The Enterprise Law (2020) does not confirm which type of enterprise is the most optimal and most suitable for all investors. Each type of business has its own characteristics as well as advantages and disadvantages and will give investors different advantages depending on the needs and capabilities of each investor such as the ability to raise capital and share risks in business, management organization, and operating costs etc.
Limited Liability Companies (LLC) and Joint Stock Companies (JSC) are the 2 most popular types of enterprises operating in Vietnam. Limited liability companies are organized in 2 forms: 1-member limited liability companies and limited companies from 2 to 50 members (hereinafter referred to as limited liability companies with 2 or more members).
- A 1-member limited liability company is a special form of a limited company, so the statutes as well as the advantages and disadvantages of a 1-member limited liability company will not be mentioned in this article.
- Limited liability companies with 2 or more members and joint stock companies when established have legal status, but there are many differences between them. It is these differences that create unique characteristics, as well as pros and cons for each type.
1. Number of members
- A limited liability company with 2 or more members is a type of company consisting of at least 2 members and no more than 50 members contributing capital, and each member will be responsible for debts and other property obligations of the enterprise within the scope of its contributed capital. It should be noted that members of the company can be organizations or individuals.
A limited liability company is a type of business that is both reciprocal and human. This means that contributed capital is not the only link between limited company members, but they are also linked by familiar relationships because limited company members are usually people who already know each other, trust each other, and contribute capital to establish a company together. Therefore, the management and operation of the company are not too complicated.
- Members of joint-stock companies are called shareholders. Joint stock company shareholders can also be organizations or individuals, similar to limited companies. However, a joint-stock company is required to have at least 3 shareholders and does not limit the maximum number. This comes from the fact that a joint stock company is a capital company, the greater the number of shareholders, the higher the capital raised, which is considered an outstanding advantage of a joint stock company compared to a limited liability company. However, because of the nature of capital, the right to decide and solve problems in the company is based on the proportion of capital contributed by each shareholder, so the issue of managing and operating a joint-stock company is very complicated, especially for those who hold the management of the company.
For example, A is the chairman of the board of a joint-stock company, holding 30% of the company’s shares. B is also 1 member of the company, and B holds 28% of the shares. As long as B mobilizes and buys back another 3% of shares, he can take the company management from A.
2. Structure of organization
- A limited liability company with 2 or more members has a Members’ Council, Chairman of the Members’ Council, Director, or General Director. A limited liability company with 11 or more members must establish a Supervisory Board; in case there are fewer than 11 members, a Supervisory Board may be established in accordance with the requirements of corporate governance. Rights, obligations, standards, conditions, and working regimes of the Supervisory Board and the head of the Supervisory Board shall be prescribed by the company’s charter. The Chairman of the Members’ Council or the Director or General Director is the company’s legal representative as prescribed in the company’s charter.
- A joint-stock company has a General Meeting of Shareholders, a Board of Directors, and a Director or General Director. For a joint-stock company with at least 11 shareholders who are individuals or organizations holding 50% or more of the total shares of the company, there must be a Supervisory Board. The Chairman of the Board of Directors or the Director or General Director is the company’s legal representative specified in the company’s charter.
When the size of a joint-stock company is small, the number of shareholders is small, there is usually no separation between the owner and the direct operator, but the shareholders are usually simultaneously the executive of the company, that is, the General Meeting of Shareholders will simultaneously be a member of the Board of Directors.
For a larger company, the number of shareholders is greater, the running and management of the company becomes complicated and, therefore, a professional management team is required. From here, the person who directly runs the company may not be the company’s owner at the same time because of the company’s management process complexity, reflected in requiring the need to be transparent about the relationship between the owner and the direct operator of the joint stock company, the shareholders and others. Those are the reasons for establishing a Supervisory Board.
Note that for both types of companies, the legal representative of the company must reside permanently in Vietnam; in case of absence for more than 30 days in Vietnam, it must authorize in writing to another person as prescribed in the company’s charter to exercise the rights and duties of the legal representative of the company.
3. Capital and ability to mobilize and transfer capital
3. 1 Capital
- The charter capital of a joint-stock company is divided into equal parts called shares, while the capital of a limited liability company is not divided into parts but calculated as a percentage of capital contributed by each member.
- The ability to raise capital of a joint-stock company is much higher than that of a limited liability company through the issuance of shares to the public in the form of securities or intercompany issuances. Therefore, the capital structure of a joint stock company is very flexible. The issuance of shares to the public is considered a strength and also a weakness of a joint stock company. On the one hand, it will help the company raise a large amount of capital. On the other hand, the share price will be listed on the exchange, the share price partly reflects the company’s business situation honestly to the public.
3.2 Transfer capital
- The transfer of capital contributions of limited company members to people outside the company is strictly limited. The contributed capital must be offered to the members of the company in advance, so if the company or its members do not buy/buy out within 30 days from the date of the offering, this can be then offered for sale outside. The transfer of capital is carried out only with the consent of a group of members representing at least 75% of the charter capital of the company. This regulation has limited the penetration of outsiders into the company, so the operation of the limited company as well as the business secrets of the company are kept confidential at a high level, showing the human aspect of this company type.
- Shareholders of joint-stock companies are free to transfer their shares, except for the case of transferring ordinary shares of founding shareholders to non-founding shareholders in the first 3 years from the issuance of business registration certificates. With this regulation, although shareholders can maintain the liquidity of shares and can transfer shares conveniently when they need cash, it creates a huge risk in the operation of the joint stock company without limiting the penetration of strangers into the company and hence making it difficult to preserve business information. The nature of capital of a joint-stock company at this point appears when the mechanism of capital mobilization and circulation is higher.
4. Scope of responsibility
The scope of responsibility is considered the most important factor for investors when choosing the form of the business establishment because it directly affects their rights and interests when the company’s business activities are at risk.
- The scope of responsibility of members of limited companies and shareholders of joint-stock companies is “finite”. As mentioned above, limited company members are only liable for debts and other property obligations of the enterprise to the extent of the committed capital contributed to the enterprise.
- Similarly, joint-stock company shareholders are only responsible for the company’s debts until the end of the value of the shares they own. This means that if the company’s debt and other property obligations are greater than those committed by the members, they are not liable for the difference between the debt and the contributed capital.
The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.
