Types of Business Entities in Vietnam - The Company in Vietnam

Types of Business Entities in Vietnam - The Company in Vietnam

04-09-2018 84 Comments 1180 Views

Of all the choices you make when deciding on incorporating an entity in Vietnam, one of the most important factors is the type of business structure you choose for your business. Your decision can affect the amount you pay in taxes, the image and perception of your business among your clients and suppliers, the amount of paperwork your business is required to do, the personal liability you face, the ability to borrow money and the possibility to expand your business.

This guide provides an overview of the various types of business entities in Vietnam and the differences among them. Each of these is subject to different regulatory and tax regimes reflecting their organization and ownership.

The following are the main business entity types in Vietnam:

Limited Liability Company

A Limited Liability Company is a company limited by shares i.e. its liabilities are limited to the amount of share capital. Limited Liability Company is a business entity registered under the Vietnam Companies Act and a separate legal entity from its members. In a Limited Liability Company, the liabilities of the owners are limited to the assets in the company and their personal assets are protected from business liabilities.

A Vietnam Limited Liability Company can be of the following types:

Private Limited Company

A private limited company is a Limited Liability Company in which the shares are held by less than 50 persons and are not available to general public. Most privately incorporated businesses in Vietnam are registered as private limited companies. A private limited company’s name in Vietnam usually ends with Private Limited or Pte Ltd. For example, our own company Hawksford Vietnam Pte Ltd is incorporated as a private limited company. The shareholders of a private limited company can either be individuals or corporate entities or both.

A private limited company is the most advanced, flexible, and scalable type of business form in Vietnam. It’s also the most preferred type of Vietnam business entity for serious entrepreneurs (as opposed to sole proprietorship or limited liability partnership). For more detailed information about private limited companies, refer to quoc luat law firm.

Types of Business Entities in Vietnam

Types of Business Entities in Vietnam

Why entrepreneurs prefer Private Limited Company

  • Separate Legal Entity : A private limited company has its own legal identity, separate from its shareholders and its directors. It can acquire assets, go into debt, enter into contracts, sue or be sued in its own name.
  • Limited Liability: The liability of the members to contribute to the debts of the company is limited to the amount that they each agreed to contribute as capital to the company.
  • Perpetual Succession: The company’s existence does not depend on the continued membership of any of its members. Ease of transfer of shares or changes in shareholders ensures that company continues to exist even in the event of death, resignation, or insolvency of shareholders or directors.
  • Ease of raising capital: You can raise capital for expansion or other purposes by bringing in new shareholders or issuing more shares to existing shareholders. Investors are more likely to purchase shares in a company where there usually is a separation between personal and business assets. Also, most banks prefer to lend money to limited companies.
  • Credible Image: As an incorporated business entity, it commands a better image than a sole proprietorship or a partnership firm, and investors will be more willing to become part of the company as it demonstrates a vision to grow and expand. As a private limited company, your business will be taken more seriously by your potential clients, suppliers, bankers, and other professionals you will be dealing with.
  • Ease of transfer of Ownership: Ownership of a company may be transferred, either wholly or partially, without disrupting operations or the need for complex legal documentation. This can be done through the selling of all or part of its total shares, or through the issue of new shares to additional investors.
  • Tax Benefits and Incentives: A Vietnam private limited company is a very efficient tax entity. The effective corporate tax rate for Vietnam companies for profits up to SGD 300,000 is below 9% and capped at 17% for profits above SGD 300,000. Furthermore, there is no capital gains tax. Vietnam follows a single-tier tax policy which means once the income has been taxed at the corporate level, dividends can be distributed to shareholders tax free.

Public Limited Company

A public limited company is a Limited Liability Company that may offer its shares to general public. A public limited company must have at least 50 shareholders and is subject to significantly more stringent rules and regulations since they have the power to raise funds from the public. Usually a public limited company is listed on a stock exchange. Public limited companies are outside the scope of this article as they are meant for large businesses.

Public Company Limited by Guarantee

A public company limited by guarantee is a type of business entity meant for non-profit purposes. For more details, refer to Establishing a foreign owned company in Vietnam.

Foreign Company Registration Options

Foreign companies wishing to setup a presence in Vietnam, have the choice of setting up a branch office, subsidiary, or a representative office in Vietnam.

