LIMITED LIABILITY COMPANIES vs. JOINT-STOCK COMPANIES (Part 1/2)

Which Type of Turkish Company is Should You Incorporate? 

The two most common companies in Turkish law are Limited Liability Company (LLC or “LTD”) and Joint-Stock Company (JSC or “A.Ş.”). LLC and JSC are both capital companies, meaning the shareholders’ liability is limited to the amount of capital that they invest into the company. A frequently asked question is whether to start an LLC or a JSC for a certain type of business in Turkey.

In a nutshell, here are the main differences between a Limited Liability Company and a Joint-Stock Company in Turkish law:

When it comes to deciding whether to incorporate a Limited Liability Company or a Joint-Stock Company in Turkey, an investor should consider several aspects:

1) Anonymity

Under Turkish Law, in a Limited Liability Company, the current shareholders are registered in the trade registry directorate and then announced on the trade registry gazette. A new announcement is made every time a share in an LLC exchanges hands. Therefore, the identity of the current shareholders and the number of their shares are always publicly accessible information.

On the other hand, under Turkish Law in a Joint-Stock Company current shareholders are not registered and shares can exchange hands daily. Therefore, the identity of the current shareholders and the amount of their shares is known only to the board of directors. However, this information is made public after a general assembly of shareholders when the attendees, who are the current shareholders on that particular day, are published in the trade registry gazette.

As a result, shareholders in JSC may benefit from a certain degree of anonymity whereas in LLC share structure is transparent to the public.

2) Bureaucracy

An LLC requires less paperwork to incorporate in comparison to a JSC. Similarly, holding a general assembly of shareholders in an LLC requires less paperwork to incorporate in comparison to a JSC. Therefore, with respect to the bureaucracy of establishing and running the company, it can be said that an LLC is more advantageous.

On the flip side, in an LLC transferring shares requires more paperwork in comparison to a JSC. Therefore, an LLC is not advantageous for trading of shares which will be discussed next:

3) Trading of Shares

In a JSC, profits from the sale of shares are exempt from income tax if the shareholder has held them for at least 2 years since their acquisition. This allows investors to exit from their investments after 2 years and enjoy the profits tax-free. LLC does not benefit from this type of tax break.

Furthermore, in JSC share transfer is significantly simple. In JSC, shares can be transferred by a simple written agreement of share transfer and by registering this transfer in the company’s shareholder ledger, whereas in LLC the transfer must be approved by the general assembly of the shareholders, be notarized and then registered in the trade registry.

Finally, only Joint-Stock Companies can be turned into public companies by way of an Initial Public Offering (IPO), allowing the public to invest into the companies and allowing the shareholders to sell their shares or buy new ones on the stock exchange.

In conclusion, JSC is the more advantageous option for investors who wish to trade their shares.

4) Cost

In an LLC, the minimum required capital is only 10,000 TL and no advance payment is necessary before or during the incorporation. All of the capital can be paid within 2 years of incorporation. On the other hand, in JSC, the minimum required capital is 50,000 TL, 25% which must be paid prior to the incorporation while the remaining 75% of the capital is payable within 2 years. Therefore it can be said that an LLC is less costly to incorporate.

The same rule is applicable when it comes to the costs of running an LLC vs a JSC. The costs of holding general assembly of shareholders, Certified Public Accountant fees, legal fees and many other costs are lower in LLC than in JSC.

5) Limitation of Liability

In a capital company, whether it is LLC or JSC, shareholders by definition are not liable for the debts of the company and their liability is limited to the amount of capital that they pledge.

However, in an LLC, shareholders are personally and jointly liable for the company’s unpaid debts to the state (e.g. taxes, duties and penalties). This is a clear exemption to the rule of separation of business and personal liability in limited liability companies.

Furthermore, in an LLC, at least one of the shareholders must be also a director, and the directors are liable to the company for negligence.

Therefore, JSC is the preferable option for investors who wish to avoid any personal liability arising from company affairs and who wish to leave the management of the business to professionals.