Variable Capital Company (VCC): An Alternative to the Limited Liability Company (LLC)

Variable Capital Company (VCC): An Alternative to the Limited Liability Company (LLC)

Bulgaria has recently introduced a new type of company, the Variable Capital Company (VCC), known in Bulgarian as DPK.

This new legal structure shares many characteristics with the traditional Bulgarian Limited Liability Company (LLC) (OOD and EOOD). Like an LLC, a VCC has separate legal personality, may engage in commercial activities, and is liable for its debts solely with its own assets. Accordingly, the shareholders' liability is limited to the amount of their capital contributions.

However, the VCC is primarily distinguished by its flexible incorporation process. One particularly practical advantage is that the company may be incorporated without the need to open a bank account in advance for the purpose of depositing its share capital.

Incorporation of a Variable Capital Company

A VCC may be established by one or more shareholders for projects that do not exceed at least one of the following three thresholds:

• an average workforce of fewer than 50 employees;

• annual turnover of less than EUR 2 millions (rounded);

• total assets not exceeding EUR 2 millions (rounded).

If any of these thresholds is subsequently exceeded during the company's existence, the company must convert into a company with fixed capital (such as an LLC or another appropriate corporate form).

The principal benefit of this legal structure lies in the possibility of incorporating and registering the company with the Business Register without first opening a bank account. For entrepreneurs, securing a bank account for the incorporation of a traditional LLC can often be a significant obstacle. The VCC therefore separates the legal formation of the company from the opening of its operational bank account: the company can first be incorporated and registered, and only then proceed with opening its bank account.

Capital Structure of a VCC

As its name suggests, the key innovation of the VCC is the variable nature of its share capital. Unlike a traditional LLC, the amount of the VCC's capital is not registered in the Commercial Register. Instead, the amount of capital is determined annually upon approval of the company's financial statements.

The capital is divided into shares, and the articles of association must generally specify the rights attached to each share as well as the conditions governing their transfer.

Nevertheless, as with a Bulgarian LLC (OOD or EOOD), the company maintains its own separate assets, and the shareholders are not personally liable for corporate debts beyond the amount of their contributions.

In this respect, the VCC is also frequently used as a vehicle for implementing employee equity participation schemes. Its capital structure makes it easier to gradually allocate shares to employees, particularly based on seniority or the achievement of specified performance targets.

Tax Treatment of VCCs

The VCC is subject to the ordinary Bulgarian corporate tax regime and therefore benefits from the same tax environment as an LLC, including the Bulgarian corporate income tax rate of 10%.