Choosing the Right Type of Companies in Vietnam for Foreign Investors

Vietnam has emerged as a top destination for foreign direct investment in Southeast Asia, with its young population, rising middle class and business-friendly policies attracting investors across sectors. However, navigating the intricate legal landscape is crucial when opening a business in Vietnam. Selecting the appropriate business structure is important to ensure compliance, optimize taxation, limit liability and align with commercial objectives. This article explores key options like limited liability companies, joint stock companies, partnerships, and representative offices – understanding the types of companies in Vietnam is key when establishing entities that align with your goals.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is currently the most popular investment vehicle for foreign businesses in Vietnam. They offer a blend of ownership flexibility and liability protection. LLCs can be either wholly foreign-owned enterprises (WFOE) or partially foreign-owned ventures, depending on the industry. There are two main types of LLCs in Vietnam:

• Single-member LLC (SLLC): Ideal for sole owners, this structure offers straightforward management as the single member is also the company owner.
• Multiple-member LLC (MLLC): This format accommodates two or more members (up to a maximum of 50) who share ownership.

Key features and regulations of LLCs in Vietnam include:

• Capital contribution requirements: Rather than a fixed amount, minimum capital requirements vary based on your business sector and the specific investment project. Ensuring sufficient capital for operational costs and financial stability is essential.
• Liability and risk considerations: A crucial benefit of the LLC structure is the limited liability for members. They are only liable for company debts and obligations up to the extent of their capital contribution, safeguarding personal assets.

Organizational and management structure: LLCs require a legal representative residing in Vietnam who has the authority to act on the company’s behalf. Additionally, an LLC must have a board of members (the decision-making body) and a director or general director responsible for daily operations.

Joint stock company

Joint Stock Companies (JSCs) are a complex business structure in Vietnam, typically suitable for large-scale enterprises. They offer the potential for significant capital raising through the division of ownership into shares. Shareholders in a JSC enjoy limited liability, meaning their financial risk is generally restricted to the value of their shares. Two main classes of JSC exist:

• Public JSCs: These companies can list their shares on a stock exchange and raise capital from the public through Initial Public Offerings (IPOs). To qualify for an IPO, they must meet rigorous requirements regarding minimum capital, number of shareholders, profitability, and governance standards.
• Private (or Non-Public) JSCs: These companies cannot offer shares to the public and must rely on other funding sources.

JSCs do facilitate substantial capital raising for large projects and offer shareholders some risk mitigation compared to certain other business structures. However, JSCs come with a higher level of regulatory complexity. This includes rules on investor rights, share transfers, takeovers, and often limitations on foreign ownership percentages. Additionally, JSCs must adhere to strict transparency standards, including independent auditing, regular financial reporting, and public disclosures.

The management structure in a JSC typically involves a Board of Management, a Supervisory Board, and a General Director. This hierarchical structure, while potentially bureaucratic, can be suitable for managing large, geographically dispersed operations. JSCs often appeal to foreign investors seeking significant investments with diversified risk exposure (minority stakes) rather than seeking direct majority control. Banking, manufacturing, and infrastructure sectors frequently favor the JSC structure due to their capital-intensive nature.

Representative Office (RO) and Branch Office

Foreign companies seeking a preliminary presence in Vietnam can consider establishing a Representative Office (RO) or a Branch Office (BO). These structures differ from fully licensed companies and come with specific limitations and advantages.

• Representative Offices (ROs): ROs are designed for non-commercial activities. Their primary functions include market research, promotion of the parent company, and acting as a liaison for business development. Importantly, ROs cannot directly generate revenue in Vietnam.
• Branch Offices (BOs): BOs can engage in commercial activities within the scope of their parent company’s business. However, they are restricted from issuing invoices directly to Vietnamese customers.

Both ROs and BOs offer foreign companies a lower-risk way to explore the Vietnamese market before committing to larger, fully licensed investments. The setup costs and operational expenses tend to be lower compared to establishing an LLC or a JSC. The registration process for ROs and BOs is relatively streamlined, typically taking 15-60 days and requiring documentation regarding the parent company, office location, and personnel. Note that licenses for both ROs and BOs must be renewed annually (sometimes with extensions possible).

ROs, in particular, offer great flexibility for foreign investors. They allow companies to assess the market, build relationships, and potentially coordinate product trials before formulating a more comprehensive expansion strategy.

It’s crucial to consult with legal and tax professionals in Vietnam for the most up-to-date and specific regulations and restrictions regarding ROs and BOs.

