Type of Business in Vietnam: Classifications and Features

In Vietnam, companies are categorized into many types of business based on investment capital, business fields, and the number of company shareholders,… Company owners need to choose the right type of business depending on their demands, potential capability, and development orientation. Let’s find out in detail the types of businesses in Vietnam in this article by LTS LAW!

Type of business in Vietnam for foreigners
Type of business in Vietnam for foreigners

What is the type of business?

Type of business refers to the business form that local or foreign investors choose for their business based on their future development goals. Each type of business will have its method of establishing a system and operating within the framework of the law.

Types of legal businesses in Vietnam

According to the Enterprise Law 2020, there are 5 types of legal businesses, including private enterprises, limited companies, joint stock companies, partnerships, and state-owned enterprises. Each type of business in Vietnam has its advantages and disadvantages. Company owners need to find out information about each type of business before choosing the suitable one for their needs and future development orientation.

Type of Private Enterprises

A Private Enterprise will be wholly owned by an individual owner, and the owner of the Private Enterprise will be solely responsible for all business activities with the whole of their assets. Private enterprises can register and carry out business activities per the Law. A Private Enterprise has no legal status.

Enterprises that are registered under the form of private enterprises will not be allowed to issue securities (i.e., stocks and bonds). According to the regulations, an individual can only establish one private enterprise. The owner of a private enterprise shall not be the owner of a household business and a member of a partnership company.

At the same time, private enterprises will not be allowed to contribute capital to establish or purchase shares or contribute capital in partnerships, limited liability companies, or joint stock companies.

The advantage of this type of business is that the owner of a private enterprise has complete control over all business activities of the enterprise. The organizational structure, operation, and management are straightforward.

However, a disadvantage of this type of private enterprise is that it has no legal status, so there is a high risk for private enterprise owners as they have unlimited liability towards the enterprise’s debts and financial obligations by their assets.

Types of legal businesses in Vietnam
Types of legal businesses in Vietnam

Limited Liability Company (LLC)

Limited liability companies are divided into two types, single-member limited liability companies and limited liability companies with two or more members.

Single-member limited liability company

Article 74 of the Enterprise Law 2020 stipulates that a single-member limited liability company is a type of business in Vietnam owned by an organization or individual. The owner will perform liability for the company’s debts and financial obligations to the extent of the company’s charter capital (also known as “limited liability”).

The type business of a single-member limited liability company will be issued with an Enterprise Registration Certificate, and it has full legal status. A single-member limited liability company will not be able to issue shares unless the company wishes to convert to a joint stock company. Single-member limited liability companies are allowed to issue bonds under Articles 128 and 129 of the Enterprise Law 2020.

The owner of a single-member limited liability company must make an adequate and correct contribution of assets as committed within 90 days from the date of establishment of the company. In case of failure to contribute enough within the time limit, it must register for an adjustment to reduce the charter capital to the actual contributed value within 30 days from the due date.

A single-member limited liability company owned by an organization is organized and managed under either the model of the Company President or the Members’ Council.

If the company is a state-owned enterprise, a Supervisory Board must be established.

Advantages of a single-member limited liability company:

  • The company owner is solely responsible for the amount of capital contributed to the company; there is little risk to the owner.
  • Simple management structure; owners have complete control over all company matters without being interfered with by any party.
  • The company has the right to issue bonds to raise capital.

Disadvantages of a single-member limited liability company

  • Raising additional capital is limited as there is only one owner and no shares are allowed to issue.
  • Any expenses involved by the company owner are not included in the company’s expenses.
Two types of Limited Liability Company
Two types of Limited Liability Company

Limited Liability Company with two or more members

A limited liability company with two or more members is a limited company with a number of members from 2 to 50. Like a single-member LLC, a limited liability company with two or more members also has legal status from the date of issuing the Enterprise Registration Certificate, and all members of the company only have limited liability to the extent of the amount of capital contributed to the company.

