no one else.
 
A private company is also required under Section 31(2) to lodge with the Registrar a statement signed by all its shareholders stating, inter alia, that:
 
(i)      as at the application date, the company appears to be able to pay its debts as they become due in the normal course of business and all outstanding statutory fees or any amount owing to any government agency has been settled; and
 
(ii)     all of its creditors have agreed to its application to convert to a LLP.
 
REGISTRATION AND EFFECTS OF CONVERSION
 
Upon approval of the application for conversion of a conventional partnership or a private company (“transferor”), the Registrar will issue a notice of registration to state that the LLP has been registered under the Act (“registration notice”) from the date specified in the registration notice ("registration date").
 
The registration of the conversion will, inter alia, result in the following:
 
(a)     Vesting of properties and transfer of rights and liabilities - All properties vested in the transferor, all interests, rights, privileges, liabilities and obligations relating to the transferor, and the whole of the transferor's undertaking shall be transferred to and vest in the LLP without the requirement for any further act or deed (Section 33(1)(a));
 
(b)     Pending proceedings, judgments or convictions - All proceedings by or against the transferor which are pending on the registration date may be continued, completed and enforced by or against the LLP. This similarly applies to any conviction, ruling, order or judgment in favour of or against the transferor (Sections 34 and 35);
 
(c)     Existing agreements and arrangements - Every agreement, deed, contract, bond, instrument and arrangement to which the transferor was a party immediately before the registration date, shall as from that date continue in force as if the LLP is the party thereto and shall be enforceable by or against the LLP (Sections 36 and 37);
 
(d)     Continuance of employment - Every contract of employment shall continue in force on or after the registration date as if the LLP was the employer thereunder instead of the transferor (Section 38); and
 
(e)     Existing appointment, authority or power - Every appointment of the transferor in any capacity in force immediately before the registration date shall take effect from that date as if the LLP had been appointed. Similarly, every authority or power conferred on the transferor shall take effect from the registration date as if it were conferred on the LLP (Section 39).
 
However, the automatic vesting provisions under Sections 33 to 39 do not apply to any approval, licence or permit held by the transferor. It will therefore be necessary for the LLP to apply afresh for a similar approval, licence or permit (Section 40).
 
Notwithstanding the automatic vesting provisions, every partner of a conventional partnership that has converted to a LLP will continue to be personally liable, jointly and severally, with the LLP for the liabilities and obligations incurred by the conventional partnership prior to its conversion or which arose from any contract entered into before the conversion. Subject to any agreement with the LLP to the contrary, any partner who discharges any such liability or obligation shall be entitled to be fully indemnified by the LLP in respect of that liability or obligation (Section 41).
 
A LLP is also required to ensure that every invoice and official correspondence bears a statement of the conversion and the name and registration number of the transferor from which it was converted for a period of 12 months commencing 14 days after the registration date (Section 42).
 
CONVERSION ISSUES
 
As highlighted in the preceding paragraphs, a conversion entails the transfer of the properties, interests, rights, privileges, liabilities and obligations from the transferor to the LLP. Set out below are some key issues which are expected to arise upon conversion and which should be addressed by the relevant authorities before the Act comes into operation:
 
(1)     Income tax treatment - It remains to be seen whether the income of a LLP will be charged with tax at the entity level or based on the individual or corporate partner’s respective tax rates.
 
In Singapore, a LLP is deemed to be a body corporate under the Singapore Limited Liability Partnerships Act (Chapter 163A). However it is treated as a partnership for income tax purposes. Thus, the income of a LLP in Singapore is subject to tax based on the income derived by the individual or corporate partner from the LLP. 
 
(2)     Stamp duty - A conversion results in the automatic transfer of all the properties vested in the transferor to the LLP. Any conveyance upon the sale of any property is chargeable with stamp duty that ranges between 1% to 3% of the consideration or market value, whichever is the higher, of the property under Item 32(a) of the Stamp Act 1949.
 
Under the Stamp Act, a “conveyance on sale” includes every written document whereby any property, estate or interest in any property is transferred to or vested in a purchaser upon the sale thereof.
 
As the registration notice automatically transfers the transferor’s properties to the LLP, it is possible that the registration notice may be construed as a "conveyance upon sale" and be subject to stamp duty at the rates set out above.
 
In Singapore, the notice of registration of a LLP is deemed to be a conveyance on sale of the assets of the transferor to the LLP. A transfer upon conversion under the LLP regime in Singapore is relieved from stamp duty if the following conditions are satisfied:
 
(i)      the partners and assets of the LLP are those of the transferor as at the date of conversion;
 
(ii)     in the case of a firm, the capital contributed by each partner of the LLP remains the same as in the original firm, and in the case of a company, the percentage of partnership interest in the LLP is the same as the shareholdings in the transferor as at the date of conversion; and
 
(iii)    at least 75% of the composition of the partnership interest in the LLP held by the original partners immediately after the conversion remains unchanged for 2 years from the date of conversion.
 
(3)     Real property gains tax - Real property gains tax is imposed on any chargeable gain accruing from the disposal of any real property or shares in a real property company under the Real Property Gains Tax Act 1976 (“RPGT Act”).
 
As a conventional partnership and a company are deemed to be “chargeable persons” under the RPGT Act, the transfer of real property or shares in a real property company upon a conversion to a LLP may subject the transferor to real property gains tax.
 
CONCLUSION
 
The benefits of a LLP are manifest, the principal one being the concept of limited liability that is associated with a limited liability company, whilst allowing its partners the flexibility of adopting an internal structure akin to a conventional partnership.
 
The Government should minimise the incidental cost of conversion to a LLP by either exempting the registration notice from stamp duty or imposing duty of a fixed minimal amount on such an instrument. Similarly, the Government should exempt the transferor from real property gains tax in relation to the transfer of real property or shares in a real property company upon the conversion to a LLP.
 
If appropriate fiscal measures are not taken by the Government, the cost of conversion could be so prohibitive as to render the provisions of Part V to be a dead letter.