Advantages and limitations of each type of business entity in Vietnam

Thursday, February 27, 2014 12:00 AM | UTC+7 Viewed: 4098
According the Vietnam Law on Enterprises, there are four common types of business entity at present: private enterprises, partnerships, joint stock companies, limited liability companies (multi-member limited liability companies and single-member limited liability companies).

 

I. Private Enterprises 

This is the most simple business entity.  A private enterprise is owned by an individual who is liable for all of its operations with his/her entire property.

Advantages:

Procedures of establishing a private enterprise are simple;

The owner of a private enterprise has the full decision-making power on any business operation of the enterprise and  the use of its profits after payment of taxes;

Owners of private enterprises are not obliged to pay personal income tax after they have paid for corporate income tax.

Disadvantages:

In case where the enterprise is for lease, during the lease term, the owner of such private enterprise remains fully liable before law in the capacity as its owner. Rights and responsibilities of the owner and the lessee with respect to business operations of the enterprise are defined in the leasing contract.

 

II. Partnerships

A partnership is an enterprise in which there are at least two partners who are co-owners of the company, jointly conduct business under one common name, and are liable for all obligations of the partnership with his/her own entire property. Moreover, a partnership can also have limited partners, who are liable for debts of the partnership only to the extent of their capital contribution.

Advantages:

Generally, a partnership consists of only a few members managing the company based on mutual trust, internally assigning the rights to manage and organize business activities of the company under majority rule.

Another advantage of this type is the combination of reputation of many people. Additionally, due to the partners’ liability for all obligations of the partnership with his/her own entire property, a partnership can easily gain trust from customers and business partners.

Disadvantages:

Assets of partners and limited members contributed as capital to the partnership are required to be in its possession. However, if the company could not afford to pay the debts incurred, the members would then be responsible for payment of those debts by using their personal assets.

 

III. Joint Stock Companies

A joint-stock company is an enterprise where its charter capital is divided into equal portions known as shares. The minimum number of shareholders shall be three and shall not be restricted to any particular maximum number. This business entity is different from the two mentioned above because shareholders may be organizations and/or individuals, and are able to freely transfer their shares in most cases, except for those prohibited by Law on Enterprises.

Advantages:

The liability of a shareholder of a joint stock company is limited to the value of the capital that he/she has contributed to the company, which will minimize the risks of damaging personal assets.

Only joint stock companies have the ability to raise capital through the issuance of shares. Flexible capital structure, high ability to raise capital, and being relatively free to transfer/ purchase shares enable more people to contribute capital to the company.

Disadvantages:

Having too many members can lead to the formation of groups of opposing shareholders in terms of benefits, which makes managing and operating the company more difficult.

Complicated organizational structure: A joint-stock company shall comprise: the Shareholders' Meeting; the Management Board, the director or general director; for a company with more than eleven shareholders being individuals or with a shareholder being an organization holding more than 50% of total shares, it must also have a Control Board.

 

IV. Limited Liability Companies (LLC)

There are two types of limited liability companies in Vietnam, which are: multi-member LLC and single-member LLC.

1.  Multi-member LLC:

A multi-member LLC is a company of which members may be organizations and/or individuals and must not exceed the number of 50. They are responsible for debts and other property liabilities of the enterprise within the amount of capital that they have committed to contribute to the enterprise.

Advantages:

Members are responsible for debts and other property liabilities of the enterprise to the extent of capital that they have contributed to the enterprise, which will the risks of damaging personal assets.

Moreover, the purchase and transfer of capital between members are strictly regulated by law so that managers can easily control the capital contributed by the members, limiting the penetration of strangers into the company.

Disadvantages:

A multi-member LLC is not entitled to issue shares.

A multi-member LLC must have a Members' Council, chairman of the Members' Council and director or general director. An LLC with 11 or more members must set up a Control Board. A Control Board may also be set up in a company with less than 11 members to meet its management requirements.

 Also, due to the limited scope of liability, a multi-member LLC will initially find it difficult to build credibility with customers and partners in the trading relationship.

2.Single-member LLC:

A single-member LLC is an enterprise owned by one organization or individual. The company owner is liable for debts and other property liabilities of the company within the charter capital of the company.

Advantages:

The organizational structure of management of a single-member LLC is not too complicated. Therefore, managers can easily control business activities of the company. Organizational structures of management may vary, depending on either the owner is an organization or an individual:

If the company owner is an organization, the company's organizational structure of management is required to comprise Members' Council, director or general director and controller.

If the company owner is an individual, in this case, the company's organizational structure of management is required to comprise company president, director or general director.

The owner of a single-member LLC has the authority on all business operations of the company but is only liable within the company's charter capital. Therefore, a single-member LLC is considered a safe option for enterprises owned by an individual or an organization.

Disadvantages:

A single-member LLC is not entitled to issue shares.

The company owner is entitled to withdraw the capital only by transferring part or whole of the charter capital to another organization or individual; if the capital is withdrawn from the company by another way, the company owner will be liable for all debts and other property liabilities of the company.

If the company owner wants to transfer part of the charter capital to another organization or individual, such company must first be transformed into a multi-member LLC.

PLF - LAW FIRM



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