Pros and cons of VN's commercial entities

"Owners of private enterprises are not obliged to pay personal income tax after they have paid corporate tax."-Illustrative image/Photo sto.com.vn

I. Private Enterprises

This is the simplest form of business entity. A private enterprise is owned by an individual who is liable for all of its operations with his/her entire property.

Advantages:

The procedures for establishing a private enterprise are simple;

The owner of a private enterprise has full decision-making powers on any business operation of the enterprise and the use of its profits after payment of taxes;

Owners of private enterprises are not obliged to pay personal income tax after they have paid corporate tax.

Disadvantages:

In case the enterprise is for lease, the owner of such private enterprise remains fully liable before the law in the capacity of its owner during the lease term. The rights and responsibilities of the owner and the lessee with respect to business operations of the enterprise are defined in the leasing contract.

II. Partnerships

In a partnership enterprise, at least two partners are co-owners of the company, jointly conduct business under one common name, and are liable for all obligations of the partnership with his/her own entire property. Moreover, a partnership can also have limited partners, who are liable for the debts of the partnership only to the extent of their capital contributions.

Advantages:

Generally, a partnership consists of only a few members managing the company based on mutual trust, internally assigning the rights to manage and organise business activities of the company under majority rule.

Another advantage of this type is the combination of reputations of many people. Additionally, due to the partners' liability for all obligations of the partnership with his/her own entire property, a partnership can easily gain the trust of customers and business partners.

Disadvantages:

The assets of partners and limited members contributed as capital to the partnership are required to be in its possession. However, if the company cannot afford to pay the debts incurred, the members will then be responsible for payment of those debts by using their personal assets.

III. Joint Stock Companies

A joint stock company is an enterprise where its charter capital is divided into equal portions known as shares. The minimum number of shareholders shall be three and shall not be restricted to any particular maximum number. This business entity is different from the two mentioned above because the shareholders may be organisations and/or individuals, and are able to freely transfer their shares in most cases, except for those prohibited by the Law on Enterprises.

Advantages:

The liability of a shareholder of a joint stock company is limited to the value of the capital that he/she has contributed to the company, which will minimise the risks of damaging personal assets.

Only joint stock companies have the ability to raise capital through the issuance of shares. Flexible capital structure, high ability to raise capital and being relatively free to transfer purchase shares enable more people to contribute capital to the company.

Disadvantages:

Having too many members can lead to the formation of groups of opposing shareholders in terms of benefits, which makes the management and operation of the company more difficult.

IV. Limited Liability Companies (LLC)

The two types of limited liability companies in Viet Nam are multi-member LLC and single-member LLC.

1. Multi-member LLC:

A multi-member LLC is a company in which the members may be organisations and/or individuals and must not exceed 50 in number. They are responsible for debts and other property liabilities of the enterprise within the amount of capital they have committed to contribute.

Advantages:

Members are responsible for debts and other property liabilities of the enterprise to the extent of capital that they have contributed, which will not be at the risk of damaging personal assets.

Moreover, the purchase and transfer of capital between members are strictly regulated by law so that managers can easily control the capital contributed by the members, limiting the penetration of strangers into the company.

Disadvantages:

A multi-member LLC is not entitled to issue shares.

A multi-member LLC must have a members' council, chairman of the members' council and director or general director. An LLC with 11 or more members must set up a control board. A control board may also be set up in a company with less than 11 members to meet its management requirements.

Also, due to the limited scope of liability, a multi-member LLC will initially find it difficult to build credibility with customers and partners in the trading relationship.

2. Single-member LLC:

A single-member LLC is an enterprise owned by one organisation or an individual. The company owner is liable for debts and other property liabilities of the company within the charter capital of the company.

Advantages:

The organisational structure of management of a single-member LLC is not too complicated. Therefore, managers can easily control the business activities of the company. Organisational structures of management may vary, depending on whether the owner is an organisation or an individual:

If the company owner is an organisation, the company's organisational structure of management is required to comprise members' council, director or general director and controller.

If the company owner is an individual, the company's organisational structure of management is required to comprise company president, director or general director.

The owner of a single-member LLC has the authority to conduct all business operations of the company, but is only liable within the company's charter capital. Therefore, a single-member LLC is considered a safe option for enterprises owned by an individual or an organisation.

Disadvantages:

A single-member LLC is not entitled to issue shares.

The company owner is entitled to adjust the capital only by transferring part or whole of the charter capital to or receiving the capital from another organisation or individual. If the capital is withdrawn from the company in another manner, the company owner will be liable for all debts and other property liabilities of the company.

If the company owner wants to transfer part of the charter capital to another organisation or individual, such company must first be transformed into a multi-member LLC.