RISKS WHEN CONTRIBUTING CAPITAL TO INVEST IN BUSINESS

With today’s developed socio-economic environment, business investment and especially investment cooperation between investors to develop their businesses. When implementing business ideas, start-up entrepreneurs often focus on the market and sales.

However, for start-up businesses to have solid steps, limit risks, and be ready for the ability to mobilize investment capital, contributing capital to cooperate in business is no longer strange today. However, this also has many risks that can arise during the cooperation process.

Contributing capital is the act of contributing assets to form the charter capital of a company. Contributing capital includes contributing capital to establish a business or contributing additional capital to the charter capital of an established business. When contributing capital to a business, the person contributing capital becomes one of the owners of the business.

A business cooperation contract (hereinafter referred to as a BCC contract) is a contract signed between investors to cooperate in business, share profits, and share products in accordance with the provisions of law without establishing an economic organization.” (Clause 14, Article 3 of the Investment Law 2020).

We can understand that a Business Cooperation Contract is a document signed between two or more parties to conduct business investment in Vietnam, which stipulates the responsibilities and business results for each party without establishing a new legal entity.

In order to invest effectively and bring the highest profits to investors, the first important thing investors must do is choose the form of investment. According to the Investment Law 2020, investors can choose one of four forms of investment.

Of which, the form of investment under a business cooperation contract (also known as a BCC contract) is the most commonly used form.

Although it is a fairly common type of contract in investment and cooperation, a business cooperation contract has risks for investors when implementing this contract. Through research, it can be seen that the risks in a business cooperation contract include the following risks:

(1) Because it does not create a new legal entity, not the same organization, the parties will have to meet and assign one party to act as a representative to manage the general operations of the enterprise.

This inadvertently leads to the authority of one party being able to overwhelm the other party, when there is a conflict, it is very likely to lead to negative behavior or unnecessary misunderstandings for the other party. The other party does not completely agree or views the operator with suspicion, leading to disputes.

In addition, because an economic organization is not established, the two parties will not have a common seal. At that time, the two parties must agree to use the seal of one party to serve business investment activities. This also has very high potential risks and is easy to dispute.

(2) The parties’ right to negotiate is very high because the law allows it, however, if the parties do not clearly and fully specify the operating, management, financial accounting mechanisms… then when a dispute arises, there will be no legal mechanism to adjust or resolve it. This leads to confusion for the parties, using emotions to resolve the matter, making it more difficult to handle and leading to greater conflicts, even leading to dissolution and litigation.

(3) Because the nature of a business cooperation contract is a joint activity of two parties to create assets and generate profits, the profits generated will be jointly owned by both parties, and the responsibilities arising will also be the responsibilities of both parties.

So when performing obligations and responsibilities to a third party, who will perform and what each party’s obligations are to the third party are not clearly stated. If one of the parties refuses to perform its obligations or does not fully perform its responsibilities to the third party, the legal mechanism for handling this issue is very difficult.

Contributing capital to do business is related to the individual and common interests of each partner. Therefore, this can cause many complicated issues. There are many forms of capital contribution and each form has different risks:

* Form of capital contribution to sell goods

Common problems that arise are:

• Because of trusting friends and relatives, they do not take seriously and clarify the binding conditions.

• Not clarifying responsibilities and dividing work clearly from the beginning. Such as who holds the common capital? Who is responsible for recording and balancing the income and expenditure during the business process? Who manages the employees?

This leads to many bad consequences. The parties involved in the capital contribution will easily quarrel, shift responsibility when there are difficulties and fight for their own interests.

To avoid the above problems, it is necessary to make a black and white contract from the beginning. The contracts must clearly define the work and responsibilities of the parties. During the business process, if any difficulties arise, it is necessary to discuss and consult each other to come up with a final solution.
* Form of capital allocation
This form is popular with people who have money but no business experience. So they contribute capital with experienced people and agree to share profits. This is also considered an investment trust. This brings many risks such as:
• The business person does not have enough professional expertise. You will not be able to ensure that the person using your capital is effective and profitable.
• This is not a real economic contract. Because when transferring capital, the two parties only agree privately with each other. Therefore, you will not be protected by law.
• You will be at risk of having your capital appropriated. Because you do not have business experience and do not understand professional expertise.
• External factors such as the market changes badly and the capital holder cannot cope. The business fails, your capital is also lost in vain.
* Form of capital contribution to a joint stock company
The form of capital contribution to establish a joint stock company is very popular with people with large capital and “blood” for business. Contributing capital to do business in this form has advantages such as:
• Capital contributors are guaranteed legal status.
• You can still participate because there are many members contributing capital, so with a small amount of capital. The risks will be shared by the members.
• As a shareholder, you can easily transfer capital, sell shares freely. This is an advantage that you cannot find in a multi-member limited liability company.
* The management organization of a joint stock company is very complicated. There will be problems that arise such as:
• Shareholders have many people you do not know, leading to division into groups of shareholders who oppose each other to compete for benefits.
• Joint stock companies must comply with strict financial and accounting inspection and reporting regimes.
• Many shareholders only care about annual dividends without caring about the company’s work. Therefore, the company’s operations will not be effective.
• You are also not sure how much profit the management board can bring you. Because they may just want to preserve or increase dividend income to enhance their own reputation.
5. How to avoid risks when contributing capital to do business
To minimize the risks that may occur when contributing capital to do business, you need to:
• Make a detailed and clear business strategy plan.
• Be careful and thoughtful when choosing people to cooperate with in business
• There must be a clear and detailed contract with full regulations.
• Divide the work and responsibilities of the participating parties.
• Be clear in the way of dividing profits and losses.

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