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“Forced” into becoming an entrepreneur

Atty. Tran Thanh Tung –  Phuoc & Partners Law Company

 Rejecting the role of an entrepreneur

 I have a friend who owns a home karaoke business with approximately 10 employees. An inter-sectorial inspectorate had just finished reviewing his establishment. After detecting no violations, the inspectorate still fined him VND500,000 for hiring more than 10 employees without internal labour regulations. They then stated that for the same reason, he must convert his home business into a company. Thus, early in the morning, he called me sounding very urgent:

“They punish me while I must do everything to make enough money to pay salaries to my employees. Why do they create problems when I create jobs? Why do they insist on me becoming a company whilst I currently pay presumptive taxes but would now have to endure a more complicated accounts structure? What are the benefits of becoming a company? Why do they force me to convert my home business into a company?”

Furthermore, I came to understand that all his staff was none other than his relatives –children, nephews, and nieces. He does not hire outside his family because of the increased difficulties in management. Appreciating his annoyance, I tried to lighten the conversation with a joke. Now the time has come for everyone to convert their home business into an enterprise and take pride in becoming an entrepreneur; except for you, the only man insisting on keeping his little home business. Hanging up, I contemplated his situation and begun to perceiving a certain logic in his emotional outpouring.

So is becoming a company really that good?

 Evidently, the company is a great human invention for the making and accumulating of money and becoming a company brings many benefits.

First, becoming a company protects the owner through two key advantages: limited liability and legal status. A corporate member shall take limited responsibility to the extent of the capital he/she has contributed or undertaken to contribute to the company. That is, once enough capital has been paid to the company per your commitment, no one is entitled to touch your personal property – metaphorically likened to the “rice pot” of your wife and children. And the company is an independent entity, having its own legal personality, creating a legal cover to shield the owner. When doing business with the company, should a case of litigation arise, a partner can only sue the company and the owner cannot be directly liable.

Next is the company’s perpetually; the company is independent of its owner, so if they pass away, the company will still exist and be handed down to the next generation. This explains why in Japan, some companies are more than 1000 years of old having passed through many generations of the one family.

One equally important advantage is the company transferability. Once an owner no longer wishes to continue with the business, they can dispose their capital to others and withdraw from the company. If they still want to keep the company, he/she can dispose of corporate assets including factories, land, brands, machinery and even distribution systems or customer lists.

Another advantage is the company can operate as a tax shield i.e. the company only has to pay income tax on the remaining monies after taking revenue and subtracting the costs. If revenue is less than the costs (i.e. the company loses), the company will not have to pay income tax.

However, there are two sides to a coin and that also applies to companies and their disadvantages (roughly comparable to home businesses). Company organization is complicated and the cost of maintaining the operation of corporate institutions is high (leadership welfare, staff salary, the cost of maintaining the departments and other countless payables). As usual, companies often have to comply with multiple regulations and such compliance costs are not immodest. Company tax and accounting obligations are headaches as well, at least compared with the presumptive tax applied to home businesses. For companies with many members, such members must share the corporate management and it is often not easy to reach any agreement among them. In other words, there will always be the possibility of a conflict of interest among the corporate members.

An unclear regulation in the Law on Enterprises 2005

 Article 170 of the Law on Enterprises 2005 contains a compulsory regulation that any home business regularly employing over 10 employees MUST register as a corporate establishment. Despite this, the law neither imposes any penalty for non-compliance, nor any mandatory time limit for converting a home business into an enterprise. More importantly, the law provides no guidance on the procedures for converting a home business into an enterprise.  In a phone conversation with my friend, when I began discussing Article 170, he immediately retorted: “must I apply for re-issuance of all current licenses upon conversion into an enterprise? So will I be exempted from all licensing fees by the state authorities?”. From a business perspective, I must admit his reaction is valid. Currently, in order to run a such a karaoke home business, the owner needed to apply for dozens of different licenses and work through various other procedures such as a certificate of home business registration, certificate of fire protection eligibility, license for social security eligibility, commitment on environmental protection, certification of food safety, criminal prevention and combat commitment, commitment on countering social evils, and so on. In case of a conversion into an enterprise, my friend shall apply for all such related licenses (as he said, it is quite a headache and this will cost him a not inconsiderable amount of money!). This provision really neither rewards nor harms any subject. Perhaps due to such indecision, few entrepreneurs know it to be a part of the Law on Enterprises 2005. However, the bad news is that this provision is retained in the Enterprise Act 2014, although we are not sure about its implementation going forward.

In making this provision, lawmakers seem to have forgotten that not everyone wants to establish an enterprise, regardless of whether they may have an expansive right to do so. Article 13 of the Law on Enterprises 2005 does not allow public officials, civil servants and state employees, officers, non-commissioned officers, professional soldiers, workers, employees of defence, public security personnel, leaders, professional managers of the state enterprises, and others, to manage enterprises. However, said persons have the right to open stores as home businesses to increase their income. Forcing home businesses to be converted into enterprises (while they are among those banned from enterprise establishment) is like ordering their closure and blocking them from earning a living.

 What can we learn from past failures?

 Idealising the enterprise model is not just embodied in the Law on Enterprises but also the Law on Real Property Business 2006 which contains similar provisions; it requires that to conduct a real property business, organizations and individuals shall establish enterprises or cooperatives, have legal capital and register a real estate business as prescribed by law.[1]

Several state agencies use this provision to infer that a house lease lies within the real property business regardless of its scale. This thereby forces homes to establish a real estate company for the purpose of leasing houses because this is the only way it can be accomplished in accordance with the law (!). However, due to mounting opposition, this view was untenable and the real property business has been revised as per the Law on Real Property Business 2014; accordingly, organizations, homes and individuals that sell, transfer, lease or purchase-lease the real property on an irregular or small-scale basis shall not be required to establish an enterprise.[2]

The Law on Real Property Business 2006 failed at imposing the enterprise model on the real estate industry. A little farther back, history also showed that the cooperative model was not perfect upon mass application.

 The Company – An instrument for entrepreneurs

The company is ultimately a codified legal instrument for entrepreneurs to use. In this view, the company is of equal standing with any home business, cooperative, private enterprise or other business instruments. And as demonstrated above, there are advantages and disadvantages with every instrument. The lawmakers’ mission is to set out these instruments clearly for entrepreneurs to make a selection on their preference or needs, rather than the lawmakers’ desire. Forcing home businesses using more than 10 employees to convert into enterprises restricts the entrepreneur’s right to select their business instrument and such impositions are not often divers of success. In our opinion, there needs to be an issuance of clear guidelines on the implementation of provisions for such a conversion. In addition, its implementation also requires a certain degree of flexibility. Finally, from now until the effective day of the Law on Real Property Business 2014 LDN, there is still quite some time for lawmakers to consider and assess the relevance and practicality of this provision.

[1] Article 8 of the Law on Real Property Business 2006

[2] Article 10 the Law on Real Property Business 2014