Sole Proprietorships – A Common Business Type in Vietnam

A sole proprietorship is one of the most common forms of enterprise currently in Vietnam. However, it is considered a small-scale business entity due to its limited organizational structure and modest capital resources. Despite this, sole proprietorships are favored in Vietnam due to their simplicity in management, suitability to the local economic conditions, and relatively flexible operating model.

Several key aspects warrant close attention in the context of sole proprietorships, including the organizational structure, ownership of assets, and the rights and obligations of the business owner throughout the organization and operation of business activities.

According to Clause 10, Article 4 of the Law on Enterprises 2020,
"An enterprise is an organization with its own name, assets, transaction office, and is established or registered for establishment in accordance with the law for business purposes."

An enterprise may be established by an individual or organization, or by capital contribution from multiple parties. Accordingly, a sole proprietorship is formed in accordance with legal provisions as an organization with a distinct name, assets, and a transaction office for the purpose of conducting business and production activities.

Legal Nature and Characteristics of Sole Proprietorships in Vietnam

Pursuant to Article 188 of the Law on Enterprises 2020:

1. A sole proprietorship is an enterprise owned by an individual who is solely liable with all of his/her assets for all activities of the enterprise.

2. A sole proprietorship shall not be allowed to issue any kind of securities.

3. Each individual shall be permitted to establish only one sole proprietorship. The owner of a sole proprietorship is not allowed to concurrently be the owner of a household business or a general partner in a partnership.

4. A sole proprietorship is not allowed to contribute capital to establish or purchase shares or capital contributions in a partnership, limited liability company, or joint-stock company.

According to the aforementioned provision, a sole proprietorship is an enterprise established and owned by a single individual who bears unlimited liability with his/her entire assets for all obligations and activities of the business. This means that the assets of the enterprise are legally indistinguishable from the personal assets of the business owner, unlike other types of companies such as limited liability companies or joint-stock companies, where asset segregation is clearly defined.

Moreover, during its operation, a sole proprietorship is subject to various legal regulations governing rights and obligations toward the state, such as the Law on Tax Administration, Civil Code, and other relevant legislation. Therefore, asset-related obligations and liabilities of both the enterprise and the owner must be clearly understood and observed in accordance with legal requirements.

The investment capital of a sole proprietorship is self-declared by the owner. The owner must register the total amount of investment capital, including specific declarations of the amount in Vietnamese Dong, freely convertible foreign currency, gold, and other assets. In the case of capital contributions in the form of assets, the type, quantity, and residual value of each asset must be clearly stated. Any increase or decrease in the investment capital must be fully recorded in the accounting books. Where the investment capital is reduced to a level lower than the registered amount, such reduction may only take effect after registration with the Business Registration Authority.

In addition, the Law on Enterprises stipulates that the owner of a sole proprietorship shall have full authority to make decisions regarding all business operations, the use of profits after fulfilling tax and financial obligations in accordance with the law. The owner may directly manage the business or appoint another individual as Director or General Director; however, in all cases, the owner remains fully liable for all business activities of the sole proprietorship.

The owner of a sole proprietorship also serves as the legal representative of the enterprise, representing it in civil matters, as a claimant, respondent, or party with related rights and obligations before arbitration bodies and courts, and performing other legal rights and duties on behalf of the business.

According to Article 74 of the Civil Code, an organization is recognized as a legal entity if it satisfies the following conditions:

- Established in accordance with the provisions of this Code and other relevant laws;

- Has an organizational structure as prescribed in Article 83 of this Code;

- Possesses assets that are separate from those of individuals and other legal entities, and is independently liable with its own assets;

- Independently participates in legal relations in its own name.

Although a sole proprietorship is established in accordance with the Law on Enterprises, it does not meet the conditions for legal personality due to the lack of asset independence and a typically simple organizational structure. Therefore, a sole proprietorship is not considered a legal entity under Vietnamese law.

Conclusion: A sole proprietorship is a simple business model where the enterprise’s assets are legally indistinguishable from those of its owner. The owner must assume unlimited and direct liability for all financial and legal obligations incurred in the course of the business’s operations, in accordance with applicable legal regulations.