Choosing the right type of business entity is a question entrepreneurs seek a satisfactory answer to. Each type has its own advantages and disadvantages; to make the right choice, it's essential to understand the pros and cons of each business structure.
With the economy expanding, business opportunities and demands are increasing. Therefore, laws are gradually becoming more relaxed and creating more favorable conditions for businesses. To operate stably and sustainably, businesses must choose a suitable business model. So, what type of business is the most appropriate to establish?
The following is Expertis' selection guide, specifically focusing on: legal regulations, operational practices, and practical business experience.
1. Current types of businesses
A business entity is a form that individuals or organizations wishing to conduct business choose to establish their own operational structure and scale of development in accordance with the law. Currently, the 2020 Enterprise Law lists five basic business entities as follows:
– Private enterprises;
– Partnership company;
– Limited liability company with one member;
– Limited liability company with two or more members;
– Joint-stock company.
Each type of business entity has its own regulations and also its own advantages and disadvantages. The type of business entity chosen by the business entity must comply with the specific requirements and constraints of that type.
2. Characteristics and advantages/disadvantages of each type of business.
To answer the question, "Which type of business should I establish?", it is necessary to analyze the unique characteristics of each type of business.
2.1. Private enterprise
A private enterprise is a business owned and operated by a single individual who is personally liable for all business activities with their entire personal assets.
Advantages of Private Enterprises:
+ The owner of a private enterprise has full authority to decide on all business activities of the private enterprise, including the use of profits after paying taxes and fulfilling other financial obligations as prescribed by law;
+ Private business owners have the right to lease out their entire private business;
+ Private business owners have the right to sell their private businesses to other individuals or organizations;
Disadvantages of Private Enterprises:
+ Private enterprises do not have legal personality;
+ The owner of a private enterprise is liable without limit (not only for the assets of the enterprise but also for all assets of the owner) for the financial obligations of the enterprise;
Private enterprises are not allowed to issue any type of securities;
Each individual is only entitled to establish one private enterprise;
+ A private business owner cannot simultaneously be the owner of a household business or a partner in a partnership company;
Private enterprises are not permitted to contribute capital to establish or purchase shares or capital contributions in partnerships, limited liability companies, or joint-stock companies.
It can be said that the most significant drawback and risk in business for private enterprises is "unlimited liability." Therefore, since Vietnam's Enterprise Law allowed the establishment of single-member limited liability companies, private enterprises are no longer a preferred option for entrepreneurs when starting a business.
2.2. Partnership
A partnership company is a business with at least two members who are co-owners of the company, conducting business together under a common name. In addition to the general partners, the company may also have contributing members.
Advantages of a Partnership Company:
A partnership company has legal personality;
+ Partners have the right to use the company's assets to conduct business in the company's registered business sectors.
+ Contributing members are only liable for the company's debts to the extent of the capital they have committed to contribute to the company;
The assets of a partnership company are separate from the personal assets of its members.
Disadvantages of a Partnership Company:
+ Partners must be individuals and are liable for the company's obligations with their entire assets;
+ A partnership company is not permitted to issue any type of securities;
+ A general partner is not allowed to own a private enterprise; nor is he/she allowed to be a general partner in another partnership except with the unanimous consent of the remaining general partners;
+ Partners are not allowed to conduct business in the same industry or profession as the company in their own name or in the name of others for personal gain or to serve the interests of other organizations or individuals;
+ A general partner may not transfer part or all of their capital contribution in the company to another organization or individual without the approval of the remaining general partners.
As can be seen, the partnership company is similar to a limited liability company with two or more members; however, it has the disadvantage of binding the partners. Because some industries require a high level of responsibility, the law mandates the establishment of a partnership company. Otherwise, a partnership company is almost certainly not a viable option for entrepreneurs.
2.3. Single-member limited liability company
A single-member limited liability company is a business owned by one organization or individual (hereinafter referred to as the company owner).
Advantages of a Limited Liability Company with a single member:
The company owner is only liable for the company's debts and other financial obligations to the extent of the company's registered capital;
A single-member limited liability company has legal personality;
+ Bonds may be issued in accordance with the Law on Enterprises and other relevant legal regulations;
+ There may be one or more legal representatives;
The owner has full decision-making power over all business activities of the enterprise.
Disadvantages of a Limited Liability Company with a single member:
No shares may be issued except for the purpose of converting into a joint-stock company;
+ When a company wants to raise capital from others through equity investment, it must convert to a different type of business entity.
This is the optimal choice for businesses owned and managed by a single person, who has full control but is only liable up to the amount of registered capital.
This type of business has one drawback: the owner's (who is also the director's) salary cannot be deducted from business expenses.
2.4. Limited Liability Company with two or more members
A limited liability company with two or more members is a business with between 02 and 50 members, who are organizations or individuals.
Advantages of a Limited Liability Company with two or more members:
Members are only liable for the debts and other financial obligations of the business to the extent of the capital they have contributed to the business;
A limited liability company with two or more members has legal personality;
+ Bonds may be issued in accordance with the Law on Enterprises and other relevant legal regulations;
+ The number of members ranges from 02 to 50, including organizations and individuals;
+ There may be one or more legal representatives.
Disadvantages of a Limited Liability Company with two or more members:
Capital contributed to the company may not be withdrawn in any form, except as stipulated in Articles 51, 52, 53, and 68 of the Enterprise Law;
No shares may be issued, except for conversion into a joint-stock company;
+ Company members are not allowed to conduct business activities on behalf of the company in their own name;
+ The number of members is limited to a maximum of 02 and a maximum of 50.
This is the optimal choice for businesses started by two people who do not need the flexibility of transferring shares or raising investment capital that only a joint-stock company offers.
2.5. Joint Stock Company
A joint-stock company is a business whose charter capital is divided into many equal parts called shares. Shareholders can be organizations or individuals; the minimum number of shareholders is 03, and there is no limit to the maximum number.
Advantages of a Joint Stock Company:
Shareholders are only liable for the debts and other financial obligations of the business to the extent of the capital they have contributed to the business;
Shareholders have the right to freely transfer their shares to others, except in cases stipulated in Clause 3 of Article 120 and Clause 1 of Article 127 of the Enterprise Law;
A joint-stock company has legal personality;
+ Has the right to issue shares, bonds, and other securities of the company;
+ There is no maximum limit on the number of shareholders;
+ Flexible structure, large scale, easy to mobilize large amounts of capital;
Disadvantages of a Joint Stock Company:
+ The number of shareholders must be at least 03 or more.
Shareholders are not allowed to withdraw capital contributed in the form of common shares from the company in any form, except in cases where the shares are repurchased by the company or another party;
Within 03 years from the date the company is granted its Certificate of Business Registration, the common shares of founding shareholders may be freely transferred to other founding shareholders and may only be transferred to non-founding shareholders with the approval of the General Meeting of Shareholders;
+ Company shareholders are not allowed to conduct business activities on behalf of the company;
+ The company's organizational structure and model are relatively large, making its operation and management complex.
You should choose to establish a joint-stock company when you need to utilize the unique capabilities of a joint-stock company, such as flexibility in raising capital and transferring shares, or if you intend to become a publicly listed joint-stock company.
Managing and complying with the management requirements of a joint-stock company is far more complex than with the other types of companies mentioned above.
Thus, it can be seen that each type of business has its own advantages and disadvantages. Depending on each person's purpose, capabilities, and vision, they should choose the appropriate type of business to operate and develop.