Vietnam's food trade industry is one of the most dynamic sectors in the country. Fueled by an expanding middle class, rising disposable incomes, and shifting consumer preferences, the increasing demand for high-quality food products is undeniable. From bustling markets in Ho Chi Minh City to modern supermarkets in other major cities, the opportunity for both […]
Business expansion in foreign countries is a part of a strategic plan of many giant companies with a view to creating a business network worldwide as well as finding talents in these countries. Regarding the latest achievements, Vietnam has become a favourable destination for many foreign investors to invest in and establish businesses. In order to set up a business in Vietnam, it is vital to understand the available types of legal entity in the country. This article provides you helpful information about two main types of legal entity in Vietnam and introduces you to the procedure of establishing a company in Vietnam.
What is a legal entity?
For one thing, we have to know the concept of a legal entity. According to the Cambridge Dictionary, a legal entity is defined as “a company or organization that has legal rights and responsibilities, for example, the right to make contracts and the responsibility to pay debts”. The Business Dictionary provides a more in-depth definition, a legal entity is “an association, corporation, partnership, proprietorship, trust or individual that has legal standing in the eyes of law.
A legal entity has the legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in its own rights and to be held responsible for its action.” Hence, generally, a legal entity has the responsibility for the legal obligations of a company.
Two main types of legal entity in Vietnam
This part focuses on two main types of legal entity in Vietnam including limited liability company and joint-stock company and provides advantages and disadvantages of these types of companies.
Limited Liability Company
There are two types of LLC depending on the number of members. A Limited Liability Company (LLC) with one member is called "Single Member LLC", and the one with 2 to 50 members is called "Multiple Member LLC." An LLC has its own charter and board of members (BOM). Members of LLC are responsible for the liabilities of the company to the extent of the amount of capital the member has contributed. Besides, LLC is also authorized to establish independent units like branches and representative offices domestically or abroad. Additionally, an LLC does not issue shares.
In fact, there is no requirements for capital contributed to an LLC. However, for some sectors, such as foreign-owned banks, the company is required to have at least VND 3000 billion capital investment.
Regarding single-member LLC, this type of company is owned by one organization or one individual who is liable for the debt of the company to the point of the charter capital. The company owner can appoint a representative or create a board of manager (BOM)of 3-7 people to exercise the rights of the owners. Moreover, a general director (CEO) will be appointed by the president to oversee the everyday operations of the company. The company owner can decrease or increase its charter capital. In the event of transferring capital, the company must register to convert into a multiple LLC or a JSC within 10 days.
With regard to multiple-member LLC, members have certain privileges such as attending meetings of BOM, voting rights in proportion to their capital contribution, be distributed profits proportional to their capital contribution, given priority in contributing additional capital. When members want to transfer all or part of their capital, they must offer to sell their capital to other members first.
BOM in multiple-member LLC is the body with the most decision-making power. BOM with more than 11 members must also establish a Control Committee. Resolutions can be passed if approved by a number of votes that represent more than 65% of the company's contributed capital. The proportion is 75% if the resolutions concern decisions on sales of assets or reorganization of a company or amendment to the company's charter. Plus, BOM must appoint one director responsible for the operations of the companies.
Then what are advantages and disadvantages of LLC?
Advantages
- This type of business entity is safer because decision-making authority is concentrated in fewer hands and the law restricts the penetration of outsiders into the company. Also, the management structure is more cost-effective and gives people in charge of easier control of business activities.
- The structure that is most appropriate for small and medium enterprises with a limited number of associates, registered capital of reduced values and liabilities of its members are limited to the share of capital.
- Perpetual existence: the transfer of ownership does not impact business operations and therefore not affect a business's ability to continue its financial activities and achieving its objectives.
- LLC is more stable in regard to corporate governance.
- Vietnam ranks favorably on the ease of starting an LLC company compared with other countries in the Southeast Asian region.
Disadvantages
- According to Vietnamese law, regarding the expansion of LLC by capital rising, the company owner has to sell to members first before selling to investors, then the process is fairly complex.
