When deciding between a single-member LLC and a sole proprietorship, business owners must weigh factors such as liability protection, taxation, and management. Although these two structures share similarities, they also have important differences that can impact the business’s operation and financial responsibilities.
Similarities
- All are types of businesses established by individual owners
- No shares are issued
- In case of transferring part of the capital or receiving part of the capital, the type of enterprise must be changed.
- In case of transferring all capital, procedures for changing the owner must be carried out according to regulations.
Differences
| Single-member LLC | Sole proprietorship | |
| Ownership | Individuals or organizations (Clause 1, Article 74 of The 2020 Enterprise Law) | Individuals. The owner of a sole proprietorship must not concurrently be a business household owner or a general partner in a partnership. (Clause 1 and 3, Article 188 of the 2020 Enterprise Law) |
| Legal person status | Have legal person status (Clause 2, Article 74 of The 2020 Enterprise Law) | Don’t have legal person status |
| The property responsibility of the owner | The company owner is liable for all debts and other property obligations of the company within the charter capital of the company. (Clause 1, Article 74 of The 2020 Enterprise Law) | A sole proprietorship is an enterprise owned by an individual who is liable for all activities of the enterprise with all his/her assets. (Clause 1, Article 188 of the 2020 Enterprise law) |
| Charter capital | The charter capital of a single-member limited liability company at the time of enterprise establishment registration is the total value of assets which the company owner has committed to contribute and is recorded in the company charter. The company owner must contribute capital to the company in full and with the right type of assets as committed upon enterprise establishment registration within 90 days after being granted an enterprise registration certificate. (Article 75 of The 2020 Enterprise Law) | The investment capital of a sole proprietorship owner is registered by the business owner himself. All capital and assets, including loans and leased assets, which are used for business operations of a sole proprietorship, shall be recorded fully in its account books and financial statements in accordance with law. (Article 189 of the 2020 Enterprise Law) |
Change of charter capital | – In case of increasing charter capital by raising additional capital amounts from other parties, the company shall be organized in the form of a limited liability company with two or more members or a joint stock company. It is possible to increase charter capital by mobilizing additional capital contributions from owners and mobilizing additional investment capital from other individuals and organizations. – A one-member limited liability company reduces its charter capital in the following cases: + Refund part of the capital contribution to the company owner if the company has continuously conducted business operations for at least 2 years from the date of enterprise establishment registration and ensures full payment of its debts and fulfillment of other asset obligations after such return; + Charter capital is not paid in full and on time by the company owner (Article 87 of The 2020 Enterprise Law) | In the course of operation, the owner of a sole proprietorship may increase or reduce his/her capital amount invested in the business operations of the sole proprietorship. Such increase or reduction shall be recorded fully in the account books. In case the investment capital is reduced to less than the registered investment capital, the sole proprietorship owner can only reduce the capital after registering with the Business Registration Agency. (Clause 3, Article 189 of the 2020 Enterprise Law) |
| Right to issue bonds | Single-member LLCs may issue bonds in accordance with this Law and other relevant laws. (Clause 4, Article 74 of The 2020 Enterprise Law) | Sole proprietorships may not issue securities of any type. (Clause 2, Article 188 of The 2020 Enterprise Law) |
| Organizational structure | – A one-member LLC has a company President, Chief Executive Officer and is owned by an individual. – A single-member LLC of an institutional owner shall be organized and operate after either of the following models: + Company President, Chief Executive Officer; + Members’ Council, Chief Executive Officer. (Article 79 of The 2020 Enterprise Law) | Can directly or employ another person to be the Chief Executive Officer to manage. The owner of a sole proprietorship is the legal representative. (Article 190 of The 2020 Enterprise Law) |
Right to transfer capital contribution | The company owner has the full right to transfer all or part of the company’s charter capital. (Article 76 of The 2020 Enterprise Law) | 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, but only has the right to sell or lease a private enterprise to individuals or organizations. other positions. (Clause 4, Article 188 and Article 191 and Article192 of The 2020 Enterprise Law) |
Advantages and Disadvantages of a Single-Member Limited Liability Company
Advantages
The One-Member Limited Liability Company (LLC) has the following advantages:
- As it is owned by a single organization or individual, the owner has full authority to make decisions on all matters related to the company’s operations without needing approval or input from other parties. This simplifies the management of the company.
- It has legal status, meaning the business is recognized as a legal entity, capable of independently participating in legal relationships. This provides the business with legal stability, as the legal entity is not subject to sudden changes like an individual. The legal entity’s operations are more enduring and unaffected by any events involving its members.
- The owner is only liable up to the amount of capital invested in the company (Clause 1, Article 74 of the 2020 Enterprise Law), thus limiting the owner’s risk when conducting business activities.
- The company has a structured organization, with a Chairman, Director, or General Director. If the company is owned by an organization, it may be organized according to the model of a Members’ Council (which elects a Chairman of the Members’ Council), and a Director or General Director (Article 79 of the 2020 Enterprise Law).
- The owner has full rights to transfer all or part of the company’s charter capital (Article 76 of the 2020 Enterprise Law).
- The company can increase its charter capital by adding more capital from the owner, raising additional investment from other individuals or organizations (Article 87 of the 2020 Enterprise Law), or issuing bonds.
Disadvantages
- The legal system governing One-Member Limited Liability Companies (LLCs) is stricter than that for Sole Proprietorships.
- There are limitations on capital raising, as One-Member LLCs are not allowed to issue shares.
- If there is a need to raise additional capital from other individuals or organizations, the company will need to go through the process of converting its business structure to a multi-member LLC or a joint-stock company.
Advantages and Disadvantages of a Sole proprietorship
Advantages
Sole Proprietorships have several advantages:
- Since the Sole Proprietorship is owned by only one individual, the owner has full authority to make decisions regarding all business activities.
- The capital of the business is registered directly by the owner, and there is no need to transfer ownership rights to the business (Article 189 of the 2020 Enterprise Law).
- Because the liability of a Sole Proprietorship is unlimited, it can more easily gain trust from customers and partners, as customers face minimal risk when cooperating with the business.
- A Sole Proprietorship is subject to fewer legal restrictions and can better manage risks, as there is only one individual acting as the legal representative of the business.
Disadvantages
- Since a Sole Proprietorship is owned by only one individual and does not have any capital contributions from other parties, it may struggle to quickly meet the need for large capital to run the business. Moreover, with only one owner, unilateral decision-making is more likely, which can lead to a lack of objectivity.
- The fact that a Sole Proprietorship cannot issue any type of securities (Clause 2, Article 188 of the 2020 Enterprise Law) is also a limitation on its ability to raise capital for business operations.
- The owner of a Sole Proprietorship cannot simultaneously be the owner of a business household, a member of a partnership, or the owner of another Sole Proprietorship (Article 188 of the 2020 Enterprise Law).
- A Sole Proprietorship does not have legal status, so it cannot carry out certain transactions as required by law.
- The business owner is personally liable before the law for all business activities of the Sole Proprietorship.
- The owner is liable with unlimited responsibility, using all of their personal assets. This means that if the business’s assets are insufficient to cover debts and other financial obligations, the owner must use their personal assets to settle these debts, even if the company declares bankruptcy.
In conclusion, while both a single-member LLC and a sole proprietorship offer simplicity and control, the LLC provides added liability protection, making it a more secure option for many business owners. The choice ultimately depends on the owner’s risk tolerance and business goals.
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