Variable Capital Company: What Startups and Innovative Businesses Need to Know
The variable capital company is a relatively new legal form in Bulgaria, designed with small, growing and innovative companies in mind. What is it, who is it suitable for, and what opportunities does it provide?
In recent years, Bulgarian commercial law introduced a legal form that has been attracting increasing attention from entrepreneurs, startups and innovative companies: the variable capital company, or VCC.
Although it is already part of the legal framework, this form still remains relatively unfamiliar to many business owners, startup founders and professionals working with small and growing enterprises. This is why the topic is particularly suitable for a more detailed informational article.
The VCC has the potential to be a useful instrument for companies that are developing dynamically, attracting partners or investors, working with key employees, and looking for a more flexible model for participation in the company’s capital.
What Is a Variable Capital Company?
The variable capital company is a type of commercial company introduced through amendments to the Bulgarian Commercial Act, promulgated in the State Gazette, Issue No. 66 of 1 August 2023. With these amendments, a new sixth type of commercial company was added to Article 64, paragraph 1 of the Commercial Act: the variable capital company.
According to the legal definition, a VCC may be established by one or more natural or legal persons. The company is liable to its creditors with its own assets. This means that it has separate property liability, distinct from the personal assets of its shareholders, subject to the general rules and the specific provisions of the law.
When the company is established by a single person, its company name must include the designation “sole-owner variable capital company” or the abbreviation “SOVCC”. In all other cases, the company name must include “variable capital company” or “VCC”.
Why Was This Legal Form Introduced?
The practical logic behind the VCC is linked to the needs of small, growing and innovative companies, where traditional forms such as the limited liability company and the joint-stock company do not always provide sufficient flexibility. Startups often face dynamic changes in ownership, the inclusion of new shareholders, the negotiation of different rights between founders and investors, and the need for mechanisms that allow key employees to participate in the company.
This is where the VCC can offer a more suitable framework. The law allows the company agreement to regulate different classes of shares, the rights attached to them, privileges, transfer conditions, the method of profit distribution, and other specific rules related to the management and development of the company.
This makes the VCC particularly relevant for companies whose value is not limited to the initial capital, but is created through knowledge, intellectual property, technological development, team capabilities and the potential for rapid scaling.
Who Can Use a VCC?
The VCC is not a universal form for every company. The law sets a specific limitation: a variable capital company may only be an enterprise with an average headcount of fewer than 50 employees and an annual turnover not exceeding BGN 4,000,000, and/or assets not exceeding BGN 4,000,000.
This means that the form is mainly aimed at micro and small enterprises, including startups, technology teams, innovative service providers, software developers, high-growth potential companies, and businesses planning to attract investment or strategic partners.
If the company grows and no longer meets these criteria, the law provides for an obligation to transform it into a capital company. If this is not done within the relevant period, the company may be dissolved by the district court upon a claim filed by the prosecutor.
What Does “Variable Capital” Mean?
The most significant difference compared to familiar company forms is the capital itself. In a VCC, the capital is variable and is not subject to registration in the Commercial Register. Its amount is established by a decision of the regular annual general meeting when reviewing the annual financial statements.
This is a significant simplification compared to companies with fixed capital, where an increase or decrease in capital usually requires a more formal procedure. In a VCC, the capital can change more naturally over time, in line with shareholder participation, the subscription of new shares, changes in ownership structure and the development of the company.
The capital of a VCC is divided into shares. Shares of the same class have the same nominal value, which may not be less than one euro cent. The law allows different classes of shares, which enables a more flexible structuring of shareholder rights.
Different Classes of Shares and Special Rights
One of the most practical opportunities offered by the VCC is the creation of different classes of shares. This allows the company to provide different rights for founders, investors, key employees or other participants.
The law allows preferred shares, which may grant more than one vote, a guaranteed or additional dividend, a liquidation quota, a buyback right or other rights provided for by law or by the company agreement. It is also possible for certain preferred shares to have no voting rights, if this is provided for in the company agreement.
This flexibility is important for the startup environment. For example, an investor may receive certain protective rights without necessarily participating in operational management. Founders may retain specific rights when key decisions are made. Key employees may be incentivized through the future acquisition of shares.
Opportunity for Employee Participation
The VCC also introduces an important opportunity that is particularly valuable for innovative companies: granting employees the right to acquire shares. The general meeting may establish such a right, regardless of the type of contract or legal relationship, and the right is exercised through the transfer of the company’s own shares.
The law also provides for a limitation: the total number of shares acquired through the exercise of this right by employees may not exceed 15% of all shares.
In practice, this creates a basis for models similar to the employee participation schemes well known in the international startup environment. For small technology companies, this can be a tool for attracting and retaining talent, especially at an early stage when the business may not be able to offer remuneration comparable to that of larger companies.