The company’s charter capital is the total value of the contributed capital that the members commit to contribute to the company. The time limit for members to contribute capital is 90 days from the date of establishment. In case the committed capital has yet to be contributed or has yet to contribute fully, the company must register for an adjustment to the reduction of charter capital and the percentage of contributed capital of members within 30 days from the due date.

Members contributing capital to establish a limited liability company with two or more members can be individuals and organizations with legal status. A limited liability company with two or more members will not be entitled to issue shares but can issue bonds to raise capital.

Advantages of a limited liability company with two or more members:

  • The company has legal status, so the members of the company only have limited liability to the extent of the capital contributed to the company, so there is little risk to the company members.
  • The management and operating mechanism are not too complicated, the members are mainly trusted partners, so it is easy to manage.
  • The transfer of capital contribution is rigid, so it is easy to control the members and limit the penetration of strangers into the business.
  • Having the right to issue bonds to raise capital.
  • In case of capital transfer at par value, the payable tax amount will be zero.
  • Members in a limited liability company can equally and flexibly allocate profits based on their capital contribution ratio according to their share of capital in the company.

Disadvantages of a limited liability company with two or more members:

  • Be managed more strictly than the model of a private enterprise or a partnership.
  • Restricted from raising capital due to not being able to issue shares

Joint Stock Company

According to the provisions of Article 111 of the Enterprise Law 2020, a joint-stock company is a type of business in Vietnam whose charter capital is divided into equal parts called shares. Shareholders will be referred to as shareholders.

A joint stock company has legal status from the date of establishment.

A joint stock company has a management structure consisting of the General Meeting of Shareholders, the Board of Management, the Director (General Director), and the Supervisory Board (if there are more than 11 shareholders).

Shareholders can be individuals or organizations. Shareholders have limited liability for the operation and obligations of the enterprise to the extent of the contributed capital.

Shareholders can freely transfer shares, except for the cases specified in Clause 3, Article 120 and Clause 1, Article 127 of the Enterprise Law 2020.

This type of business requires a minimum of 3 shareholders, and there is no limit to the maximum number of shareholders. Joint stock companies are entitled to issue securities to raise capital but must comply with the provisions of the law.

Advantages of a joint stock company:

  • Low risk: Shareholders only have limited liability to the extent of the amount of capital contributed to the company. Within 03 years from the date of issuance of the  Enterprise Registration Certificate, ordinary shares of founding shareholders are freely transferable to other founding shareholders and can only be transferred to persons who are not founding shareholders if approved by the General Meeting of Shareholder.
  • The ability to raise capital is high as the company is allowed to raise capital by issuing shares. This is a prominent feature only in the type of joint stock company. Shares are freely transferable, and the issuance of additional shares allows joint stock companies to raise capital from new shareholders quickly.
  • Joint stock companies can operate independently for a long time without being affected by the existence of shareholders.

Disadvantages of a joint stock company:

  • A Joint Stock Company has a complicated structure and many difficulties in managing if there are a large number of shareholders. This quickly leads to the division of factions to dispute internal interests.
  • Joint stock companies will have difficulties deciding on company management or business methods. The confidential security of finance and business plans is not guaranteed as the companies must disclose and report in annual shareholder meetings.
  • When transferring shares, shareholders need to declare personal income and pay a personal income tax of 0.1% on the share transfer price each time.
Shares held by shareholders
Shares held by shareholders

Partnership Company

Another common type of business in Vietnam is partnership companies. A partnership company must have at least two general partners. In addition to general partners, it can have capital-contributing partners. The partnership company will not be allowed to issue any securities to raise capital. The partnership company will have legal status when receiving the Enterprise Registration Certificate.

General partners must be individuals, unlimitedly liable to the company by all their assets. Capital-contributing partners can be organizations or individuals and only have limited liability to the enterprise to the extent of their contributed capital.

