What type of enterprise should be chosen?

“WHAT TYPE OF ENTERPRISE SHOULD BE CHOSEN” IS THE CLASSIC QUESTION OF MANY ORGANIZATIONS AND INDIVIDUALS WHO WANT TO LAUNCH THEIR BUSINESSES. WHEN AN ORGANIZATION OR INDIVIDUAL CHOOSES A CERTAIN TYPE OF ENTERPRISE, THEIR RIGHTS AND OBLIGATIONS WILL BE CONNECTED WITH THAT TYPE OF ENTERPRISE.

What type of enterprise should be selected at the time of establishment?

In order to answer this question, two issues need to be addressed:

• Firstly, what are the types of enterprise?
• Advantages and disadvantages of these types of enterprise?

TYPES OF ENTERPRISE

According to the Enterprise Law 2014, there are four typical types of enterprises:

• Private Enterprise: is an enterprise owned by one individual. Each individual is only allowed to set up 01 private enterprise.
• Partnership: There must have at least 02 members who are joint owners of the company and jointly conduct the business under one common name (hereinafter referred collectively to as partnership members). In addition to partnership members, the company may have additional capital contributors.
• Joint Stock Company: There must be at least 3 shareholders who may be organizations or individuals.
• Limited liability company: includes one member limited liability company which is owned by one organization or one individual; and two or more member limited liability company which is owned by from 2 to 50 members.

ADVANTAGES AND DISADVANTAGE OF EACH TYPE OF ENTERPRISE

THE PRIVATE ENTERPRISE

– Advantages:

• • The procedure for establishing this type of enterprise is simple.
  • The owner has full control over all business activities of the enterprise.
  • The owner can easily increase or decrease their investment capital in business activities of the enterprise.
  • The owner can freely use after-tax profit.
  • Personal income tax of the owner of the enterprise is paid along with the enterprise income tax.

– Disadvantages:

• The owner of the enterprise must be responsible for all business activities of the enterprise before the law whether he is leasing the enterprise or hiring a person to function as the director of the enterprise. Even when the enterprise goes bankrupt, the enterprise owner shall have to pay the debts by his/ her personal assets.

THE PARTNERSHIP

– Advantages:

• The members who contribute capital to the enterprise are familiar with and trust each other. Therefore, it is easier to manage partnerships.
• Having legal status from the date of issuance of business registration certificate.

– Disadvantages:

• Unlike capital contributing members who are only responsible for the debts of the company corresponding to their amount of capital contributed to the enterprise, partnership members are liable for the debts of the company with all of their assets.
• Partnerships are not allowed to issue shares to raise capital.

THE LIMITED LIABILITY COMPANY

– Advantages:

• Members of limited liability companies are only responsible for the debts and other property obligations of the enterprise corresponding to their amount of capital contributed to the enterprise.
• Having legal status from the date of issuance of Business Registration Certificate.

– Disadvantages:

• Limited liability companies are not allowed to issue shares.
• Limited liability companies undergo stricter management of the law than partnerships or private businesses.

THE JOINT STOCK COMPANY

– Advantages:

• Shareholders are only responsible for the debts and other property obligations of the enterprise corresponding to their amount of capital contributed to the enterprise.
• Having legal status from the date of issuance of Business Registration Certificate.
• Shareholders have the right to freely transfer their shares to other persons, except shareholders who own voting preference shares and restrictions on ordinary shares of founding shareholders within the first 3 years from the date the company is granted the Business Registration Certificate.
• Joint stock companies have the right to issue securities of all kinds to mobilize capital. Therefore, the mobilization of capital becomes more easy and flexible. Moreover, they can mobilize more capital than other types of enterprises.

– Disadvantages:

• Because joint stock companies do not limit shareholders, it is likely that there will be divisions of shareholders whose interests are conflicted. Therefore, the management and administration of the company will be more complex.
• The establishment of joint stock companies is more complex than that of other types of enterprise because of the law’s strict regulations on the financial and accounting regime.

Here are our suggestions for finding the answer to the question “What type of enterprise should be chosen”. We hope you will make the right choice. If you have any concerns, please feel free to contact us for advice.

Phan Law Vietnam Law Firm:

Head Office: 179 Ly Chinh Thang, District 3, Ho Chi Minh City – (08) 3 931 0007

Branch: 70 Ngo Quyen, Hang Bai Ward, Hoan Kiem District, Hanoi – (04) 3 943 4306

You can also contact us by Hot Line 1900.599.995 or 0938.162.169 for direct and completely free consultancy. 

Phan Law Vietnam