Some businesses are established but do not operate, often referred to as “shell company”. These companies will be dealt with to mitigate risks for organizations and individuals linked to them.
What does it mean to establish a company but not operate?
This refers to a situation where an individual or organization, or a group of individuals or organizations, establishes a company. After completing the company formation procedures, the company obtains legal status but does not engage in any business operations.
In other words, the company is established but has no production or business activities. The owner or the co-founders of the company do not intend to operate or conduct business under the legal status of the company to generate profit.
Reasons for Establishing a Company but Not Operating It
Internal Factors:
One key reason is tied to the initial intentions of the company founders. In some cases, the goal of forming the company is not focused on conducting business, but rather on achieving other objectives, such as securing bank loans, participating in bidding processes, signing short-term contracts, meeting legal requirements, or simply registering the company on an “auspicious date” without any plans for actual business activity.
Another factor is choosing the wrong time to establish the company. Many individuals may rush into becoming business owners without being fully prepared. This lack of readiness often results in insufficient knowledge of business management, finance, and accounting. They might not have a solid customer base or a clear business strategy, and their long-term plans may be unclear. Furthermore, the lack of sufficient capital and important business connections contributes significantly to this issue.
As a result, rushing to establish a company without a clear plan or preparation for how to operate it leads to a situation where the company only exists on paper, without any real business activity or growth.
External Factors
An important external factor to consider when discussing the establishment of a company that does not operate is the market situation.
The market environment always demands strong competition among businesses. Weaker businesses with insufficient capacity are more likely to be eliminated and find it difficult to compete in the long-term business landscape.
Some of these businesses may struggle to address business challenges when their annual costs exceed their profits. They may fail to find solutions to the complex problems of running a business and decide to cease their operations. This situation contributes to the increasing presence of companies that are established but do not engage in actual business activities.
Revocation of Business Registration Certificate?
Currently, the 2020 Enterprise Law and related legal documents do not explicitly require that a business must start operating immediately after being established.
However, Article 212, Clause 1 of the 2020 Enterprise Law stipulates the cases in which a Business Registration Certificate may be revoked as follows:
- The information declared in the business registration file is fraudulent;
- The business is established by individuals who are prohibited from setting up a business under Clause 2, Article 17 of this Law;
- The business suspends operations for 1 year without notifying the Business Registration Authority and the tax authority;
- The business fails to submit reports as required under Point c, Clause 1, Article 216 of this Law to the Business Registration Authority within 6 months after the report deadline or fails to provide a written request for an extension;
- Other cases as decided by a court or requested by a competent authority as stipulated by the law.
Thus, while a business may not operate, its Business Registration Certificate can still be revoked in the above cases, particularly when it has been inactive for 1 year without notifying the tax authority or the business registration authority.
In addition to the revocation of the Business Registration Certificate, the business may face administrative fines for not notifying the authorities about temporarily suspending operations. Specifically:
A fine of 1 to 2 million VND will be imposed in the following cases:
- Failing to notify or notifying the Business Registration Authority incorrectly or after the deadline about the time and duration of business suspension or resumption;
- Registering for business suspension but failing to notify the suspension of operations at branches, representative offices, or business locations.
(Article 32 of Decree 50/2016/ND-CP)
Note on the Business Suspension Procedure
According to Clause 1, Article 6 of the 2020 Enterprise Law, a business must notify the Business Registration Authority in writing at least 3 working days before suspending operations or resuming business before the previously notified deadline.
Additionally, under Clause 1, Article 66 of Decree 01/2021/ND-CP, if a business wishes to extend its suspension beyond the initially notified period, it must notify the Business Registration Authority at least 3 working days before the continuation of the suspension.
The Business Registration Authority is responsible for notifying the tax authority about the taxpayer’s business suspension no later than 2 working days from the date of receiving the taxpayer’s written notice (Article 14 of Circular No. 151/2014/TT-BTC).
Therefore, a business is only required to submit the suspension notification to the Business Registration Office. The responsibility for notifying the tax authority lies with the Business Registration Office, not the business itself.
In this regard, a business that is established but does not operate may have its Business Registration Certificate revoked if it does not notify the suspension of operations within 1 year.
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