  • Subsidiary Company. A subsidiary company is a private limited company incorporated in Vietnam with the parent company as its shareholder. For small to medium-sized foreign businesses, a subsidiary company is the most preferred choice of registration in Vietnam.
  • Branch Office. A branch office is registered in Vietnam as an extension of its parent company and not as a separately incorporated entity. The liabilities of a branch office extend to its parent company.
  • Representative Office. A representative office is registered in Vietnam as a temporary arrangement for conducting marketing research activities. A representative office does not have any legal status and cannot be engaged in any profit yielding activities.

For further details about these choices, refer to business opportunities in vietnam.

Sole Proprietorship

A sole proprietorship is the simplest but the riskiest type of business form in Vietnam. From a legal perspective, sole proprietorship is not a separately incorporated entity and therefore the owner and the business are one and the same. The owner personally owns all assets and liabilities of the business. There is no protection of personal assets from business risks and liabilities. As the sole proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all its liabilities, the creditors to whom your business owes money can come after your personal assets. Many entrepreneurs are usually unaware of this enormous financial risk. If the business is sued or can’t pay its bills, the owner is personally responsible for the business’s liabilities.We consider this a serious drawback and hence do not recommend sole proprietorship to inspiring entrepreneurs.

Further details about sole proprietorship can be found at Vietnam sole proprietorship registration guide.

Partnership

The partnership type of business structure attempts to address the limited-expansion constraint faced by a sole proprietorship by allowing two or more people to establish and co-own a business. A partnership firm has no legal existence separate from its partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership. A partnership type of business structure may make sense only in very limited number of situations. We generally don’t recommend this type of business structure to business owners.

Partnerships in Vietnam can be of three types:

General Partnership

A general partnership is not a very attractive way to structure a business in Vietnam because - like a sole proprietorship, partners are personally liable for the debts and liabilities of the business, each partner can be held responsible for the actions of another partner.

Limited Partnership

The concept of limited partnership is an alternative to the general partnership type of business form in Vietnam. It introduces the concept of a limited partner in addition to a general partner. The liabilities of limited partners are limited to their investment in the partnership. However, such partners are unable to participate in the management of the business in a limited partnership. In a nutshell, even a limited partnership in Vietnam is not a very attractive vehicle for setting up a business for most people.

Limited Liability Partnership

Among the three types of partnership business entities, Limited Liability Partnership is the most recent and most advanced business incorporation structure. It combines the features of partnerships and companies. Limited Liability Partnership was introduced in Singapore in 2005 through enactment of Limited Liability Partnership Act. Registering an Limited Liability Partnership gives owners the flexibility of operating as a partnership while enjoying many of the benefits that come with a corporate body like a private limited company.

A Limited Liability Partnership is primarily meant for carrying a profession (e.g. accountants, law firms, architects, etc.) where two or more professionals would like to build a joint practice in a common field. The owners must enter into detailed agreements about how the profits and management responsibilities are divided. It can get very complicated and generally requires the services of a lawyer to draw up the agreement. Partners in a limited liability partnership are usually responsible for cultivating their own clients based on the partner’s specific area of focus.

A Limited Liability Partnership must have at least two partners at all times. An Limited Liability Partnership is not suited for a business that carries a trade. For more details on Limited Liability Partnership.

Which business entity type to choose?

  • Deciding on the right business structure to incorporate in Vietnam will depend on your particular situation and plans. As a general rule, you can use the following guidelines when making your decision:
  • If you are a local person and would like to register a small business where you will be the only owner and the nature of your products/service does not carry liability issues, it might be easier for you to register your business as a Sole Proprietorship. However, you must carefully consider the fact that in case of any business liabilities, the claimants can go after your personal assets.
  • If your business involves selling your services by way of the profession you hold (e.g. accountant, lawyer, architect, etc.) and you have one or more additional partners in a similar profession and would like to build a joint practice, setting up a Limited Liability Partnership might be a suitable business structure for you.
  • In all other cases, incorporating a private limited company in Vietnam would be the best choice. Although compliance requirements are slightly more complex, it is by far the best structure in the long run.

Thanks for Reading!

Tin Liên Quan