Types Of Legal Entities For Setting Up A Business In Vietnam

According to the Enterprise Law 2020 of Vietnam, enterprises are classified into five major groups: Joint-Stock Company, Single-Member Limited Liability Company, Limited Liability Company with Two or More Members, Partnership, and Sole Proprietorship. This article outlines the key features, advantages, and disadvantages of each type.

1. Joint-Stock Company

Key Characteristics:

  • Charter Capital: Divided into shares of equal value.
  • Shareholders: Liable for company debts up to the amount of capital they contribute.
  • Transfer of Shares: Freely transferable unless they are voting preference shares.
  • Shareholders: Minimum of three, with no maximum limit.
  • Legal Status: Granted upon issuance of a Business Registration Certificate.
  • Fundraising: Permitted to issue stocks to the public.

Organizational Structure: A General Meeting of Shareholders, a Board of Directors, a Supervisory Board (if required), and a Director or General Director.

Advantages:

  • High Capital Mobilization: Unlimited number of shareholders allows for flexible capital raising.
  • Simple Share Transfers: Ease of transferring shares makes it attractive to investors.
  • Limited Liability: Shareholders face limited risks as they are liable only for their contributions.
  • Wide Operational Scope: Suitable for nearly all industries permitted by Vietnamese law.

Disadvantages:

  • Complex Management: Large shareholder base can lead to complicated decision-making.
  • Trust Issues: Limited liability can affect partner confidence.
  • Complex Structure: A more sophisticated organizational framework compared to other types.

Joint-stock companies are ideal for businesses needing significant capital, operating across diverse sectors, and seeking to attract a large number of investors.

2. Limited Liability Company (LLC)

Limited Liability Companies are classified into Single-Member LLCs and LLCs with Two or More Members.

2.1 Single-Member Limited Liability Company

Key Characteristics:

  • Single Owner: Complete control over company decisions.
  • Limited Liability: Owner’s liability is limited to contributed capital.
  • No Shares: Cannot issue shares to the public.

Advantages:

  • Simple Management: Single owner simplifies management.
  • Limited Liability: Reduces risks for the owner.

Disadvantages:

  • Trust Issues: Limited liability may reduce partner confidence.
  • Restricted Capital Raising: Cannot issue shares; must rely on owner’s funds or transfer of ownership.

Suitable for individuals or organizations wanting full control and having sufficient capital to operate independently.

2.2 Limited Liability Company with Two or More Members

Key Characteristics:

  • Membership: Up to 50 members.
  • Capital Contributions: Transfers of capital are regulated, prioritizing existing members.
  • No Shares: Cannot issue shares to the public.

Advantages:

  • Controlled Capital Transfers: Provides management with greater control over ownership.
  • Limited Liability: Members are only liable up to their contribution.

Disadvantages:

  • Limited Trust: Liability concerns may deter some partners.
  • Limited Capital Sources: Restricted to up to 50 contributors and cannot raise capital through public shares.

An LLC with two or more members is ideal for partnerships where control and flexibility are prioritized, with a cap on member numbers.

3. Partnership

Key Characteristics:

  • General and Limited Partners: At least two general partners (must be individuals) with optional capital-contributing members.
  • Liability: General partners have unlimited liability, while capital contributors are only liable up to their contribution.
  • Legal Status: Acquired upon the issuance of the Business Registration Certificate.

Advantages:

  • Simple Management: Few members mean streamlined decision-making.
  • High Trust: Unlimited liability of general partners boosts credibility.

Disadvantages:

  • High Risk: General partners bear significant risks due to unlimited liability.
  • Limited Fundraising: Cannot issue shares to the public.

Partnerships are suited for professional services where partners are known and trusted, despite the high risks.

4. Sole Proprietorship

Key Characteristics:

  • Single Owner: Responsible for all business assets and liabilities.
  • Unlimited Liability: Personal assets are at risk.
  • No Legal Status: The business does not have independent legal status from the owner.

Advantages:

  • Full Control: Owner has complete decision-making authority.
  • Simple Setup: Minimal legal constraints and establishment procedures.

Disadvantages:

  • High Risk: Owner’s liability extends to personal assets.
  • Limited Fundraising: Cannot raise capital through securities or involve third-party investors.

Sole proprietorships are suitable for small-scale businesses where the owner is comfortable with personal financial risks.

Conclusion

Each type of legal entity under Vietnam’s Enterprise Law 2020 offers unique advantages and challenges. A Joint-Stock Company is optimal for large-scale ventures needing substantial capital. Limited Liability Companies cater to businesses desiring structured control, with single-member LLCs being ideal for individuals and multi-member LLCs for small partnerships. A Partnership provides a balance of simplicity and trust, while a Sole Proprietorship is the best choice for individual entrepreneurs preferring full control despite high risks. Entrepreneurs should carefully consider these factors to select the structure that aligns with their business goals and resources.

 

The above information is provided by Mys Law. For any questions regarding the content of this article, please contact 0969.361.319 or email: [email protected] for further clarification. Best regards!

Editor: Nguyễn Anh Quân