According to the Turkish Commercial Code No. 6102 ("TCC"), capital companies are basically defined as joint stock companies and limited liability companies, and unlike sole proprietorships, these companies are subject to limited liability in respect of their shareholders. A joint stock company is defined as "a company whose capital is definite and divided into shares, and which is liable for its debts only with its assets" as per Article 329 of the TCC. A limited liability company, on the other hand, is defined as "a company established by one or more real person or legal entity under a legal title" as per Article 573 of the TCC.
Shareholders are free to determine which type of company to establish according to the industry in which the company will operate based on their short-term and long-term investments and business strategies. In addition, there are some fundamental differences between the two types of companies in terms of the number of shareholders, capital, liability, field of activity and thus shareholders should take these into consideration when deciding on the type of company to be established. The main differences between the two types of companies are summarized as follows:
Number and Type of Shareholders: A single real person or legal entity shareholder is sufficient for the establishment of both companies. However, the maximum number of shareholders in limited liability companies can be 50 (fifty). In joint stock companies, it is possible to have more than 500 (five hundred) shareholders and when this number is reached, the company might be considered as a public company as per the capital market regulations. Pursuant to Article 3 of the Foreign Direct Investment Law No. 4875, foreign investors have equal treatment with local investors. In this respect, foreign investors are able to establish these types of companies specified under the TCC or become shareholders of such companies through share transfer transactions.
Liability for Public Debts: In principle, shareholders of joint stock companies are not liable for the public debts of the company. However, pursuant to Repeating Article 35 of the Law No. 6183 on the Procedure for Collection of Public Receivables, the members of the board of directors of joint stock companies who also serve as "legal representative" are jointly liable for the full amount due in case such debts cannot be collected from the company itself. On the other hand, shareholders of the limited company are liable in proportion to their shares for public debts which are not collected from the company in whole or in part or appear to be uncollectible. If these shareholders also serve as managers of the limited liability company as envisaged under the TCC, they are responsible for the entire debt in contrary to their liability when they are solely shareholders and thus liable for public debts in proportion to their shares.
Capital: The minimum capital amounts for the establishment of joint stock companies and limited liability companies have been have been changed with the Presidential Decision on Increasing the Minimum Capital Amount for Joint Stock and Limited Liability Companies numbered 7887 and dated 24 November 2023 ("Decision"). While the minimum capital amount of joint stock companies was TL 50,000 (fifty thousand), it is changed to TL 250,000 (two hundred and fifty thousand). For the establishment of limited liability companies, on the other hand, the minimum capital amount is raised from TL 10,000 (ten thousand) to TL 50,000 (fifty thousand). These amendments will enter into force on 1 January 2024. As per the announcement of Ministry of Trade, although there is no obligation at this stage to increase capital for existing companies whose capital is below than the newly determined amounts, it is suggested for the respective companies to increase their capital to at least the referred amounts to strengthen their equity positions. Both companies may be capitalized in cash or in kind. Each share must be worth at least TL 0,1 (one) or its multiples in joint stock companies, and each share must be worth at least TL 25 (twenty-five) or its multiples in limited liability companies.
Registered Capital System: The registered capital system is a system that allows companies to increase their capital up to the amount determined by the articles of association and registered in the trade registry by the decision of the board of directors, without being subject to the capital increase obligations of the TCC (such as general assembly decision, article of association change etc.). With the Decision, for private joint stock companies, the minimum registered capital amount is changed to TL 500,000 (five hundred thousand) from TL 100,000 (one hundred thousand) which will enter into force on 1 January 2024. This system is not applicable to limited liability companies.
Field of Business: Joint stock companies and limited liability companies can be established for any economic purpose which aren't restricted by laws as per Articles 331 and 573 of the TCC, respectively. However, companies that will operate in areas such as banking, investment partnership, financial leasing, insurance, etc. should be established as joint stock companies. Therefore, the shareholders may need to consider the field of activity while determining the type of company to be established.
Mandatory Bodies: While the general assembly and board of directors are compulsory bodies for joint stock companies, general assembly and board of managers are compulsory bodies for limited liability companies. The powers of the mandatory bodies cannot be transferred due to the limitations set forth in TCC. In joint stock companies, it is not compulsory for shareholders to take part in the board of directors, but in limited liability companies, one of the shareholders of the company should take part in the board of managers.
Obligation to have a Company Lawyer: At the moment, in joint stock companies, if the capital of the company is over TL 250,000 (two hundred and fifty thousand), there is an obligation to have a lawyer in the company, while there is no obligation to have a lawyer in limited liability companies. However, since the minimum share capital of joint stock companies has changed with the Decision mentioned hereinabove, we would expect this amount will also change in the coming days.
Voting Rights: Shareholders can vote in the general assembly in proportion to the total nominal value of their shares. However, each shareholder has at least one voting right even if they own only one share. Pursuant to Article 479 of the TCC, unless there is a situation required by corporate governance or a just cause, a maximum of 15 (fifteen) voting rights can be granted to one share in joint stock companies. On the other hand, there is no limitation on the voting rights of shareholders in limited liability companies.