Advantages of type business of partnership company:

  • Combining the personal reputation of many people
  • The management is relatively simple due to the small number of members and mutual trust.

Disadvantages of type business of a partnership:

  • The general partners have a high level of  risk due to the unlimited liability regime.
  • Capital-contributing partners do not have the right to manage the enterprise.
  • The companies are not entitled to issue shares or bonds.
Partnerships may not issue shares to raise capital
Partnerships may not issue shares to raise capital

Type of state-owned enterprise

The type of state-owned enterprises will be owned 100% charter capital or participate in the form of capital contribution of more than 50% and not exceeding 100% of charter capital by the State. State-owned enterprises will have a large scale of operation and operate in key industries. Besides, they will be favored in terms of conditions, policies, laws, and issues related to finance and tax.

However, the entire operation of the enterprise is subject to the strict management of the governing body, and the operating structure is rigorous.

What type of business is popular today? What are the fundamental differences?

Among the five types of businesses mentioned above, the most commonly applied types are Limited Liability Companies and Joint Stock Companies. For the following reasons:

  • In these types of enterprises, shareholders (for joint stock companies) or owners/members (for limited companies) only have limited liability towards debts and other property obligations of the company to the extent of contributed capital without being liable by their whole assets, like those of a general partner of a partnership or a private business owner. This helps reduce the level of risk for the company’s owners/members/shareholders.
  • Three types of businesses can issue bonds and shares (for joint stock companies) to attract investment capital to serve production and business activities.
Which types of business are popular?
Which types of business are popular?

The differences between the three common types of businesses are as follows:

Feature SINGLE-MEMBER LIMITED LIABILITY COMPANY LIMITED LIABILITY COMPANY WITH TWO OR MORE MEMBERS JOINT STOCK COMPANY
The  number of members There is one owner

 

There are 2 to 50 members

 

Minimum 3 shareholders and the number of shareholders is unlimited
Issuance of  shares Not having the right to issue shares Not having the right to issue shares It is allowed to issue shares to raise capital.
Capital Structure Charter capital is not divided into equal parts Charter capital is not divided into equal parts Charter capital is divided into equal parts
Organizational structure A company owned by an individual has the organizational and management structure as follows: Company owner; Company President, Director or General Director

A company owned by an organization may be organized under one of the following two models:

– The company’s president, director or general director;

– Board of members, Director or General Director.

Board of Members, President of the Board of Directors, Director or General Director, Supervisory Board (if less than 11 members, they do not need to establish a Supervisory Board)

– The Members’ Council is the highest decision-making body

There are two models:

– General Meeting of Shareholders (GMS), Board of Managements (BOM), Supervisory Board, Director or General Director (with less than 11 shareholders and the corporate shareholders hold less than 50% of the company’s total shares, a Supervisory Board is not mandatory);

– The GMS, BOM and Director/General Director (at least 20% of the members of the BOM shall be independent members and there has to be an audit committee affiliated to the BOM).

– The GMS is the highest decision-making body.

The BOM is the governing body.

Conclusion

If you are looking for a consulting company to establish a foreign-invested business in Vietnam, LTS LAW will be the perfect choice for you. We always provide our customers with quality services with:

  • Our staff is experienced consultants, professionals, and highly specialized lawyers in the business establishment.
  • We provide reasonable solutions for investors based on practice, helping to deal with client problems quickly.
  • Service costs are clearly stated in the service contract; the implementation process will not incur hidden costs.
  • The dedication to client support in all matters related to the business establishment, helping to optimize efficiency and save time for customers.

When you are looking for a consulting type of business service and carrying out business registration procedures, please get in touch with LTS LAW for support to find solutions quickly from our professional staff members team.

LTS LAW FIRM

Address: Room 602, 6th Floor, 520 Cach Mang Thang 8, Ward 11, District 3, Ho Chi Minh City, Vietnam.

Email: contact@lts.com.vn

Hotline: (+84) 902 798 066

contact