Types of businesses in Vietnam: advantages and disadvantages

Are you planning to establish a company in Vietnam?

Have you decided what type of business you want to establish in Vietnam?

Are you still confused about the types of businesses established in Vietnam?

You are not clear about the advantages and disadvantages of different types of businesses?

According to the Vietnamese Enterprise Law, businesses are divided into four large groups including:  limited liability companies (LLC), joint stock companies (JSC), partnerships and sole proprietorship. Next we will learn about the classification and features for each of these types of businesses:

1. Limited liability companies (LLC)

A Limited Liability Company (LLC) is an incorporated company with limited liability and the investor does not intend to become a publicly traded company.

Normally, foreign investors who want to establish a Limited Liability Company in Vietnam will consider ‘100% Foreign-Owned Enterprise‘.

Limited liability companies are divided into single-member limited liability companies and limited liability companies with 2 or more members. This is the most popular business model among small and medium-sized businesses.

General features of limited liability company:

• The company has legal status from the date of issuance of the business registration certificate;
• Founders can be an individuals or organizations;
• Members are responsible for debts and other property obligations to the extent of the capital contributed to the enterprise;
• A limited liability company is not entitled to issue shares to raise capital.

a. Advantages and disadvantages of single-member limited liability companies

Advantages:

• There is only one owner, so the company owner has the right to make all decisions in the management and operation of the company;
• Organizational structure is simple and easy to manage;
• The company owner is only liable to the amount of capital contributed to the company, which leads to less risk for the owner than a private enterprise.

Disadvantages:

• Because the owner is only responsible within the amount of capital committed to contribute to the company, in many cases there is little trust from partners who want to associate and cooperate;
• This type of company is not allowed to issue shares so it can only raise capital from the owner or by transferring a part of the capital to another individual or organization. However, if transferring a part of the capital, it means that the company must be converted from one member to a limited liability company with two or more members or a joint stock company.

b. Advantages and disadvantages of limited liability companies with 2 or more members

Advantages:

• Members of a limited liability company have the right to request the company to purchase their contributed capital in certain cases;
• The purchase, sale and transfer of capital contributions among members of the company are quite strictly regulated by law. A member of the company may offer to sell or transfer the capital contribution to another person but must give priority to the members of the company first. Accordingly, managers can easily control the capital contribution of members, limiting the entry of strangers into the company;
• Similar to a joint-stock company, members of a limited liability company are only liable for the company’s debts and other property obligations to the extent of the amount of capital committed to contribute to the company. Thus, in a limited company, there is a separation of assets: assets of the company and assets of members. The principle of separation of assets is applied in all relationships of assets and liabilities of the company;
• A limited liability company with 2 or more members is allowed to have a maximum of 50 capital contributors, which is a favorable factor for enterprises to mobilize additional capital from new members. However, the mobilization time is not as fast as that of a joint stock company.

Disadvantages: 

• • Because the company’s members are only responsible for the amount of capital committed to contribute to the business, in some cases the trust from partners and customers in the business may be shaken and they do not really want to cooperate due to fear of possible risks;
  • Limitation on the number of capital contributors is also a disadvantage of this type of company;
  • This type of company cannot issue shares to the market to openly raise capital from the public.

2. Joint stock companies (JSC)

This company has at least three shareholders liable for its debts only to the extent of their share value. A JSC can issue shares and bonds to raise capital from the public. A JSC is suitable for large-scale businesses that want to access more funding sources and expand their market presence.

A joint stock company can be desribed as follows:

• Charter capital is divided into equal parts called shares;
• Shareholders are only liable for debts and other property obligations of the enterprise to the extent of the amount of capital they have contributed to the enterprise;
• Shareholders have the right to freely transfer their shares to others, except in cases where shareholders own voting preference shares;
• Shareholders can be organizations or individuals. The minimum number of shareholders is three and there is no limit to the maximum number.
• A joint stock company has legal status from the date of issuance of the business registration certificate. Joint-stock companies have the right to issue stocks to the public in accordance with the law on securities.
• Charter capital of a joint-stock company is the total par value of shares of all kinds sold. Charter capital of a joint-stock company at the time of business registration is the total par value of shares of all kinds which have been registered for purchase and recorded in the company’s charter. Shareholders must pay in full for the number of shares registered for purchase within 90 days from the date of issuance of the Certificate of Business Registration.
• A joint stock company must have a General Meeting of Shareholders, a Board of Directors, a Supervisory Board and a Director or General Director. In case a joint-stock company has less than 11 shareholders and the shareholders are organizations holding less than 50% of the total shares of the company, it is not required to have a Supervisory Board.