General Assembly Meetings and Presence of Ministry Representative: Joint stock companies and limited liability companies are obliged to hold their general assembly meetings within 3 (three) months following the end of their annual activity years. Joint stock companies are also obliged to have a ministry representative at the meetings in the specific cases listed in Article 32 of the "Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Ministry Representatives to be Present at These Meetings".
Public Offering: Pursuant to the Capital Markets Law ("CML"), a public offering is defined as "a general invitation for the purchase of capital market instruments through any mediums and the sale realized following such invitation". Accordingly, public companies are benefiting from alternative financing generated through public offering by offering their shares fully or partially on the stock exchange. In addition to the obligations arising from the TCC, public companies must also comply with the principles and obligations set forth in the CML. Joint-stock companies which are incorporated for at least 2 (two) calendar years as of their establishment can apply for an initial public offering. It is not possible for limited liability companies to become public. A limited liability company wishing to become a public company can only become public by first changing its company type to a joint stock company along with satisfying any other requirements. In the event that a limited liability company changes its type to a joint stock company, the period spent as a limited liability company is also taken into consideration when calculating the initial establishment time as it is only possible for joint stock companies to go public if at least 2 (two) calendar years have elapsed since their establishment as also noted hereinabove.
Delegation of the Representation and Management of the Company to a Third Party: In joint stock companies, the management authority of the company can be partially or completely delegated to several members of the board of directors or to a third party. All board members are deemed to have management authority unless there is a such delegation. However, the authority of representation can be delegated to third parties provided that at least 1 (one) member of the board of directors has the full representation authority in joint stock companies. If the representation authority is delegated to one or more members of the board of directors, these members are defined as "executive members (murahhas üye)". If the representation authority is delegated to someone other than the members of the board of directors, these persons are defined as "executive manager (murahhas müdür)". In limited liability companies, the management or representation of the company cannot be completely delegated to a third party. At least one (1) of the shareholders of a limited liability company should be appointed as a manager.
Issuance of Bonds and Similar Debt Instruments: Bonds are debt securities issued by the government or companies to provide additional financing. The CML and its sub-regulations allow both public and non-public joint stock companies to issue bonds and similar debt instruments as long as certain requirements are met. On the other hand, limited liability companies cannot issue bonds and other similar debt instruments.
Share Transfer: In joint stock companies, the transfer of shares is made more easily comparing to limited liability companies since it is not required for joint stock companies to transfer their shares through Notary Public in contrary to limited liability companies. Pursuant to Article 490 of the TCC, the transfer of registered share certificates is conducted by endorsement and transfer of possession to the transferee, whereas the transfer of bearer share certificates is conducted by transfer of possession to the transferee and notification to the Central Registry Agency. In practice, share transfer agreements and shareholders' agreements are executed in order to determine the rights of the seller and buyer and the framework of the transfer including the sales price. These agreements are prepared within the principle of freedom of contract and thus are negotiated according to the free will of the parties. In limited liability companies, the transfer of shares is subject to a written form and the signatures of the parties should be approved by a Notary Public. In addition, unless otherwise stated in the articles of association of the limited liability company, the approval of the general assembly of shareholders must be obtained for the transfer of shares. The transfer should also be registered with the relevant Trade Registry and announced in the Turkish Trade Registry Gazette.
Income Tax on Share Transfer: In joint stock companies, if the share is sold and transferred within 2 (two) years after the acquisition of the share certificate, incomes gained in accordance with the Income Tax Law are subject to tax as "appreciation gains". However, in limited liability companies, share certificates can only be issued for evidence purposes meaning that there is no obligation to issue share certificates and thus the time limitations pertaining to the share certificates is not applicable for limited liability companies. When shareholders in a limited liability company sell and transfer their shares, they will be subject to income tax arising from "appreciation gains" in any case.
Type of Share Certificate: Joint stock companies may issue bearer shares provided that the capital is fully paid, and the necessary decision is taken by the board of directors. Bearer shares must be registered with the Central Registry Agency and companies should make a notification in case of distribution and transfer of bearer shares as per the amendment in December 2020. On the other hand, it is not possible to issue bearer shares in limited liability companies. In limited liability companies, share certificates may be issued only for the purpose of proving share ownership or in connection with a registered certificate as per Article 593 of the TCC.
Independent Audit: As per TCC, companies which are subject to independent audit are determined in accordance with the Decision on the Determination of Companies Subject to Independent Audit announced by the President of Türkiye. Joint stock companies and limited liability companies that meet the criteria set forth in this decision will be subject to independent audit.
Change of Company Type: It should be noted that it is always possible for a capital company to transform into another capital company in accordance with the provisions of the TCC with respect to the change of type. Accordingly, it is possible to change company type from joint stock company to limited liability company in case initial conditions considered during the establishment of such company have changed or if there is a need for reorganization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
