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Compare Limited Liability company and Sole Proprietorship in Vietnam

Limited Liability Company (LLC) and sole proprietorship are 2 types of enterprises currently according to the Law on Enterprises 2020. Therefore, these 2 types of enterprises will have different advantages and disadvantages. To answer client’s questions, Viet An Law Firm will provide an article about compare LLC and sole proprietorship in Vietnam below.

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    Legal basis

    • Law on Enterprises 2020.

    Compare LLC and sole proprietorship in Vietnam

    No Criteria Limited liability company (LLC) Sole proprietorship
     

    1

    Legal basis Section 2 from Article 74 to Article 87 of Law on Enterprises 2020 Chapter VII from Article 188 to Article 193 of Law on Enterprises 2020
    2 Owner Can be an individual or organization.

     

     

    Can be only an individual, called the owner of a sole proprietorship.

    The owner of a sole proprietorship must not concurrently own a household business or hold the position of the general partner of a partnership or other sole proprietorship owner (Article 188).

    3 Responsible for assets of owner The owner must only be responsible and limited within the scope of their contributed capital (Clause 1 Article 74) The owner of the sole proprietorship shall be personally responsible for all activities of the enterprise. This means that if assets of a company are not paid debts or other financial obligations, the owner must use the personal asset to handle these debts.
    4 Contributing capital to establish other companies Be allowed to establish or purchase shares of other companies. Not be allowed to establish or purchase shares of other companies
    5 The chapter capital ·      The chapter capital of a company is the total assets promised by the owner within 90 days from the date of receiving the Enterprise Registration Certificate.

    ·      In case of increasing the capital: Only record in the accounting book of this company without announcing to the business registration agency.

    ·      In case of decreasing the capital: The company must perform procedures for decreasing the capital with the business registration agency.

    ·      The chapter capital of a sole proprietorship is self-registered by the owner.

    ·      If increasing or decreasing the chapter capital must be announced to the business registration agency where the head office is located.

    6 Legal person Has the legal person from the date on which the Enterprise Registration Certificate is issued. Has not a legal person.
    7 Right to issue bonds Be allowed to issue bonds. However, single-member LLCs are restricted right to issue shares. Not be allowed to issue any securities.
    8 Structure Can choose one of the two models below (Clause 1 Article 79)

    ·      President, Director, General Director, and Controllers (Point a);

    ·      Board of Members, Director/General Director (Point b).

    Primary model: only include a sole proprietorship’s owner or hire a manager.
    9 Capacity to transfer the contributed capital The company owner has the full right to transfer part or all of the company’s charter capital. The enterprise owner does not have the right to transfer part or all of the investment capital but only has the right to sell or lease the sole proprietorship to other individuals or organizations.

    Advantages and disadvantages of LLCs

    Advantages of LLCs

    • The biggest advantage of this type is that the company owner will have the full right to decide on all issues related to the company’s operations and does not need to ask for opinions or suggestions from other entities. Company management is also simpler than if owned by an organization or individual.
    • Because the LLC has the legal person, the investor has limited liability within the scope of the charter capital. Thus, the owner will limit certain risks when conducting business and production activities.
    • Regulations on the transfer of capital are strictly regulated, so investors will have easy control.

    Disadvantages of LLCs

    • The legal system adjusting LLCs is stricter than that of sole proprietorships.
    • Be restricted in raising capital because LLCs cannot issue shares. Therefore, the company will not have a large amount of capital to be able to implement large business plans.
    • If there is a need to mobilize additional capital from other individuals or organizations, the procedure for converting the enterprise type into a joint stock company will have to be carried out.
    • Salaries paid to the owner are not included in reasonable expenses when calculating the corporate income tax.

    Advantages and disadvantages of sole proprietorships

    Advantages of sole proprietorships

    • Because this type of enterprise is owned by only an individual, the owner will have the full right to decide on all business activities of the enterprise.
    • The capital of a sole proprietorship will be registered by the owner without the need to carry out procedures to transfer the ownership right to the enterprise.
    • Because the owner of a sole proprietorship must have unlimited liability, clients can minimize risks when cooperating, making it easier to gain the trust of clients and partners; and easily mobilize capital and business cooperation.
    • Because there is only a person acting as the legal representative of the enterprise, risk control will be better, sole proprietorships are less tightly bound by law.

    Disadvantages of sole proprietorships

    • The biggest limitation of a sole proprietorship is the need for large capital for the business because there is only an individual as the owner, without the connection. At the same time, because there is only one owner, it is easy to lack objectivity in work.
    • The next limitation in raising capital for enterprises is that sole proprietorships are not allowed to issue any type of securities.
    • Because it does not have a legal person, this type of enterprise will not be able to carry out some transactions on its own as prescribed by law.
    • Enterprise owners must be responsible before the law for all business activities of sole proprietorships.
    • Enterprise owners are subject to very high risks due to unlimited liability for paying debts arising from the enterprise even when declaring bankruptcy. This means that in case the company’s assets are not enough to pay debts or other financial obligations, the owner will have to use personal assets to handle these debts even if the company has declared bankruptcy.
    • The owner of this enterprise has only the right to establish a sole proprietorship.

