Foreign Startups in Taiwan: 3 Most Common Types of Companies in Taiwan
Once you understand the process of setting up a company in Taiwan (please refer to Foreign Startups in Taiwan: 3 Key Questions You Need to Consider in Advance for more details), the next step is to decide which type of company you want to set up. Below we will compare the three most common types of companies in Taiwan and provide advice from our past experiences.
There are 3 common types of companies in Taiwan:
- Limited Company
- Company Limited by Shares
- Close Company (which is also a company limited by shares but is given more flexibility in terms of internal management due to its private nature)
These three types of companies share two legal features in common. First, they all have a “corporate entity” or “corporate personality” (i.e., a company is a separate legal entity independent from its shareholders and directors). Second, the Company Act states that the shareholders of a company are protected by limited liability, so the shareholders’ liabilities are restricted to their investment amount in the company. This means that if the company becomes insolvent, its creditors can only claim against the company’s assets but not against the shareholders’ personal assets.
However, when it comes to the actual operation of the company, there are certain critical differences among the 3 types of the companies, primarily regarding Shareholders’ Rights, Capital Contribution Options, Qualification and Election of Company Directors, and the Article of Incorporation. We will elaborate each of these critical differences below.
- Voting Rights:
In a Limited Company, each “shareholder” has one vote regardless of the amount of the capital contributions they invest into the company, unless otherwise stated in the Articles of Incorporation of the company.
By contrast, in a Company Limited by Shares, each ordinary “share” has one vote. However, under the Taiwan Company Act, a company may have other special types of “preferred shares” with multiple voting rights and/or veto rights over specific matters, or “deferred shares” with no voting rights at all. However, when it comes to the election of a supervisor, one share has only one voting right regardless of whether the shares are preferred shares or ordinary shares.2
A Close Company also has the flexibility to arrange voting rights by creating special shares, but a Close Company is not subject to the above “one share one voting right” restriction when electing the supervisor of the company.3 The Taiwan Company Act allows greater flexibility to a Close Company considering its private and close nature.
- Transfer of Interest:
If a shareholder in a Limited Company would like to transfer their capital contributions, they must obtain consent through a majority vote of all other shareholders. If such a shareholder is a director of the Limited Company, they then must obtain consent through at least two-thirds of voting rights of all other shareholders.
In a Company Limited by Shares, a shareholder can freely transfer the shares they hold. However, shareholders may impose restrictions on the transfer of preferred shares, and such restriction shall be set forth in the company’s Articles of Incorporation.
A Close Company is required to state provisions regulating the transfer of shares in its Articles of Incorporation. That being said, shareholders of a Close Company may design their own rules regarding the transfer of shares (i.e., certain shares can only be transferred to certain immediate relatives of the transferring shareholders with the unanimous approval of all other shareholders).
Capital Contribution Options and Financial Tools Available
For a Limited Company and a Company Limited by Shares, shareholders can contribute in cash or contribute in-kind (non-cash) as the consideration for his/her investment in the company. The contribution in-kind can be monetary credit extended to the company, property, or technical know-how required by the company.
For a Close Company, at the time of incorporation, in addition to contributing in cash, property, or technical know-how, shareholders may also provide their services to the company as the consideration in exchange for the shares they hold. At the time of the following capital increase, the shareholders then can also make a contribution in monetary credit extended to the company.
In addition, for a Company Limited by Shares and a Close Company, it can also apply other financial tools/mechanisms in raising funds, such as issuing preferred shares and corporate bonds.
It is worth noting that the holders of preferred shares are shareholders, while the holders of corporate bonds are not. The rights or privileges of preferred shares can vary, including different voting rights and special dividend distribution arrangements. A company that issues corporate bonds is in fact borrowing money from bondholders, and it can only do so when the company meets a certain financial threshold prescribed by the Company Act. The company also must pay interest and repay the principal when the corporate bond reaches maturity.
Qualifications of Directors and Elections of Directors
In a Limited Company, the director must be a shareholder of the company and shall be elected by shareholders, and they must obtain the approval of at least two-thirds votes of all shareholders to be elected as the director.
By contrast, in a Company Limited by Shares or a Close Company, the director does not need to be a shareholder of the company. With respect to the voting methods of elections of directors, all Company Limited by Shares must adopt a “cumulative voting” method in accordance with the Company Act.
For example, Company A has 3 openings on its board of directors, and Shareholder X has 1,000,000 common shares. During the election, Shareholder X has 3,000,000 votes and they may either cast all of their votes for a single nominee or distribute their 3,000,000 votes among the candidates. Likewise, the Company Act chooses the “cumulative voting” method to be the default for a Close Company’s election of directors. However, unlike a Company Limited by Shares, a Close Company is allowed to establish different voting methods, such as straight voting, block voting, or limited voting in its Articles of Incorporation.
Threshold to Amend the Articles of Incorporation
A Limited Company requires the approval of at least two-thirds votes of all shareholders to amend the Articles of Incorporation of the company.
For a Company Limited by Shares or a Close Company, there are two requirements to be met. First, shareholders who represent two-thirds or more of the company’s outstanding shares must “present” at a shareholders’ meeting. Second, the resolution shall be “adopted” by a majority of the shareholders who present at such meeting.
In summary, among the three most common types of companies, Companies Limited by Shares and Close Companies have greater flexibility than Limited Companies with respect to shareholders’ rights, capital contribution options, and financial tools available.
For startups, Close Company is usually the top choice because it offers the possibility of a balance between raising capital and maintaining the founders’ controls of the business by providing the greatest extent of flexibility to shareholders’ rights arrangement and restricting the transfer of share.
However, if there is only one founding shareholder, the founder has no choice but to set up a Limited Company under the Company Act. Given such, we encourage startup founders to consult a lawyer or accountant before they set up a company or raise funds. Lawyers and accountants can assist the founders in making arrangements over shareholders’ rights with external shareholders and preparing a lawful and appropriate Articles of Incorporation.
Note 1: The “Monthly Statistics of the numbers of Registered Businesses” published by the Ministry of Economic Affairs reported that there are 554,135 Limited Companies, 178,859 Companies Limited by Shares (among which there are 4,077 Close Company), 7 Unlimited Companies, and 5 Unlimited Companies with Limited Liabilities Shareholders as of February 28, 2022. In terms of the number of each type of company, Limited Company, Company Limited by Shares, and Close Company are the three most common types of companies. By contrast, Unlimited Company or Unlimited Company with Limited Liabilities Shareholders are quite rare. Therefore, we do not include Unlimited Company or Unlimited Company with Limited Liabilities Shareholders in this article.
Note 2: See the Company Act, Article 157.
Note 3: See the Company Act, Article 356-7.
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