When to convert a Limited Liability Partnership (LLP) to a Limited Liability Company (LLC)?

Like most small businesses, you could have incorporated your business at the start as a Limited Liability Partnership (LLP), a separate legal personality from you and your business partners, so as to protect your personal interests while you take time to test out the viability of your business ideation. This is a sound move as it to provides you protection in many ways:

• Your liabilities are only limited to the capital you contributed to the LLP. In other words, any legal actions taken against the LLP will not affect your personal assets.

• As a LLP has perpetual succession, this means that any change in the partners of a LLP will not affect its existence, rights or liabilities. This ensures that the business will continue to operate.

• A LLP is also subjected to less stringent compliance requirements from ACRA. For instance, a LLP only needs to submit to the Registrar/ACRA an “Annual Declaration of Solvency or Insolvency”, it does not need to appoint a company secretary, hold annual general meetings, appoint an auditor or file annual accounts. The annual statutory requirement is also definitely simpler and therefore incurs less compliance costs. These contribute directly as savings to a LLP’s bottom line.

In this sense, setting up your business as a LLP does provide you the bandwidth to “experiment” with your business idea as long as your personal tax liability is below the current corporate tax rate of 17%.

Yet, you may have heard at one point or another - from your accountant or anecdotally from industry colleagues - that you should consider registering your business outfit as a Limited Liability Company (LLC) / Private Company, a legal business entity limited by shares (either an Exempt Private Company, a Private Company Limited by Shares or a Public Company Limited by Shares), in order to curb your personal tax liability once your business revenue and profits start to escalate. Why is this so?

• LLC enjoys a flat corporate tax rate of 17% while the tax liability of an LLP is subsumed to the partners’ personal income tax, which is variable (up to 22%). In other words, even when your net profit (before taxes) goes up, you don’t end up paying more taxes.

• LLC enjoys various tax rebates and tax exemptions offered by the Singapore government. Therefore, the effective tax rate for LLC can be significantly lower than 17%.

• Dividends received from LLC are tax-free.

So, at this point, it seems to make perfect sense for businesses to consider deregistering the status of the outfits as an LLP and incorporate it as a LLC.

That’s the sensible thing to do right?

Well, not really. What’s sensible is to consider all pros and cons diligently before you take the next step. Unfortunately, most business owners don’t do sufficient due diligence in this area. In fact, in our line of work, we’ve seen businesses taking the hasty step to register their LLP as a LLC so as to minimise their personal tax liability and enjoy tax benefits offered under corporate tax structure. But having to reverse their steps to reinstate their LLP status when they realise the cost of their action.

So, when exactly is the sweet spot for businesses to reap maximum benefits by re-registering their businesses as a LLC? There are 4 key areas to consider before you make the switch:

1. Tax Liability

Understand your current individual tax liability position. Compute your potential tax liability under the LLC tax structure. Compare the two and determine if there is any tax savings. You also need to find out if you will be drawing Directors’ Remuneration or Directors’ Fees or both under LLC and how it will affect your personal tax liability. But it isn’t as straightforward as that. There’re implications as you would also want not only to minimise your personal tax liability but also assess from the view of the newly incorporated LLC. It’s a matter of balancing and making informed decisions on when is the best time to convert from a LLP to LLC thereby optimising the available corporate tax rebates and tax exemptions provided in the corporate tax structure.

One way to ascertain is from your past years of personal tax assessment: what is the amount of tax you have been paying and is it getting close to the corporate tax rate or have even exceeded the 17%. You can use the Basic Corporate Tax Calculator for a preliminary assessment to determine the amount of tax savings.

However business owners may choose to speak to their tax consultant(s) as they would be able to assist in computing your potential tax liability both from a LLP and a LLC standpoint and advise if there’s any tax savings arising from such a conversion.

2. Tax Incentives

Be knowledgeable of all current tax exemptions and benefits available for LLC to make informed assessment and decision-making. A good place to begin is the Inland Revenue Authority of Singapore website so business owners continue to stay current in terms of shifts in tax policies as they are updated after each year’s Budget announcement by the Minister of Finance.

For instance, during the current COVID pandemic situation, to address the economic uncertainties, the Singapore Government rolled out 4 fiscal packages to support workers and businesses. Through the Unity, Resilience, Solidarity and Fortitude Budgets, Singapore has put aside almost S$100 billion – or almost 20 percent of its GDP. In addition, a further $11 billion will be set aside in Budget 2021 for the COVID-19 Resilience Package.

In general, Singapore is a pro-business nation. Besides tax incentives offered by the IRAS, there are many other forms of government grants offered to small and medium sized businesses here. So, do look out regularly for grants and schemes that will benefit your company.

3. Statutory Obligations of LLC

Besides being mindful of all the upsides and downsides from both personal and corporate tax perspective due to business conversion, there are also additional statutory obligations and regulatory duties a LLC must abide by. For example, under the Companies Act, all Singapore-incorporated companies are required to file annual returns with ACRA. The company must also submit the date of its annual general meeting (AGM), hold an AGM, submit the company’s annual financial statements and appoint a Company Secretary and Auditor.

4. Administrative Burden of LLC

With additional statutory obligations, comes administrative burden and duties. Under the Companies Act, the statutes clearly state the fiduciary duties and responsibilities of a company director. As a director of a company, you need to comply with financial reporting obligations under the Companies Act which entails maintaining financial statements, presenting the profit and loss account, balance sheet and directors’ report before the members at the annual general meeting, reporting on the state of the company’s affairs, holding meetings (AGM and EGM) and providing members with copies of the financial statements. Additional administrative burden would mean incurring additional costs in terms of appointing a Chartered Accountant, Company Secretary, Auditor, Tax Accountant, and all these can easily amount to $15,000 to $20,000 per annum depending on the size of your business.

In a nutshell, you should do sufficient due diligence before making the hasty decision to make the switch in your business structure.

The writer, Ms Valerie Tan, is a Chartered Accountant and she is a partner with AGILIT Consultancy LLP. If you’d like to find out more in this area, drop her a line at valerietan@agilitconsultancy.com.sg