Transfer of Shares and Protection of Shareholders
Shares in a VCC may be inherited, transferred and pledged. At the same time, the company agreement may provide for restrictions and special rights, including a pre-emption right, a tag-along right to sell under the same terms as another shareholder, restrictions in the event of a change of control in a legal entity that is a shareholder, and other mechanisms.
This is important because in small and growing companies the composition of shareholders often has strategic significance. It matters who enters the company, under what conditions, with what rights, and how this affects management, future financing and trust between the founders.
Management of a VCC
The governing bodies of the company are the general meeting of shareholders and a management board or manager. In a single-owner company, the sole owner of the capital decides on matters falling within the competence of the general meeting.
The general meeting has key powers, including amending the company agreement, issuing new shares, determining the method for subscribing them, invalidating shares, excluding shareholders, transforming or dissolving the company, electing a manager or management board, approving the annual financial statements and distributing profits.
The company agreement may regulate rules on quorum, majority, voting by classes and other internal mechanisms. This once again shows that the quality of the company agreement is of critical importance in a VCC.
Practical Relevance for Startups and Innovative Companies
The VCC can be particularly useful in several situations.
First, when the company is at an early stage but, from the outset, wants to provide for the possibility of future investors, different classes of shares and a more flexible participation structure.
Second, when the founders want to create a mechanism for involving key employees through the right to acquire shares.
Third, when the business expects changes in ownership structure and wants to avoid overly burdensome procedures whenever the capital changes.
Fourth, when it is important to regulate relations between shareholders, investors and the team in a way that goes beyond the classic limited liability company model.
What Are the Limitations and Risks?
Despite its advantages, the VCC should not be seen as automatically better than a sole-owner limited liability company, a limited liability company or a joint-stock company. It is suitable only for a specific company profile.
The most important limitation concerns the size of the enterprise. If the company exceeds the statutory thresholds for employees, turnover or assets, it must be transformed into a capital company.
Another important risk is linked to the complexity of the company agreement. It is precisely there that the classes of shares, rights, restrictions, management, profit distribution, transfer conditions and other key issues must be regulated. A poorly drafted company agreement may lead to future disputes between shareholders, uncertainty for investors or difficulties during growth.
A third practical consideration is that the form is still new to the Bulgarian legal and business environment. This means that practice in its application is still developing, including among entrepreneurs, lawyers, accountants, investors and institutions.
Registration of a VCC
The practical possibility to register a variable capital company has already been provided by the Registry Agency. On 15 December 2024, the Agency announced that it had upgraded the information system of the Commercial Register and that, as of that date, interested persons may submit applications using Form A19 for the registration of circumstances relating to a VCC.
To register the company in the Commercial Register, the company agreement must be submitted and a manager or management board must be elected. The Commercial Register records key data such as the company name, registered office, management address, business activity, term of the agreement, if any, as well as data on management and representation.
VCC, Limited Liability Company or Joint-Stock Company?
The choice of legal form should follow the logic of the business, not fashion. For many small companies, a sole-owner limited liability company or a limited liability company will remain entirely sufficient and easier to manage. For companies planning more serious capital raising, an expansion of the shareholder base, participation of investors and employees, the VCC may be the more suitable option.
The joint-stock company, in turn, remains a more complex but also more familiar form for larger investment structures, more mature companies and cases where a more sophisticated corporate framework is needed.
In this sense, the VCC can be seen as an intermediate and more flexible form that responds to the needs of early-stage and growing businesses, without removing the need for careful planning.
What Should an Entrepreneur Consider?
Before choosing a VCC, an entrepreneur should answer several practical questions:
- Will the company need investors in the coming years?
- Is it necessary to create different classes of shares with different rights?
- Are there key employees who could be motivated through participation in the company?
- Is the ownership structure expected to change frequently?
- Is there readiness to prepare a more precise company agreement?
- Does the company meet the statutory limitations regarding employees, turnover and assets?
If the answers to most of these questions are positive, the VCC may be a serious opportunity. If the business is more traditional, with a clear owner, no need for investors and no complex participation structure, a classic sole-owner limited liability company or limited liability company may be the more appropriate choice.
Conclusion
The variable capital company is an important change in the Bulgarian business environment. It is not a universal solution, but it provides an instrument that can be particularly useful for startups, technology companies and innovative small enterprises.
Its greatest value lies in its flexibility: variable capital, different classes of shares, the possibility of special rights, employee participation and better preparation for future financing. At the same time, this flexibility requires good planning, a well-drafted company agreement and professional legal and accounting advice.
For Bulgarian entrepreneurs, the VCC is another instrument in the choice of an appropriate legal form. For the innovation ecosystem, it is a step towards a more modern and flexible framework for creating and developing companies with growth potential.
Note: This article is for informational purposes only and does not constitute legal advice. When choosing a legal form, establishing or transforming a company, it is advisable to seek professional legal and accounting advice.
