How can you make your business more flexible and attractive to investors? If you are developing a limited liability company (LLC) and want to attract capital more easily and incentivize key people on your team, converting into the new legal form—a Variable Capital Company (VCC)—may be the right step. We share experience from our practice, the main advantages, key points in the conversion from LLC/Sole-owner LLC into a VCC, and important details to consider when planning future growth.
Our team was engaged in the case of a company whose partners had ambitions for significant development. The problem was that the legal form—LLC—did not allow such rapid growth without constraints. Some of these constraints could deter investors.
An adequate proposal in this situation is to take advantage of the new company form—the Variable Capital Company (VCC). This was also our recommendation, as implementing it requires conversion of the legal form, transforming the LLC into a VCC.
In such a process, it is important to focus on several points:
- Will the conversion lead to the desired easier access for investors to your company?—In this case, yes, definitely. That is why it is essential, when deciding how your VCC should be structured, to stipulate a simple written form for share transfers.
- Use the instrument of agreements granting the right to acquire shares under Art. 260i1 of the Commerce Act—these are the so-called vesting agreements. With them, you can incentivize employees, managers, and others to receive a portion of the shares under certain conditions. By working as if for something “their own,” these individuals would raise the coefficient of efficiency.
- Set clear frameworks and boundaries for incoming partners. The goal is to regulate early not only which people you want to work with, but also how much control they will have over the company’s structure. You may restrict the sale of shares to third parties for a certain period or tie the sale to other conditions, such as the “right of first refusal.” In any case, act so that your VCC retains its personal character rather than acquiring an uncontrolled public character, without you knowing who has sold shares and when. There will be time for that later, but not at an early development stage.
- Choose the most appropriate method of management and representation.
Have you had a single manager who is often busy and cannot pay attention to every issue? In this case, you may appoint a kind of Board of Directors which, by analogy with a joint-stock company, can meet and consider the most important decisions. - Be mindful of the pace of development.
Overperformance of a financial plan is often good news, but with a VCC, there is a specific consideration. If you exceed the statutory thresholds for turnover and personnel in a VCC, you must practically, within about a year, convert it again into a capital company. After all, the VCC is primarily conceived as a starting form designed to accelerate turnover. In that situation, since you will have accumulated capital and experience, an appropriate solution is to transition to a joint-stock company. The latter opens the door to trading shares on a publicly regulated market.
For advice on the most suitable conversion method, you can contact our team of lawyers and legal experts with extensive experience in corporate and commercial law.
More about VCC:
- 7 good reasons to choose a Variable Capital Company (VCC)
- Variable Capital Companies (VCC) – how they are applied worldwide
Images: Canva
