LIMITED LIABILITY COMPANY VS. JOINT STOCK COMPANY: WHICH IS THE IDEAL OPTION FOR INVESTORS?

Before engaging in business activities in Vietnam, investors need to set up a business with the type of business that aligns with their objectives and goals. Among various types of businesses, limited liability companies and joint stock companies are two commonly chosen types due to the characteristics of the limited asset liability regime.

The reason is that the owner is only responsible for the debts and other property obligations of the business to the extent of the contributed capital. This newsletter aims to introduce the characteristics of these two types of businesses and provide recommendations from LMP on selecting the appropriate one.

A. Single-member limited liability company (Single-member LLC)

1. Single-member LLC owned by an organization or an individual.
2. The company owner is responsible for the debts and other property obligations of the company to the extent of the charter capital.
3. Single-member LLC is not entitled to issue shares, except in the case of conversion into a joint stock company. However, a single-member LLC is allowed to issue bonds.
4. Income tax on transfer of contributed capital:
   a) Personal income tax (PIT) = (Transfer Price – Purchase Price of the Transferred Capital – Transfer Cost) x Tax rate 20%.
   b) Corporate income tax (CIT) = (Transfer Price – Purchase Price of the Transferred Capital – Transfer Cost) x Tax rate 20%.
5. Management structure:
   a) For owner being an organization, the single-member LLC can operate under one of the two organizational structures as follows:

(i)  President of the company, Director/General Director and Inspection Committee (optional); or

(ii) Board of Members (having from 03 to 07 members), Director/General Director and Inspection Committee (optional).

b) For owner being an individual, the single-member LLC’s organizational structure consists of the President of the company and Director/General Director. In which, the owner is the President of the company and can concurrently hold or hire someone else to be the Director/General Director.

Advice: A single-member LLC allows the owner to maintain absolute control over business operations while benefiting from limited liability protection. Nevertheless, as there is only one owner, external capital raising may not be feasible since this could lead to changes of the type of company to multi-member LLC or joint stock company.

B. Limited liability company with more than one member (Multi-member LLC)

1. The owners of multi-member LLC include 02 to 50 members being organizations or individual.
2. The company owners are responsible for the debts and other property obligations of the company to the extent of charter capital.
3. Multi-member LLC is not entitled to issue shares, except in the case of conversion into a joint stock company. However, multi-member LLC is allowed to issue bonds.
4. Income tax on transfer of contributed capital is determined as similar to single-member LLC.
5. Management structure:

Multi-member LLC’s management structure consists of the Members’ Council (including all capital contributors), the Chairman of the Members’ Council and the Director/General Director.

6. Restrictions on establishing/terminating company membership

When a company member intends to transfer a part or all of their contributed capital, they must first offer it to the other (remaining) members of the company. If these members do not fully buy all transferred capital, the transferring member is entitled to sell to a person who is not a member of the company.

If an individual is given a share of capital contribution by a member of the company or receives reimbursement for the contributed capital portion as result of a member’s debt repayment, such individual may only become a member of the company if approved by the Members’ Council.

Advice: A multi-member LLC is a company that includes both partner and counter capital factors, making it ideal for owners who wish to strictly control member accession while concentrating on the connection of members in the company. However, because the law limits the number of members and does not allow multi-member LLC from issuing shares (unless converted into a joint stock company), calling for investment capital may be more restricted than that of a joint stock company.

C. Joint stock company (JSC)

1. JSC must have at least three shareholders, who can be organizations or individuals, with no maximum number of shareholders. Shareholders that owns at least one ordinary share and have their signatures on the list of founding shareholders at the time of establishment of the company are known as founding shareholders.
2. Shareholders are only liable for debts and other property obligations of the company to the extent of the amount of capital contributed to the company.
3. Joint stock company has the right to issue shares, bonds and other securities of the company. More importantly, a JSC has the right to offer private shares and bonds to the public to raise capital.
4. Income tax on transfer of shares:a) Personal income tax = Share transfer price each time x Tax rate of 0.1%b) Corporate income tax = (Transfer Price – Purchase Price of the Transferred Capital – Transfer Cost) x Tax rate of 20%.
5. Management structure:Unless otherwise prescribed by securities laws, a JSC may choose one of the organizational structures as follows:a) General Meeting of Shareholders, Board of Directors, Director/General Director, and Inspection Committee (optional if the company has fewer than 11 shareholders and the shareholders that are organizations hold less than 50% of the company’s total shares); or

   b)  General Meeting of Shareholders, Board of Directors and Director/General Director. For this structure, at least 20% of the members of the Board of Directors shall be independent members and there must be an audit committee affiliated to the Board of Directors.

6. Right to transfer shares

Shareholders have the right to freely transfer their shares to others, except for the following cases:

a) The transfer of ordinary shares by founding shareholders to other individuals or entities who are not founding shareholders of the company within 03 years of the company being granted the Enterprise Registration Certificate must be approved by the General Meeting of Shareholders.

b) The charter of the company has provisions on restrictions on the transfer of shares (such restrictions must be explicitly stated in the share certificate of the respective shares).

Advice: A JSC is a type of counter capital enterprise formed through the cooperation of multiple investors with shared economic interests. The unlimited number of shareholders, the ease of participation of shareholders in the company and the flexibility to issue many types of securities have given JSCs an advantage in attracting investors. However, due to the large number of shareholders and the ease of capital contribution compared to multi-member LLCs, managing and operating a JSC is more difficult, and may lead to groups of shareholders with conflicts of interest.