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Conversion the legal form of the limited liability company to One Person company

تغيير الشكل القانوني للشركات - Conversion the legal form of companies

Egypt has attracted more foreign direct investment (FDI) across multiple industries, predominantly within the financial services, technology and infrastructure sectors. Egypt was ranked 3rd in the top 17 African Tech Ecosystems of the Future for 2021/2022, according to the 2021 African Tech Ecosystems of the Future Report 2021/2022.

Egypt was also recognized as one of the top five global destinations for greenfield FDI in 2016, with Cairo ranking among the top ten cities for start-ups in 2016. In terms of capital investment, Egypt led the MENA region in 2020, securing 12% of the capital investment with a total value of USD13.7 billion. Notably, financial services were among the top five sectors in 2019.

With a population of over 100 million and the reach to the MENA countries, more and more trips to Egypt have the mission to sign contracts and/or set up companies.

Types of companies in Egypt

In Egypt, there are four types of possible legal forms of business:

  1. Joint stock company.
  2. Limited liability company.
  3. Representative office.
  4. Branch.
  5. Sole shareholder company.

For foreign investors the most common form is the LLC as it provides limited liability and any issued capital is accepted. Other factors to consider when determining the most suitable form of business to use are the purpose of the entity, the number of partners and capital invested are essential.

The Companies’ Law No. 159 of the year 1981, the New Investment Law No. 72 of the year 2017, and the Capital Market Law with their Executive Regulations and adaptation are the governing laws that regulate and manage the establishment of a company in Egypt from the beginning until its dissolution. Meanwhile, the central authority governing all types of companies in Egypt are the General Authority for Investment and Free Zones.

The limited liability Company (LLC):

Limited liability companies (LLC) are defined as a type of business structure where owners of the LLC are called “members” and are partners in a business entity with all the protection of a corporation plus the ability to pass through any business profits and losses to their personal income tax return.

An LLC is permitted to engage in all business activities except activities of banking, insurance, saving, receiving or investment of funds for the favor of third parties, or any other activity explicitly restricted by the law.

There is no minimum capital required under Egyptian law with respect to the incorporation of LLC. However, the issued capital of LLC shall be paid in full upon application for incorporation.

The establishment of an LLC requires a minimum of two (2) partners and up to a maximum of fifty (50) partners. Furthermore, there are no restrictions on the nationality of the partners.

LLC may be managed by one manager of any nationality.

One person Company:

A one person company means a company with capital fully owned by one person, whether a natural or legal person, in conformity with the company’s purposes. The founder of the company shall not be liable for the company’s obligations unless within its allocated shared capital.

The company shall elect a unique name for it that is derived from its purposes or the name of its founder. The company’s name shall be followed by an abbreviation that indicates that it is a one-person, limited-liability company. The company’s name shall be placed on its head office and branches (if any) and in all its head letters.

The article No. 287 from the executive regulations of the companies’ law no. 159 of 1981 stated that “The minimum capital of a single person company may not be less than (1000,0 EGP) one thousand pounds, and the capital must be paid in full when the company is established.

The company’s capital shares may not be in the form of tradable shares, nor may this company issue any type of securities, or borrow by issuing tradable securities, nor may it undertake public subscription either upon its founding or at Increasing its capital, practicing insurance, banking, saving, receiving deposits, or investing money on behalf of others.

Converting LLC to one person company

Article No.136 from companies law No.159 of 1981 stated that “The legal form of partnerships limited by shares, or limited liability companies, may be changed by a decision issued by the extraordinary general assembly, or by a group of partners with a majority of three-quarters of the capital, as the case may be.

The company whose legal form is converted, and the company to which it is converted to, and its partners are exempt from all taxes and fees due to the change in the form of the company (Article 136/3 of the law).

This tax exemption is provided in the event that the form of the company subject to the provisions of the Companies Law No. 159 of 1981 is changed to one of the other forms also mentioned in the same law without the form of private companies, and it may not be expanded or analogous to include other companies outside the scope of its application

The Cases of converting limited liability to one person company

The most important cases that require changing the company’s form are the following:

  1. Changing the form of the company to change the activity or to practice a specific activity (as the Companies Law has restricted the practice of some activities to certain types of companies, as banking companies, loan, investment, insurance and savings companies are not permitted to take the form of a limited liability company).
  2. Changing the company’s form to reconcile its situation instead of liquidating or dissolving it (change in financial quorum).
  3. Changing the form of the company due to a change in the minimum and maximum legal quorum of the number of partners.

If the legal quorum of partners exceeds 50 partners (as in cases of inheritance) or if the legal quorum is less than two partners, such as the death of one of the partners and the unwillingness of the heirs to enter as partners in the company, the legal form of the company must be changed.

The Procedures of conversion of LLC to one person company

  1. Minutes of the extraordinary general assembly from the remaining partner or shareholder with approval to change the legal form of the company for not completing the required quorum of partners or shareholders, as the case may be.
  2. A copy of the company’s articles of association and any amendments, if any.
  3. A recent true copy of the commercial register with not more than 3 months since issuance date.
  4. Evidence of the exit of the shareholders or partners, as the case may be.
  5. A valuation Report, issued by such committee as formed by the Authority, on the net equity.
  6. Minutes of the extraordinary general assembly from the remaining shareholder or partner approving the valuation report and specifying the information of the articles of association of the OPC.
  7. A bank deposit certificate of the amount of the capital increase, if any.
  8. The new articles of association of the OPC.
  9. A power of attorney from the remaining partner or the shareholder, as the case may be, authorizing amendment(s).
  10. Non-confusion Certificate.
  11. Approval of the concerned authorities, if necessary.
  12. A copy of the title deed if any.
  13. Acknowledgment of accepting the appointment of directors and copies of their ID Card.
  14. Acknowledgment of accepting the appointment of the legal advisor and a copy of the registration card in the Bar.

The effect of changing the legal form of the company

The company’s financial liability:

The company’s financial liability remains, which consists of the total shares of shares provided by the partners/shareholders, the reserves that the company built up during its life, and the profits it achieved before changing its legal form.

The financial liability is nothing but the sum of the company’s rights and obligations, and changing the company’s form has no effect on its financial liability. Since it acquires legal personality, it creates a financial liability independent of the liabilities of the partners.

All its funds remain the general guarantee for creditors, and it is not permissible to set off between the debts of the company that changes its legal form and the debts of the partners.

The effect of changing the company’s form on the rights of its creditors:

Changing the form of the company subject to the scope of application of the Companies Law No. 159 of 1981 does not result in any violation of the rights of its creditors, and the company that has been changed to its debtor form with respect to all of the company’s debts is considered the company as soon as the change procedures are completed. This is a logical effect because the personality of the company does not expire in the event of change.

It is permissible for every creditor whose right has arisen against the company to which the change is made before the completion of the change procedures to request the competent court to determine guarantees for him against the company to which the change is made, if there are serious considerations that justify this.

If it is not decided to expedite the payment of the debt or create sufficient guarantees for it, the assets of the company to which it was changed are The decision to change it guarantees that the value of the debt and its interests will be met.

It should be taken into account that all of these provisions do not prevent the application of the conditions contained in the bonds establishing these debts that require their acceleration in the event that the company changes to another.