- Create concerns about the company's capacity among clients, investors, or partners because of low charter capital.
- With the limited scope of liabilities, LLC is less attractive in terms of creditworthiness to investors, customers, and partners in trading relationships.
Joint Stock Company
Joint Stock Company (JSC) is a limited liability entity formed by the subscription for shares in the company. This is the only type of business entity that can issue shares under Vietnam legislation. It is required to have at least three shareholders (no cap on the number of shareholders maximum). Shareholders are responsible for the debts and liabilities of the enterprise to the extent of the amount of their contributed capital.
JSC can be managed under two structures. The first one includes four parties. General Shareholders Meeting (GSM), Board of Management, Control Committee and General Director (CEO). When there are fewer than 11 shareholders owning less than 50% of the company's shares, there are no requirements for the control committee.
The second one includes GSM, Board of Management, General Director. With this structure, at least 20% of the board members must be independent and the board of management has to organize an internal auditing committee.
Regardless of the management structure of JSC, these parties share the same responsibilities:
- General Shareholders Meeting (GSM)'s responsibilities: adopt a company's strategies, decide on shares outstanding and dividend rates, elect members of Board of Management and Control Committee, decide on investments or sales of assets, amend company's charters, decide on reorganization or dissolution decisions.
- Board of management: 3-11 members, elected from GSM. Has the authority to make decisions regarding the company's strategies and perform the companies' rights and obligations not assumed by GSM.
- Director: Appointed by the board of management for a term of up to 5 years. Responsible for the daily operations of the company.
- Control committee: when the JSC has more than 11 or more shareholders. The committee is appointed by GSM and must be full-time workers at the company except otherwise stated. Plus, 3-5 members must regularly reside within the territory of Vietnam.
Then what are the advantages and disadvantages of JSC?
Advantages
- The ability to acquire large capital: issuing shares and bonds allows JSC to garner enough capital required by the operations of the company in a short amount of time.
- Limited liability: the liability of the shareholder is only limited to the capital contributed. Plus, there being a large number of shareholders means that risk is diffused across different agents, so there is less at stakes for the investors.
- Perpetual existence: the transfer of ownership does not impact business operations and therefore not affect a business's ability to continue its financial activities and achieving its objectives.
Disadvantages
- Intricate management structure making the decision making process longer. Decisions must navigate different steps of bureaucracy to be adopted. A delayed decision-making process also means that the company is less adaptive and responsive to the changes in the environment.
- Too much transparency: JSC is required to have their documents, accounts, reports audited and made accessible to the public. This creates confidence for its customers, investors, partners in working with the company while it may present a threat to the company's internal.
- Instability because of capital raising and share buying is easy and flexible.
How to register a legal entity in Vietnam
Step 1: Investment Registration Certificate (IRC)
Foreign investors must have investment projects and obtain IRC by submitting an application dossier to the Management Authority of the provincial industrial/economic zone (for projects located inside an industrial zone, export processing zone, high-tech zones or economic zones) or the provincial department of planning and investment (for projects located outside an industrial zone, export processing zone, high-tech zones or economic zones). The process usually takes 15 days from the submission of the application.
Step 2: Enterprise Registration Certificate (ERC)
If a new foreign invested company (FIC) is being established together with an investment project, foreign investors must also apply for ERC at the provincial department of planning and investment. It usually takes 3 days or maybe longer.
Step 3: Taxation Registration
The registration includes enterprise Income Tax (EIT)(20% from 2016), value-added tax, foreign contractor tax, special consumption tax, import, export duties, tax incentives and personal income tax.
Read further: How to own properties in Vietnam.
In conclusion, there are two types of legal entity in Vietnam consisting of Limited Liability Company and Joint Stock Company. Each type of legal entity has its own advantages and disadvantages, hence investors should consider carefully the legal entity that you would like to establish in Vietnam.
Furthermore, the article also provides you detailed steps of registering a company in Vietnam within three steps. Each step must be followed by the legal guide and submitted essential documents to the relevant authority. Hope that the article is helpful to you and Viettonkin is always willing to offer you the most professional consulting service.