    Thus, LLCs and sole proprietorships have many similarities as well as differences and also have their advantages and disadvantages. Therefore, depending on your needs, clients can choose the type that you think is suitable.

    The process of establishing an enterprise in Vietnam

    To establish an enterprise, clients need to prepare the following steps:

    Compare Limited Liability company and Sole Proprietorship in Vietnam

    Step 1: Provide information of enterprise

    The information includes:

    • Business sectors and fields;
    • Enterprise’s head office;
    • Enterprise’s name;
    • Enterprise’s capital;
    • Information on capital contributors.

    Step 2: Prepare establishment dossier

    The dossier includes:

    • The enterprise registration application form;
    • A certified copy of one of the personal identification documents of the enterprise founder;
    • Power of Attorney for organizations/individuals to carry out procedures.

    Step 3: Submit the dossier and receive ERC (Enterprise Registration Certificate)

    After preparing all necessary dossier, enterprises can directly or authorize organizations and individuals to submit dossier for establishment directly or online:

    • Submit the dossier directly to the Business Registration Office of the Department of Planning and Investment in the area where the enterprise is headquartered.
    • Submit the electronic dossier on the Enterprise Registration National Portal (https://dangkykinhdoanh.gov.vn).

    Note: After the online submission is valid, you will have to go directly to the One-Stop Department to submit the scanned documents when submitting online.

    Based on the appointment date on the receipt, the enterprise goes to the Business Registration Office to receive the results or register to receive the results by postal service.

    • In case the dossier is valid, the state agency will issue an ERC and notify the tax administration agency.
    • If the dossier is not valid: the Business Registration Office will refuse in writing and instruct to amend the dossier to comply with the provisions of law. Must perform it again from the beginning according to instructions from state agencies.

    Step 4: Publish the enterprise’s information

    After being granted an Enterprise Registration Certificate, enterprises are required to publish enterprise’s information on the National Portal within 30 days from the date of issuance of an Enterprise Registration Certificate. If the deadline is exceeded and the publication procedure is not carried out, you may be subject to administrative sanctions.

    Step 5: Engrave the enterprise seal

    Enterprises engrave their seals and proactively manage their seals. Currently, state management agencies do not manage enterprise seals. Enterprises also do not need to carry out procedures for announcing seal samples as before.

    Step 6: Conduct post-establishment procedures

    Enterprises need to pay attention to the various tax registration procedures, initial tax declarations, purchasing digital signatures, registering invoices immediately after company establishment, and completing the required business license application processes before actually commencing operations.

    Specifically, the key steps businesses should take include:

    • Completing tax registration procedures
    • Submitting initial tax declarations
    • Purchasing a digital signature
    • Registering invoices right after company formation
    • Applying for and obtaining any necessary business licenses before starting conditional business activities.

    Procedures for converting from a sole proprietorship into a limited liability company

    According to the law, sole proprietorships can carry out procedures to convert into LLCs. The steps to carry out procedures for converting the enterprise type from a sole proprietorship to an LLC are as follows:

    Step 1: Prepare the dossier

    • The enterprise registration application form
    • Charter of the converted company; Owner’s decision on conversion.
    • Types of lists include a List of creditors and unpaid debts, including tax debt, payment deadline; a list of current employees; List of unliquidated contracts.
    • List of members in case of conversion into a multiple members LLC;
    • A certified copy of the ID card/ Citizen ID card or Passport of the company’s members in case members are individuals; A certified copy of the Enterprise Registration Certificate or other equivalent documents in case the company’s members are organizations.
    • A written commitment of the enterprise owner about responsibility by all of the assets for all unpaid debts of the sole proprietorship and commit to paying the debt in full when due.
    • A written agreement with the parties in the unliquidated contract on the conversion of the LLC to receive and perform those contracts.
    • A written commitment of the sole proprietorship owner or agreement between the sole proprietorship owner and other capital contributing members on the reception and usage of current employees of the sole proprietorship.

    Step 2: Submit the dossier and receive the results

    Within 05 working days from the date of receipt of the dossier, the competent authority will review and issue an Enterprise Registration Certificate if all conditions are satisfied. In case the dossier is not valid, the business registration agency will issue a notice of amendment and supplementation.

    Within 07 working days, the business registration agency updates the legal status of the enterprise on the Enterprise Registration National Database from the date of issuance of the Enterprise Registration Certificate.

    Above is an article to compare LLC and sole proprietorship in Vietnam. If you have any questions about the types of LLCs and sole proprietorships, please contact Viet An Law Firm for our best support!

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