Choosing the Right Company Entity When Establishing a Startup

Startups are innovative ventures characterized by their high growth potential, scalable business models, and focus on solving problems through technology. These enterprises often engage in research and development (R&D) to create new ideas, products, or services, which they eventually introduce to the market. However, before launching these business models and ideas, they must be firmly rooted in a secure legal foundation. Once the business model is deemed commercially viable, it is time to establish the appropriate legal structure. Selecting the most suitable company entity is one of the most crucial decisions for entrepreneurs, as it involves considering multiple factors simultaneously. Particularly in cases where multiple entrepreneurs come together in the product development process, early-stage incorporation becomes essential.

Establishing the Most Suitable Company Entity

The first critical decision in the initial stages of a startup is selecting the company entity. This decision should consider the structure, goals, and expectations of the startup, along with these factors:

• Business control
• Setup cost and complexity
• Limitation of liability
• Flexibility and future needs
• Ongoing management
• Tax liabilities
• Continuity of existence

For entrepreneurs, the company formation phase should involve minimal costs and lead to limited liability in the future. In this regard, entrepreneurs may consider establishing either sole proprietorships (such as collective or limited partnerships) or capital companies (such as limited liability companies and joint-stock companies). However, given the liability limitations, it is more appropriate for entrepreneurs to launch a startup as a capital company. Unlike sole proprietorships, where partners are fully liable for company debts, shareholders in capital companies such as limited liability and joint-stock companies are not personally liable for the company’s obligations. This limited liability provides investors with a level of security. Conversely, partnerships or sole proprietorships are not advisable for investment processes since the capital cannot be divided into shares. Therefore, capital companies such as joint-stock and limited liability companies are the most suitable options for startups. Below is an examination of these two company types and the differences between them:

Limited Liability Companies (LLCs)

Due to their relatively lower establishment costs and minimum capital requirements, limited liability companies may appeal to entrepreneurs. These companies can be founded with at least one and at most fifty shareholders under a commercial title. As of 2024, the minimum capital requirement for an LLC is 50,000 TL. The shareholders’ liability is limited to the capital amount they have committed, and they are not personally liable for the company’s debts. However, if public debts, such as tax and social security obligations, cannot be recovered from the company, the shareholders become personally liable in proportion to their shares. This aspect may pose a liability risk for entrepreneurs. Additionally, share transfers in LLCs must be notarized, making the process more cumbersome and potentially less attractive to investors.

Joint-Stock Companies (JSCs)

Establishing a joint-stock company involves higher costs than forming an LLC. As of 2024, the minimum capital requirement for a JSC is 250,000 TL, with one-fourth of the subscribed capital blocked in a bank account initially, while the remainder must be paid within two years. In contrast, LLCs do not require any funds to be blocked in a bank account. Joint-stock companies are entities whose capital is divided into shares, and they are only liable to the extent of their assets. They can be established for any purpose, provided it is lawful. Both natural and legal persons can be shareholders in a JSC. There is no limit on the number of shareholders, although if the number exceeds 250, the regulations of the Capital Markets Board must be observed. In a JSC, the board of directors is only liable if it violates its duties under the law or articles of association due to negligence. While forming a JSC may seem costly regarding setup and fixed expenses, this structure limits the entrepreneur’s liability in the event of unfavorable business outcomes. Furthermore, JSCs offer tax exemptions, as there is no income tax obligation if share certificates or stock warrants are issued.

Differences Between the Two Company Types

The following are the primary differences between LLCs and JSCs from an entrepreneurial perspective:

• An LLC can have a minimum of 1 and a maximum of 50 shareholders, while there is no upper limit for the number of shareholders in a JSC.
• If the number of shareholders in a JSC exceeds 250, shares can be publicly traded, whereas LLCs cannot be publicly traded.
• Share transfers in an LLC must be notarized, while JSC shares do not require registration for transfer.
• In a JSC, only the board of directors is responsible for public debts, whereas in an LLC, the shareholders bear this responsibility.
• The board of directors in a JSC holds management authority, and shareholders are not required to serve on the board; in an LLC, management rights and duties are vested in the managers, with at least one shareholder acting as a manager.
• JSCs must have a general assembly, board of directors, and an auditor, while LLCs only require a general assembly and managers.
• JSCs can issue bonds and profit-sharing certificates, whereas LLCs cannot issue bonds, and issuing profit-sharing certificates depends on provisions in the articles of association.

Conclusion and Assessment

The selection of company type in a startup establishment is a critical decision that directly impacts the strategic goals and growth plans of the entrepreneurs. LLCs offer flexibility due to lower capital requirements and reduced administrative burdens, whereas JSCs provide significant advantages in growth potential, investment attraction, and shareholder diversity. Therefore, it is recommended that entrepreneurs aiming to attract investments opt for a JSC structure. JSCs not only possess a higher capacity to raise capital but also provide transparency and a corporate structure that instills confidence in investors. Additionally, an increase in the number of shareholders may enhance the company’s valuation. Consequently, for entrepreneurs with long-term growth objectives, choosing a JSC structure is considered a more strategic decision.