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  • Writer's picturePham Ba Thien

Five key legal issues for startups to consider when incorporating a company

▪ Email: info@minhthienlaw.com | Website: minhthienlaw.com ▪ Address: Floor 19, Room 1901, Saigon Trade Center, No. 37 Ton Duc Thang, Ben Nghe Ward, District 1, Ho Chi Minh City Phone number: 0913 865 900 ; 09 77 33 77 99

Starting a small company is a long-held dream for many individuals. However, the journey of entrepreneurship is far from simple. Besides business planning, financial management, and recruiting personnel, ensuring compliance with legal regulations from the outset and avoiding legal risks pose significant challenges for founders. This article will outline 05 key legal issues to consider when incorporating a company, helping you realize your entrepreneurial dreams safely and effectively.


A.              COMPANY NAME AND THE COMPANY SIGNBOARD


Under the 2020 Law on Enterprise of Vietnam, when incorporating a company, it is mandatory to register the company name in Vietnamese. The company name must consist of two elements: (i) the type of enterprise, and (ii) the specific name.[1] For example, "Công Ty TNHH Giải Trí Minh Thiên" where "Công Ty TNHH" denotes the limited liability company type, and "Giải Trí Minh Thiên" is the specific name, distinguishing the company and reflecting its business sector as well as unique characteristics (such as the founder's name, aspirations, or implications).


In addition to the Vietnamese name, companies can use English names and trading names (abbreviated names).[2]  English names and trading names must either remain unchanged or have a similar meaning to the Vietnamese name. For instance, from the Vietnamese name "Công Ty TNHH Giải Trí Minh Thiên," the English name could be "Minh Thien Entertainment Company Limited," and the trading name could be "Minh Thien Entertainment."


Company names must adhere not only to structural requirements but also to other content conditions.[3] They must not duplicate or cause confusion with names of previously registered companies.[4] Failure to meet these conditions may result in rejection of the name registration application. Currently, Vietnamese law does not provide for name reservation mechanisms as some other countries do, emphasizing the critical importance of thorough name verification before submitting applications. Company names should also avoid sensitive factors related to politics, history, culture, geography, customs, or any inappropriate connotations.


Furthermore, after incorporation, companies are required to display a company signboard at their registered office.[5] The signboard must include at least the Vietnamese name, English name (if any), enterprise code, and company address. Failure to fulfill this obligation may lead to administrative penalties under tax or market management regulations.


B.              BUSINESS LINES


Entrepreneurs often nurture their own business plans, but when implementing them into a company, these plans need to be structured as business lines registered with the State authorities.


Business sectors in Vietnam are categorized according to Decision No. 27/2018/QD-TTg issued by the Prime Minister. This Decision classifies business lines into 734 detailed categories (Level 5 sectors with 5-digit codes), each reflecting the name and scope of activities that the company intends to undertake.


Typically, companies register under Level 4 sectors (4-digit codes) based on their business plans. For example, if a company operates a restaurant, it should register related business lines such as:


  • 5610 "Restaurants and mobile dining services";

  • 5621 "Providing dining services under non-regular contracts with customers"

  • 5629 "Other dining services"


The simple principle for determining the correct business lines to register is based on the activities for which the company plans to enter contracts and issue invoices, specifying how the operations will be conducted.


It's important to note that if a company signs contracts and issues invoices for business lines not registered, it may face serious legal consequences. These include administrative fines imposed by the competent authorities, contracts and invoices potentially being deemed void, loss of customer trust, and unnecessary commercial disputes.


When registering a business line, the company should check whether such business is subject to conditional business requirements by referring to Appendix IV of the 2020 Law on Investment and relevant legal documents. If the registered business line is conditional, apart from recording it in the company's business license, the company needs to fulfill additional conditions such as subsidiary licenses, capacity requirements, minimum capital, and other specific legal requirements for legitimate business operations.[6] For instance, in the restaurant business, compliance with food safety regulations, fire prevention and sometimes construction requirements before commencing operations are necessary.


C.               CHARTER CAPITAL


Charter capital is mandatory information in the enterprise registration dossier. Simply put, charter capital represents the commitment of founders to contribute assets to the company, typically to sustain its financial operations.[7] Assets contributed as charter capital can include currency (Vietnamese Dong, foreign currency), gold, land use rights, copyrights, and various other types of assets.[8]


It is important to distinguish charter capital from other types of capital such as borrowed capital, equity capital, project implementation capital, and statutory capital. After incorporation, charter capital must be fully contributed and fulfilled within 90 days from the date of receiving the Enterprise Registration Certificate.[9] Meanwhile, other types of capital may be composed of various factors, with or without charter capital. For instance, equity capital in accounting records may change compared to charter capital due to debts, profits, or surplus capital generated during business operations. Additionally, statutory capital differs from charter capital as it mandates maintaining a minimum capital for certain conditional business sectors. For example, multi-level marketing activities require a minimum charter capital of 10 billion VND and must be deposited at a commercial bank or a branch of foreign bank in Vietnam.[10] Conversely, charter capital can fluctuate based on the company's cash demands. A company with a charter capital of 1 billion VND is not obligated to maintain that amount in its account and may even have negative charter capital without penalties.