Partnership Company (PC)

In Vietnam, a Partnership Company (PC) is formed by at least two partners who collaborate to establish a business.  Partners in a PC share ownership, profits, liabilities, and management responsibilities. A PC can be a strategic choice for foreign investors seeking to combine their expertise with local partners’ market knowledge, particularly when navigating Vietnam’s foreign ownership regulations.

Advantages of a PC:

• Leveraging Partner Resources: PCs can benefit from the combined reputations, networks, and skills of the partners.
• Flexible Management: Decision-making within a PC can be relatively streamlined, with less rigid governance structures compared to some other business entities.
• Lower Setup Costs: Initial setup costs and administrative requirements for PCs are often lower than those of LLCs or JSCs.

Disadvantages of a PC:

• Unlimited Liability: A significant drawback is that general partners bear unlimited personal liability. Their personal assets could be at risk if the partnership incurs debts or legal obligations it cannot meet.
• Transfer and Fundraising Restrictions: Rules surrounding the transfer of partnership interests and the ability to raise capital from external investors can be limiting.

Important considerations:

• PCs must have at least two general partners who face unlimited liability. They can also have limited partners whose liability is restricted to their capital contribution.

It’s essential to consult with legal professionals in Vietnam for the most current regulations governing Partnership Companies, as laws may evolve over time.

Public-Private Partnership (PPP)

A Public-Private Partnership (PPP) in Vietnam involves a long-term contractual arrangement between a government entity and one or more private companies.  This collaboration aims to finance, build, and operate large-scale infrastructure projects. Typically, the government contributes land, defines the project scope, and provides oversight, while private partners bring capital, technical expertise, and management capabilities.

PPPs are crucial for Vietnam’s infrastructure development ambitions across sectors such as energy, transportation, healthcare, and urban development. To attract private investment, the government may offer incentives like tax breaks, revenue guarantees, preferential financing, and risk-sharing mechanisms. Notably, recent legislation has further opened up PPP opportunities, allowing foreign investors to hold majority stakes in projects across various industries.

Common PPP models in Vietnam include:

• Build-Operate-Transfer (BOT): The private partner designs, builds, finances, and operates the project for a set period (often 20-30 years) to recover their investment. Ownership then transfers to the government.
• Build-Transfer-Operate (BTO): Similar to BOT, but the asset is transferred to the government upon project completion, with the private partner then operating it under a concession agreement.
• Build-Transfer-Lease (BTL): The government leases the completed project to the private partner for a long-term period.

The specific regulations and incentives governing PPPs in Vietnam can be complex. It’s advisable to consult with legal and compliance experts for the most up-to-date guidance.

Comparative analysis and decision-making

Vietnam offers a range of legal structures for establishing a business. Selecting the most suitable one is crucial, as it influences factors like liability, taxation, ownership, fundraising, and operations. Here’s an overview of key features, advantages, and disadvantages of some common  forms of entity in Vietnam:

• Limited Liability Company (LLC): Offers limited liability for owners, meaning their personal assets are generally protected from business debts. Well-suited for small to medium-sized businesses, especially those seeking funding within Vietnam.
• Joint Stock Company (JSC):  Offers limited liability for shareholders.  JSCs can be publicly listed, allowing them to raise capital through stock exchanges.  Ideal for large-scale enterprises requiring significant funding.
• Representative Office (RO): A non-commercial entity used by foreign companies for market research, promotion, and liaison activities. ROs cannot directly generate revenue in Vietnam.
• Partnership Company (PC):  Based on shared ownership between partners. Partners typically face unlimited liability, meaning their personal assets could be at risk for business obligations.  PCs offer a simple setup and flexible management.
• Public-Private Partnership (PPP): A long-term collaboration between government entities and private companies, primarily for large-scale infrastructure projects.  PPPs can offer attractive incentives for private investors.

The table below compares liability, ownership, and fundraising considerations:

When selecting a legal structure, key factors to consider are:

• Liability risks based on business activities
• Number and type of founders/investors
• Capital requirements now and in the future
• Whether external fundraising is needed
• Plans to go public at a later stage
• Taxation implications
• Compliance complexity and accounting requirements
• Profit-sharing and decision-making preferences

Analyzing these elements against personal risk appetite and business goals will help identify the ideal company type to incorporate in Vietnam. Consultation with corporate services is highly recommended during entity selection and setup. With the right foundation, your venture can gain a solid footing for the journey ahead.

Vietnam’s vast potential, growth industries and favorable demographics invite foreign ventures of all sizes and industries. Yet realizing success requires adapting to local regulations, culture and consumer behavior, including the intricate types of companies in Vietnam. Investing time to research options, seek expert consulting for company registration, and choose a matched legal business entity sets up for fruitful expansion. With thorough preparation, Vietnam’s opportunities outweigh its complexities.