A sole proprietorship is a business model where one individual owns and fully controls the operations, assuming complete responsibility for its debts and activities. This type of business is governed by the 2020 Enterprise Law in Vietnam, which outlines its unique characteristics, such as unlimited liability and non-separation of business and personal assets.
1. What is a Sole Proprietorship?
According to Article 188 of the 2020 Enterprise Law, a sole proprietorship is defined as follows:
– A sole proprietorship is an enterprise owned by an individual who is liable for all activities of the enterprise with all his/her assets;
– Sole proprietorships may not issue securities of any type;
– Each individual may establish only one sole proprietorship. The owner of a sole proprietorship must not concurrently be a business household owner or a general partner in a partnership;
– Sole proprietorship may not contribute capital to establish or purchase shares or contributed capital amount in, a partnership, limited liability company or joint stock company.
2. Characteristics of a Sole Proprietorship
When establishing a sole proprietorship, investors need to be aware of its unique characteristics to make an informed choice.
Sole proprietorship is owned and financed by one individual.
Unlike companies with multiple owners, a sole proprietorship is solely funded by the individual business owner. The capital mainly comes from the personal assets of the owner.
Ownership relationship in a Sole Proprietorship
The initial capital of a sole proprietorship mainly comes from the owner’s assets. During the business’s operation, the owner can increase or decrease the capital invested, but they must notify the business registration office if the capital is reduced below the registered amount. There is no separation between the capital used in the business and the personal assets of the owner. This means that the owner’s personal assets are not distinguishable from the business’s assets.
Ownership determines management relations
Since there is only one owner in a sole proprietorship, the owner has full authority to make decisions regarding the organization and operation of the business. The owner acts as the legal representative of the sole proprietorship.
Profit distribution
Profit distribution is not an issue for a sole proprietorship because there is only one owner, and all profits from the business belong to the sole owner. However, this also means that the owner bears all risks associated with the business.
A sole proprietorship does not have legal personality
A legal entity must have independent assets, meaning there should be a distinction between the entity’s assets and those of the individuals who created it. A sole proprietorship lacks this asset independence because its assets are not separate from the personal assets of the owner.
Unlimited liability of the business owner
Due to the lack of asset independence, the owner of a sole proprietorship bears unlimited liability for any debts or risks incurred during the business’s operation. The owner is liable not only for the registered capital but also with their personal assets if the registered capital is insufficient.
3. Regulations on Management of sole proprietorships
According to Article 190 of the 2020 Enterprise Law, the management of a sole proprietorship is as follows:
- The owner of a sole proprietorship has full authority to make decisions regarding all business activities, including the use of profits after tax payment and fulfillment of other financial obligations as stipulated by law.
- The owner of a sole proprietorship can either directly manage the business or hire someone to serve as the CEO or General Director to manage and operate the business. In this case, the owner remains fully responsible for all business activities of the sole proprietorship.
- The owner of the sole proprietorship is the legal representative of the business, acting on behalf of the business in civil matters, as a plaintiff, defendant, or party with related rights and obligations before arbitration or the courts, and is also responsible for performing other rights and obligations as required by law.
Thus, the owner of a sole proprietorship is the legal representative of the business and has full authority to decide on all business operations. They can manage the business directly or appoint a CEO or General Director to do so.
3. Regulations on Leasing a Sole Proprietorship
3.1 Right to Lease a Sole Proprietorship
According to the law, the owner of a sole proprietorship has the full authority to make decisions regarding all business activities, including leasing the business. The current law, specifically Article 191 of the 2020 Enterprise Law, states:
“Article 191. Lease of sole proprietorships
The owner of a sole proprietorship may lease the whole sole proprietorship but shall send a notice thereof, enclosed with a notarized copy of the lease contract, to the concerned business registration agency and tax office within 3 working days after the lease contract becomes effective. During the lease term, the owner of the sole proprietorship shall remain responsible before law as the owner of the sole proprietorship. The rights, obligations and responsibilities of the owner and the lessee with respect to business operations of the sole proprietorship shall be specified in the lease contract.”
According to Article 191 of the 2020 Enterprise Law, it is clear that the owner has the right to lease the entire sole proprietorship, but they must notify the business registration office and tax authorities within three days of the lease becoming effective. The specific steps for this process are as follows:
Step 1: Sign the lease contract
The business owner (the lessor) and the lessee must sign the lease contract and have it notarized. The lease contract for a sole proprietorship is similar to a civil contract, specifying the rights, duties, and responsibilities of both parties (the lessor and lessee).
Step2: Notify the business registration office and tax authorities
After signing the lease, the business owner (or their authorized representative) must notify the business registration office and tax authorities in writing, along with a notarized copy of the lease contract, within three working days from the effective date.
The notification must be submitted to the business registration office as per Article 60, Clause 4 of Decree No. 01/2021/ND-CP on business registration. The business owner (or authorized representative) can submit the notification directly to the provincial business registration office where the business is located or submit the registration documents electronically.
The required documents include:
- Notification of leasing the sole proprietorship
- Notarized lease contract
Step 3: Complete the procedure
After receiving the notification, the business registration office will issue a receipt, check the validity of the documents, and update the business’s information in the national business registration database. If requested, the office may issue a confirmation of the business lease.
3.2 Regulations on the Lease Contract of a Sole Proprietorship
Leasing a business means transferring the right to possess and use the entire business for a specified period in exchange for rent. A lease contract is essentially a civil contract, governed by the Civil Code 2015, which stipulates agreements between parties to establish, alter, or terminate civil rights and obligations (Article 388 of the Civil Code).
Thus, the lease contract for a sole proprietorship is a contract to lease property or rights. According to the Civil Code 2015:
- Property rights are rights that can be valued in money and transferred in a civil transaction, including intellectual property rights.
- Property refers to tangible or intangible things, money, valuable papers, and property rights (Article 163 of the Civil Code 2015).
Therefore, the lease of a sole proprietorship can be considered as leasing both the business assets and the rights to operate the business.
Given that a sole proprietorship does not separate its assets from those of its owner, it is treated as a property belonging to the owner, and the lease of the business involves transferring the right to operate the entire business for a set period.
However, a sole proprietorship is not only a personal asset; it also holds legal status as an enterprise registered under the 2020 Enterprise Law, which involves relationships with other business partners and government authorities. Therefore, leasing a sole proprietorship, while it shares similarities with leasing property, also has specific characteristics distinct from typical property leases.
For instance, under the Civil Code 2015, in a typical property lease, the lessee is responsible for risks during the use of the leased property, except for damages caused by the lessor’s fault (Article 485 of the Civil Code). The lessee must protect the leased property as their own, compensating for any loss or damage (Article 487, Clause 1). The lessee must return the property in the condition received, except for natural wear and tear or agreed-upon conditions.
In the case of leasing a sole proprietorship, the lessee is similarly responsible for any risks or damages occurring during the lease period, except for those caused by the lessor or due to natural wear.
In conclusion, while a sole proprietorship offers full control to the owner, it also comes with significant risks due to the lack of asset separation and unlimited liability. Understanding the legal framework, including the ability to lease the business, is crucial for owners to make informed decisions and ensure compliance with Vietnamese business laws.
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