The article by Lawyer Anh Hong Ngan and Lawyer Nguyen Huu Phuoc - P&P Law Firm. For further information about Lawyer Ngan, please click here, and for information about Lawyer Phuoc, please click here. The article is published in Saigon Economic Time Online: www.thesaigontimes.vn/Home/doanhnghiep/phapluat/35089
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Decision to start a business is an important decision for any investor, especially for people doing business at the first time. After that important decision, it will be the time for that investor to proceed with legal procedures to establish the business. Legal procedures for establishing an enterprise are currently simple and the time for issuing business registration certificate is not long, therefore there are a lot of enterprises being established in recent years.
In the period of pre-establishment, investors often have a tendency to concentrate on other commercial matters of the enterprise such as studying the taste of potential customers, choosing business location, seeking capital, human and supplying resources to serve the business project, etc.
The legal procedures of applying business registration certificate are often disregarded and considered as an obliged procedure and are not focused on. However, in reality there are some arising legal matters relating the legal procedures for applying business registration certificate required to be paid attention to by investors (especially investors doing business at the first time).
1. The need of determination of the scope of business for the enterprise
The determination of the scope of business for the new enterprise is very important, since apart from normal procedures of business registration, for some industries the investors shall apply for business license, or shall have got practicing certificate, or shall meet some specific conditions of those industries, which are required by law, and shall properly implement those conditions throughout the trading activity.
Presently, business law prescribes three main business types requiring the investors to meet some further requirements in business registration, those are: (i) business industries with conditions, (ii) business industries requiring legal capital, and (iii) business industries requiring practicing certificate.
For business industries with conditions as mentioned in (i) above, subject to each business industry the enterprise shall be required to: (i) apply for business license issued by relevant authority for that industry (for example, for film production industry, the enterprise shall have got certificate certifying that it has sufficient business conditions issued by Cinema Department prior to doing the legal procedures of applying for business license); or (ii) meet regulations on standards of environment sanitation, food safety sanitation; regulations on
fire preventing and fighting, social order, traffic safety and regulations on other requirements for business activity at the time of establishment and throughout the operation duration of the enterprise (e.g. the business of dance hall or karaoke).
For business industry requiring legal capital as mention in (ii) above (for example, real estate business is required 6 billion VN Dong of legal capital, the service of debt recovery is required 2 billion VN Dong of legal capital), investors shall prepare the document attesting legal capital issued by relevant authority or organization (namely, the attestation issued by a bank).
For business industries requiring practice certificate as mentioned in (iii) above, such as legal service business, audit, accounting, subject to each business type, the owner or the manager of the enterprise shall have got practicing certificate.
Therefore, the determination of business industry is very important for the investors. The investors shall be sure that he/she can meet legal conditions in order to obtain business registration certificate first, instead of concentrating in other works requiring expenses (such as depositing in house rent, hiring staff) and at last recognizing that he/he has not got sufficient business conditions in compliance with legal regulations, and maybe it is late then.
2. The need of determination of charter capital
Investors need to discuss in order to determine the type of property used to contribute to establish the enterprises (such as VN Dong, foreign currency, gold, share certificates, real estate, movables, etc.) For contributed properties other than Vietnam currency, freely
converted foreign currency or gold, they need to be assessed by members, founding shareholders or professional assessment organizations, to form the basis for capital contribution and entering into accounts and tax of the enterprise. The investors need to discuss in order to agree on the assessment mode and assessment organization prior to establishment of enterprise, or even self-assess through agreement – and this issue can be put into contract/agreement of enterprise establishment (see Item 6 below). This work will avoid the situation that after the enterprise is established, the parties cannot agree on the assessment mode or assessment organization or value of the property contributed, causing delay of business operation of the enterprise.
3. The need of determination of capital contributing member number and enterprise type
The number of capital contributing member also has effect on the type and organization structure of the enterprise in the future. In case there is only one investor, the enterprise may be a private one with management structure as the owner will manage the enterprise, or may be a one member limited liability company in case
the investor is an organization with the management structure as either board of members (if there are two or more authorized representatives) or company president (if there is only one authorized representative), or company president if the investor is an individual. In case there are two or more investors, the investors will choose between limited liability company with two or more members (with board of members) or joint stock company (with board of directors and general meeting of shareholders).
Each type of enterprise and management structure has different advantages (such as, joint stock company does not have to change business registration certificate in changing shareholders holding less than 5% of total shares, joint stock company can issue bonds, limited liability company needs only one investor in order to be established) and difficulties (such as, for joint stock company the founding shareholders shall not transfer their shares in the first three years after its establishment, joint stock company shall have at least three founding shareholders, for private company the remuneration paid to the owner shall not be deemed as reasonable and valid expenses). Therefore, investors need to know in
advance in order to choose the suitable type and management structure of the enterprise. Wrong selection may cause stagnancy and obstruction to development and even cause the enterprise to go bankrupt.
4. The need of choosing name for the enterprise
Naming an enterprise like naming one’s spiritual child. The name is trade name of the enterprise that can bring success or failure to the enterprise. Presently, law allows the name of enterprise as either in Vietnamese or in foreign language (if any), or in initial form. However, the work of giving name to an enterprise shall meet some regulations and the name given shall not coincide with enterprise in the same industry previously registered in the whole country.
5. The need of determination of business location of the enterprise
Business location of the enterprise comprises the location of head office and also the location of business stations of the enterprise (if any). Although regulations on business registration are commonly applied according to the Law on Enterprises 2005 and document of instruction on implementation, but in reality due to particular features each locality may have its own restrictions or fixed conditions with which the enterprise has to comply.
For example, recently the Traffic and Transportation Department of Ho Chi Minh City collected opinions from some relevant departments in prior to submission to the City People’s Committee for official issuance of a list of streets or sections of streets, or even a whole area to which business registration certificate is temporarily ceased of issuance for types of services and trading gathering a lot of people such as supermarket, restaurant, wedding party center, trading center, training center, etc.
Therefore, the examination of proposed business location to see whether it is approved by local license authority in prior to negotiation of house renting is very important and to which the investor needs to pay attention before the submission of business registration document.
6. The need of contract/agreement of enterprise establishment
Contract/agreement of enterprise establishment is very important and necessary in case the enterprise participated by a lot of investors. However, presently, only the type of joint venture between local investors and foreign investors requires joint venture contract in business registration document.
However, even in case business registration document does not require it, the investors should prepare contract or agreement relating to enterprise establishment in order to determine rights and obligations of each investor, avoiding
unnecessary future dispute. This contract or agreement will comprise rights and obligations of each party in the period of preparing for the establishment of the enterprise until the proceeding of business registration and in the period when the enterprise is freshly established, deal with the case in which the enterprise cannot be established, etc. and the matters that sample charter of license authority does not cover (such as agreement of capital transfer among capital contributed members or founding share holders in the future; the issue of information confidentiality among investors, separate undertakings on investment cooperation among parties in the future, etc.).
In brief, subject to particular case of the investor, the legal issues (as above mentioned) have to be prepared in prior of business registration. The careful study and preparation of the investor in this period will strongly facilitate the business registration later, avoid refusal or requirement of supplement or amendment of document from the business registration authority, save time, labour and money so that the enterprise can soon enter the production or business operation.