Advantages and disadvantages of Joint Stock Company

Advantages:

• The company’s ability to raise capital is very high and flexible because there is no limitation on the number of shareholders contributing capital, and the company is entitled to issue shares to the public;
• Procedures for transferring shares in a joint-stock company are also relatively simple, thus attracting many capital contributors;
• Shareholders are only responsible for the amount of capital contributed to the company, so the risk level of shareholders is not high;
• With the ability to raise capital quickly and flexibly, joint stock companies can operate in most fields and industries.

Disadvantages:

• As shareholders only have limited liability, it is hard for this type of company to build confidence among partners;
• The management and operation of a joint-stock company is very complicated due to the large number of shareholders. Many shareholders may not know each other and there may be a division into groups of shareholders in the company that are antagonistic to each other in terms of benefit;
• The organizational structure of a joint stock company is more complex than that of a limited company, partnership or sole proprietorship. Management rights in joint stock companies are clearly decentralized.

A partnership is an enterprise which:

• Has at least two general partners; in addition to general partners, there may be capital contributors;
• General partners must be individuals, have professional qualifications and professional reputation, and be responsible with all their assets for the company’s obligations;
• Capital contributors are only responsible for the company’s debts to the extent of the capital contributed to the company.

3. Partnership

A partnership has legal status from the date of issuance of the Certificate of Business Registration.

General partners have the right to manage the company, conduct business activities on behalf of the company, and are jointly responsible for the obligations of the company. Capital-contributing members have the right to share profits according to the ratio specified in the company’s charter, and do not participate in company management and business activities on behalf of the company. General partners have equal rights when it comes to make decision on management issues.

Advantages and disadvantages of a partnership

Advantages:

• The management and operation of a partnership is not too complicated due to the small number of members, most of whom are well-known and reputable, and have absolute trust in each other;
• The general partners must be responsible with all their assets for the business activities of the company, so this type of business can easily create the trust among customers and business partners.

Disadvantages:

• Due to being responsible with all their assets for the company’s obligations, the risks of general partners are very high. This is why partnership is not common;
• The company is not allowed to issue shares to raise capital.

Although this type of business enjoys high trust from customers and partners, because of the high risk for general partners, there are not many partnerships in Vietnam.

4. Sole proprietorship

A sole proprietorship is an enterprise owned by an individual who is solely responsible for all his/her assets for all activities of the business. The sole proprietor of a sole proprietorship is an individual. A sole proprietorship has no legal status.

The owner of this type of business is also the legal representative of the enterprise. He/She has full decision-making power over all business activities of the enterprise; and has the full right to decide on the use of profits after paying taxes and performing other financial obligations as prescribed by law. The owner of a sole proprietorship can directly or hire someone else to manage and operate the business. In case of hiring another person to act as the managing director of the enterprise, the owner of the company is still responsible for all business activities.

Advantages and disadvantages of sole proprietorship

Advantages: 

• Establishment procedures are simple;
• The owner of a sole proprietorship is fully active and has full decision-making power in the management and operation of the business;
• Sole proprietorships are less subject to strict legal constraints;
• Owners of sole proprietorships must be responsible for debts not only with business assets but also with their personal assets, thus creating trust for partners and customers.

Disadvantages: 

• Due to the self-responsibility with all their assets no matter how much capital contributed at the time of establishment of the company, the risk that may happen to the business owner is very high;
• Sole proprietorships are not allowed to issue any kind of securities, nor can they sell their contributed capital to other individuals or organizations, so they are not able to raise capital from outside;
• A sole proprietorship is not entitled to contribute capital to the establishment or purchase shares or contributed capital in a partnership, limited liability company or joint-stock company.

When using GTax’s services, Consultants will help you consider the advantages and disadvantages of each option and advise you on the best solution for your needs.

Compiled by  GTax Accounting Service