Converting household businesses into enterprises

SGI

The Draft Law submitted on 16 October at the 38th meeting of the Standing Committee of the National Assembly, which amended and supplemented several articles in the Investment Law and Enterprise Law, caused many members at the meeting to voice their opinions on the present status of running household businesses in Vietnam.

It is not necessary for business households to become enterprises, but to professionalize this type of business. Photo: LONG THANH

It is not necessary for business households to become enterprises, but to professionalize this type of business. Photo: LONG THANH

Household businesses don’t necessarily become enterprises

The draft framework supplements a chapter on running household businesses in Vietnam, defining its contents and basic principles clearly with several notable points. Firstly, household businesses are continually being termed as another form of business, similar to businesses like private enterprises, partnership companies, limited companies and joint stock companies. In addition, they offer a diversity of businesses whereby the investors can freely select appropriate models to grow their business. As per new administrative procedures, all household businesses must either be converted into enterprise models or be totally scrapped.

Secondly, the legal status and civil responsibilities of household businesses are clearly defined in accordance with Civil Law in Vietnam, by which a household business can be registered under the name of an individual or a family member. However, some shortcomings in current regulations on household businesses have been deleted, as for instance, the restriction that household businesses must have less than ten employees and that they cannot open any branch or representative office.

Verifying this issue, the Economic Committee of the National Assembly stated that household businesses were an integral part of the economic system of the country. Therefore, their legal status and legalization of their rights and obligations should be stipulated with the aim of creating an advantageous environment for development of all household businesses. Simultaneously, the Committee affirmed that administrative competence in household businesses must be developed with full rights and obligations that would ensure equality of functioning as other enterprises.

The verification agency proposed to study and supplement more specific regulations on household businesses, such as the concept, type and established business; registration obligations for the business; deputing a head householder or family member; rights and obligations concerning tax, labor, social insurance, and environment; regulations on suspension, termination of operations and revocation of registration certificates of all household businesses; regulations on governance; and accounting methods in simple administrative procedures to encourage household businesses to further develop and create favorable conditions for their business, besides creating fairness, equality and transparency in their dealings.

In order to encourage household businesses to convert into enterprises and effectively manage tax and insurance procedures, the Economic Committee proposed to review and supplement all the strict regulations pertaining to household businesses. The Committee also added that regulations would be regularly reviewed in accordance with the Law on supporting small and medium-sized enterprises to help transform household businesses into enterprises.

Nguyen Hanh Phuc, General Secretary of the National Assembly, questioned why so many household businesses did not want to convert into enterprises, and affirmed that before legalizing the regulations on household businesses, this question should be satisfactorily answered. Mr. Phuc stressed that it is impossible for household businesses to switch to becoming enterprises as tax policies are tedious and complicated, whereas their business operations are quite simple as they rarely even hire a qualified accountant. Moreover, he added that in such a new situation, household businesses would face great difficulties when they are strictly supervised and inspected under the current law. As far as Mr. Phuc was concerned, there must be a careful interaction to assess if household businesses would be considered as enterprises when they are regulated under the official law.

Nguyen Duc Hai, Chairman of the Finance and Budget Committee of the National Assembly, suggested incorporating household businesses into current law. Vietnam's quintessential economic culture needs a clear mechanism to develop any business. This is not because household businesses with implementation of poll tax were included in the current laws to tighten tax management. Nguyen Thi Kim Ngan, Chairwoman of the National Assembly, assumed that supplementing regulations on household businesses in the draft law was an important issue but there was no full interactive assessment. Therefore, only if the issue is clearly understood, should it be added in the current law at this time. If this cannot be done well, only undue restrictions need to be considered and revised to support the development of household businesses.

Removing barriers for household businesses

Talking on this issue, Truong Thanh Duc, Lawyer and Chairman of the Consultancy Board of BASICO Law Company, said that enterprises with a turnover of only ten or several hundred million dong/year must submit accounting records and invoices. For wholesale and retail businesses, revenues of household businesses can be in hundreds of billion dong, and profits can go into tens of billion dong. With current poll tax and accounting system, such households are able to "paint whatever they want". If a business household only has an individual, its responsibility is similar to that of a private enterprise. But if a business household is a couple or the whole family, it must have unlimited responsibilities for all assets of all members. This means the risk is too high in business, meaning that it can totally lose all assets, instead of a part of their assets, similar to assets of one person in a private enterprise.

Considering their nature, household businesses are actually enterprises. The problem is finding a solution that encourages household businesses to apply good management standards to gradually “promote” to enterprises.
-Mr. Vũ Tiến Lộc, VCCI Chairman
According to Mr. Duc, up until now, about 1.6 million household businesses have registered to do business, while about 3.4 million household businesses are operating without business registration. The group with legal registration certificates require to transform into enterprises. Thus, whether or not a business household decides to transform into an enterprise is not important. Apparently, admitting that a business household is registered for business means that it is recognized to reach a certain size as an official enterprise. This also indicates that 1.6 million households with legal registration are considered as a form of business.

“No matter how different household businesses and enterprises are, there must be a minimum requirement, a foundation standard or basic ground for them to operate. However, it is impossible to enforce household businesses to transform into enterprises like micro businesses that must exist and survive in hard situations, and let such micro businesses easily operate as households. If standards of household businesses cannot be upgraded, standards of micro businesses must be lowered”, Mr. Duc stressed

According to Mr. Vu Tien Loc, Chairman of Vietnam Chamber of Commerce and Industry (VCCI), nearly five million household businesses, accounting for nearly 30% of the country’s GDP, are excluded from the Enterprise Law. However, considering their nature, household businesses are actually enterprises. The problem is finding a solution that encourages household businesses to apply good management standards to gradually “promote” to enterprises.

Accordingly, removing barriers on taxes and accounting records, so that millions of household businesses are strong enough to have high motivation and participate in the private business community, could be a solution to be implemented in the amended Enterprise Law. This will minimize operating conditions for small enterprises and micro businesses, create a premise to amend Tax Laws and the Accounting Law in coming times, and also create mechanisms to encourage household businesses to transform into enterprises.

Translated by Thúy Hằng

Quang Minh

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