According to the law, if only a portion of the charter capital is contributed within 90 days, the company must register adjustments to the charter capital and the actual contribution ratio. For companies with multiple founders, failure to contribute capital as committed can lead to loss of membership or shareholder status.[11] However, current law does not explicitly address scenarios where a sole founder fails to contribute capital on time.


This contribution deadline does not apply to cases of charter capital adjustments during the company's operations, such as capital increases or additional share issuances. The deadlines for additional capital contributions are typically based on agreements between the contributor and the company, or within a reasonable timeframe. Companies may face administrative fines for failure to fully contribute charter capital or update contribution information accordingly.


D.              LEGAL REPRESENTATIVE AND MANAGEMENT TITLES


The provision of "Legal Representative" of the company is regulated under the Law on Enterprise 2020 and the Civil Code 2015, defining the individual who represents the company in implementing rights and obligations arising from transactions, as well as representing the company in lawsuits and participating in litigation in courts or arbitrations.[12]


The law requires every company to have at least one legal representative, regardless of nationality, who must reside in Vietnam, typically indicated by a Vietnamese address recorded in the Enterprise Registration Certificate. In cases where the sole legal representative residing in Vietnam departs the country, that individual must authorize another person in Vietnam in writing to perform their rights and obligations.[13]


It's important to note that "Legal Representative" is not a specific title within the company. This provision does not equate to positions like Director, Chairperson of the Company, or other management titles. Depending on the company's structure, the 2020 Law on Enterprise mandates that at least one legal representative must hold one or several important management titles. For instance, in limited liability companies with two or more members, at least one legal representative must hold the title of Chairperson of the Members' Council or (General) Director.[14] Vietnamese law does not specify other management titles that can serve as legal representatives, thus even positions not in senior management like Assistant to the General Director or Department Head can act as legal representatives depending on each company's governance model.


The difference between "Legal Representative" and management titles lies in authority, responsibilities, conditions, appointment mechanisms, and other requirements. When dealing with State agencies such as tax authorities, business registration offices, and Courts, the legal representative has the authority to represent the company. Conversely, in internal transactions such as personnel appointments, decisions at annual general meetings, or negotiations with customers and partners like contract negotiations, management titles such as Director or Chairperson of the Company have authority according to the company's Charter and Vietnamese law.


The appointment and designation of the legal representative concurrently with management titles within the company should be assessed based upon the Charter, internal regulations, and current laws to avoid conflicts of power, interests, or concentration of authority in a single individual, which could pose potential risks and instability to the company's future operations.


E.               COMPANY CHARTER


Vietnamese law, including the Law on Enterprise, Law on Investment, the Civil Code, tax regulations, and specialized provisions, establishes a legal framework to ensure compliance for a company from its incorporation throughout its operations. Meanwhile, the company's Charter and its appendices can be considered as the company's "internal laws," customized based on specific needs such as business plans, management models, human resources strategies, finances, and other factors.


The Charter is issued by the founders at the time of incorporation and may be amended, supplemented, or adjusted during operations by senior management bodies such as the Owners, the Members’ Council, or the General Meeting of Shareholders. It regulates core issues to ensure that the company operates within the control of its founders or owners, including basic information such as name, address, charter capital, ownership structure, business sectors, and legal representatives. Additionally, the Charter addresses the rights and duties of senior management positions, annual meeting mechanisms, profit distribution, loss handling, financial information, internal dispute resolution, company dissolution, and asset liquidation. The absence of these crucial elements can lead to conflicts or ambiguity when the company faces complex issues or inherent risks in management.[15]


In conclusion, addressing the aforementioned five key legal issues is crucial for any entrepreneur to focus on in line with their business direction. Careful planning from the outset will establish a solid foundation for company operations, ensuring legal compliance and minimizing legal risks from potential missteps that could jeopardize the business's sustainability.


Of course, there are many other legal issues that founders or purchasers of a company should consider, such as complying with licensing procedures, accounting regulations, tax obligations, human resources, environmental laws, land use regulations, and public order and security.


Please contact us for comprehensive and detailed consultation on all these issues.


Legal basis:

[1] Article 37.1 of the 2020 Law on Enterprise (LOE)

[2] Article 39 of the LOE

[3] Article 38 of the LOE

[4] Article 41 of the LOE

[5] Article 37.4 of the LOE

[6] Article 16.6 of the LOE

[7] Article 4.34 of the LOE

[8] Article 34.1 of the LOE

[9] Article 47.2 of the LOE

[10] Article 7.1(b) and 7.1(d) of Decree 40/2018/ND-CP

[11] Article 47.3 of the LOE

[12] Article 12.1 of the LOE

[13] Article 12.3 of the LOE

[14] Article 54.3 of the LOE

[15] Article 24.2 of the LOE


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Disclaimer:

This article

  • reflects the author's subjective viewpoint on the main topic mentioned in this article, providing the best reference value at the time of publishing;

  • is not considered the viewpoint or opinion of any state agency in any case; and

  • does not constitute legal advice from Minh Thien Law and should not be applied to resolve any specific legal situation.

 

For more detailed information, please contact: info@minhthienlaw.com | thien@minhthienlaw.com


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