What is a Limited Liability Company and How is it Established in Turkey?

A. Introduction

In this article, we will introduce limited liability companies, discuss their advantages, formation processes, reasons for their popularity, and their disadvantages, providing you with the necessary information on this topic.

B. What is a Limited Liability Company?

Regulated under Articles 573 – 646 of the Turkish Commercial Code No. 6102, limited liability companies can have a minimum of one and a maximum of fifty shareholders. These companies are established with a defined company name and capital, and the liability of the shareholders is limited to their contributed share capital.

Limited liability companies possess their own legal personality, independent of their shareholders.

C. How is a Limited Liability Company Established?

The first minimum requirement for establishing a limited liability company is having at least one shareholder, but not exceeding fifty (TCC 574). These shareholders can be either natural or legal persons. The total amount of capital committed by the shareholders constitutes the company's capital.

The minimum required capital for establishing a limited liability company is 50,000.00 TL. According to TCC 581, tangible assets that are free of any encumbrance, including intellectual property rights and virtual environments, can be included as part of the capital, but services, personal labor, commercial goodwill, and unclaimed receivables cannot.

For the establishment, the following documents are needed:

• Limited Liability Company Articles of Association (prepared according to TCC 575 – 579)

• Photocopies of shareholders' ID cards

• Shareholders' proof of residency

• Shareholders' tax plates or tax identification numbers

• Shareholders' signature declarations

• Document confirming the registration of the company’s trade name

• Rental contract or deed of the company’s headquarters

• Bank receipt showing that the capital has been deposited

Once all relevant documents are prepared, the formation of the limited liability company is completed by declaring the intention to form the company in the presence of an authorized official at the Trade Registry, as per TCC 585.

Additionally, associated costs, committed capital amounts, and the competition authority fee must be paid.

Following the registration application under TCC 586 and 587, the company must be registered in the local trade registry and announced in the Turkish Trade Registry Gazette within thirty days after the declaration of intent.

The company gains legal personality upon registration. If not accepted by the company, the founders must cover the establishment expenses, and they have no right of recourse against the shareholders.

Before registration, individuals acting on behalf of the company are personally and jointly liable for these actions. These commitments must be clearly declared as being on behalf of the company to be formed and accepted by the company within three months following its registration.

After registration, the establishment of the company must also be reported to the tax office, Social Security Institution, and relevant professional chambers.

D. Advantages and Disadvantages of Establishing a Limited Liability Company

1. Advantages:

• Shareholders' liability is limited to their share amount, protecting personal assets from company debts, except for public debts.

• Taxation is favorable for limited companies, subject to corporate tax at a rate of 20%. They can also benefit from VAT refunds and 15% withholding tax refund on distributed profits. Alternatively, they can opt for remuneration or regular salaries.

• A limited company has a general assembly and a board of directors. A single director or a board of directors can be appointed as the management body, from among the shareholders or third parties. However, at least one shareholder must have the authority to manage the company under TCC 623, making management simpler than in joint-stock companies.

• Flexibility in the transfer of partnership shares and in capital increase or decrease procedures.

1. Disadvantages:

• There can be capital adequacy issues. The minimum capital requirement for limited companies is 50,000 TL, which might not be sufficient in some cases. Also, increasing capital requires a qualified majority in the general assembly, complicating the fulfillment of capital needs.

• Limited companies are subject to mandatory annual audits, a costly and time-consuming process (as per TCC 397, the audit rules for joint-stock companies apply analogously to limited companies under TCC 635).

• The growth potential is relatively limited due to the restricted number of shareholders and the lack of public offering.

E. Conclusion

The limited liability company is a significant organizational form in Turkish Commercial Law and is one of the most common types of companies in Turkish commercial life. There are various advantages and disadvantages to establishing a limited company, depending on your goals. Therefore, it is clear that the most suitable path for your business should be evaluated in detail through legal consultation.

If you want to establish a limited company or need legal advice for managing an existing limited company, contact us. TNC Law & Consultancy works with experts in corporate law to help you develop your business and secure your position in the growing commercial world.

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