The legal nature of sole proprietorship

1. Introduction

Sole proprietorship, as defined by the law, are one of the later forms of economic organizations compared to other forms of ownership. However, despite this, sole proprietorship have consistently asserted their significant position and role throughout the period since they were officially recognized by the law until now.

2. The concept and characteristics of a sole proprietorship

a, The concept of a sole proprietorship

On the other hand, sole proprietorships also possess distinctive characteristics to distinguish them from other types of businesses. According to Article 188 of Enterprise Law 2020, “A sole proprietorship is an enterprise owned by a single individual whose liability for its entire operation is equal to his/her total assets. A sole proprietorship must not issue any kind of securities. An individual may only establish one sole proprietorship. The owner of a sole proprietorship must not concurrently own a household business or hold the position of general partner of a partnership. A sole proprietorship must not contribute capital upon establishment or purchase shares or stakes of partnerships, limited liability companies or joint stock companies.”

The content of this law indicates that a sole proprietorship is not a separate legal entity. In other words, a sole proprietorship is not a legal person. Therefore, a sole proprietorship cannot be considered a subject of the law. In fact, from a legal perspective, the sole proprietorship and its owner are considered as one. The sole proprietorship does not have a separate legal identity from its owner. 

b, The characteristics of a sole proprietorship

Firstly, a sole proprietorship is a business owned by an individual. A sole proprietorship is a single-owner business, and the owner of the sole proprietorship can be an individual of Vietnamese or foreign nationality. The nature of a single owner of a sole proprietorship is reflected in various aspects.

1. Regarding the decision-making power for business operations, the owner of a sole proprietorship has sole authority over all business activities of sole proprietorship. This is one of the characteristics that distinguish the owner of a sole proprietorship from businesses with multiple owners, where decisions regarding business operations are made based on the will of the owners rather than the will of an individual, even if that individual holds the management and operational authority of the business.

For example, in a Multi-Member Limited Liability Company, decisions regarding business activities are made by the Board of Members. As for individuals such as Directors or General Directors, despite holding the authority to manage and operate the business, they do not have the authority to decide on business activities; their role is limited to organizing and implementing the business activities.

2. Regarding the management and operation authority of the business: The owner of a sole proprietorship has full authority to manage and operate the business. The owner of a sole proprietorship can directly manage or hire others to manage or operate the business activities.

3. Regarding the right to use profits and the obligation to bear risks: The owner of a sole proprietorship has full authority to decide on the use of profits after tax payment and fulfilling financial obligations, while also bearing all risks arising from the business activities without sharing with anyone.

4. Regarding the right to determine the fate of the enterprise: The owner of a sole proprietorship has the right to decide on all matters related to assets and the organization of the enterprise, including the right to establish, dissolve, sell, lease, or temporarily suspend the business operations of the enterprise.

Secondly, the owner of a sole proprietorship is personally liable for all debts arising from the business activities of the enterprise. A sole proprietorship has unlimited liability in business operations because the assets of the enterprise and the personal assets of the owner are not clearly separated. This is also one of the reasons why a sole proprietorship does not qualify as a legal entity under the provisions of Article 74 of the Law on Enterprises 2020. The moment the owner of a sole proprietorship begins to bear unlimited liability is when the enterprise is granted a business registration certificate and starts its business operations. However, the time when the sole proprietorship is subject to unlimited liability is when the enterprise is declared bankrupt and its remaining assets are insufficient to pay off the debts to the creditors of the enterprise.

For example, Sole proprietorship A, owned by Mr. B, was granted a business registration certificate on September 5, 2015. Due to the impact of the Covid-19 pandemic, the business operations of the enterprise incurred losses and became inefficient. As a result, the company declared bankruptcy on October 8, 2021. Therefore, the moment when Sole proprietorship A started bearing unlimited liability is from September 5, 2015, while the time when it became subject to unlimited liability is on October 8, 2021.

Thirdly,  regarding legal status: Sole proprietorship does not have legal personality because it does not meet the conditions stipulated in Article 74 of the Civil Code 2015.

Fourthly, regarding capital mobilization: Sole proprietorship is not allowed to issue any securities to publicly raise capital.

3. The rights of the owner of a sole proprietorship with respect to the sole proprietorship:

a, Right of leasing out a sole proprietorship

According to Article 191 of Law on Enterprise 2020, The sole proprietorship’s owner is entitled to lease out the entire sole proprietorship. Thus, being an asset of the sole proprietorship’s owner, the sole proprietorship’s shall be leased as other assets. During the lease term, the sole proprietorship’s owner still take legal responsibilities as the owner of an enterprise. The rights and obligations of the enterprise’s owner and the lessee related to the business operations are stipulated in the lease agreement. Therefore, even if the owner does not directly conduct business activities and lease his/her business to others, as the owner of the sole proprietorship, he/she still bears responsibilities for all the business activities when it is leased.

For example, Mr. Hùng is the owner of sole proprietorship H which is operated in ceramic tile. In 2015, Mr. Hung leased the sole proprietorship H to Mr. Q; however, due to operating losses and ineffective business activities, the sole proprietorship H is unable to pay its overdue debts. In 2019, the sole proprietorship H declared bankruptcy.

In this case, although Mr. Hung has leased the sole proprietorship H to Mr. Q, when the sole proprietorship H declares bankruptcy due to operating losses and ineffective business activities, Mr. Hung is still responsible for paying the secured debts, unsecured debts, employee wages, and other debts after the bankruptcy declaration.

b, Right to sell a sole proprietorship

The owner of a sole proprietorship has the right to sell the enterprise to another person. Unlike leasing, after selling the enterprise, the owner of the sole proprietorship still bears responsibility for any debts and other asset-related obligations incurred by the enterprise prior to the date of transfer, except where the buyer, seller, and creditors of the enterprise agree otherwise. Additionally, both the buyer and seller of the enterprise must comply with the labor laws and regulations.

c, Right of business suspension

According to Article 206 of Law on Enterprise 2020, an enterprise shall send a written notification to the business registration authority at least 03 working days before the suspension or resumption date. Compared to Law on Enterprise 2014, the notice period for temporary business suspension has been shortened. Instead of the previous 15-day notice, now it is only 3 days. This notification not only helps the competent authorities manage the business activities but also allows the enterprise to be eligible for tax exemptions during the period of temporary suspension.

CONCLUSION

It can be said that a sole proprietorship is essentially an individual engaged in business – the owner of the sole proprietorship, as referred to in the 2020 Enterprise Law. The sole proprietorship does not have legal entity status and is not a subject of law. From an economic perspective, when analyzing the origin of a sole proprietorship, the sole proprietorships are their owners. They are the ones who invest capital to start the business and operate as sole traders. They own the assets invested in the business, enjoy the full profits, and bear unlimited liability for any debts incurred during the business operation.