GV Lawyers would like to present an article by Mr. Tran Thanh Tung, entitled: “Forced into being an entrepreneur” published in Saigon Times on December 18, 2014 , Issue No. 51.2014 (1.253).
***
Rejector of the role as an entrepreneur
I have a friend who owns a karaoke household business with more or less 10 employees. An inter-sectoral inspectorate has just checked his establishment. After detecting no violation thereby, the inspectorate fined him VND500,000 for hiring more than 10 employees without internal labor regulations. Also, because of the said reason, they forced him to convert from household business to 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. Do they do so because I create jobs for employees? Why do they insist on my conversion into the company while now I’m paying presumptive taxes without enduring any complication due to the matter of accounts. What are the benefits from becoming a company? Why do they continue forcing me to convert my household business into a company?”. I know the whole staff are really none other than his relatives as children, nephews and nieces. He does not hire outsiders because of difficult management. Seeing him in such a pressing mood, I joked to relieve him of any annoyance. Now, the time has come for everyone to convert their household business into an enterprise and take pride in getting an entrepreneur, except for him, the only man insisting on his little household business. Hanging up, I perceive his pressing emotion as logic.
So being a company is really good?
Evidently, the company is a great invention by the humankind to make and accumulate money. It is admitted that the company brings many benefits.
First, the company protects the owner through the two key advantages: limited liability and legal status. The corporate member shall take limited responsibility to the extent of his capital he has made contribution or undertaken to contribute to the company. That is, once you have paid enough capital to the company per your commitment, no one is entitled to touch your personal property – metaphorically likened as 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, the partner could only sue the company in case of any litigation, and the owner will get rid of such lawsuit.
Next is the company’s perpetualty, the company is independent from its owner, so if such owner passes away, the company still exists and will be handed down to the next generation. This explains why in Japan, some companies have more than 1000 years of age through many generations in the family.
One equally important advantage is the company transferability. Once no longer wanting to do business, the owner can dispose of his capital to others and withdraw from the company. If still wanting to keep the company, he can dispose of such corporate assets as factories, land, brands, machinery and even distribution system or customer list. . .
The company’s last advantage is tax shield – i.e. the company only has to pay income tax on the remaining monetary portion after taking the revenue and substracting the costs. If the revenue is less than the costs (i.e. the company loses), the company will not have to pay income tax.
However, like the two sides of the same coin, the company also encounters many disadvantages (as roughly compared with household businesses). The company organization is complicated and the cost of maintaining the operation of corporate institutions is high (leadership welfare, staff salary, cost of maintaining the departments and other countless payables). As usual, companies often have to comply with multiple regulations and such compliance costs them an immodest amount. Tax and accounting are headaches as well, at least compared with the presumptive tax applied to household businesses. In case of many members in a company, such members must share the corporate management right and it is not easy to reach any agreement among them. In other words, there will always exist the possibility of any conflict of interest among the corporate members.
An unclear regulation of the Law on Enterprises 2005
Article 170 of the Law on Enterprises 2005 sets out a compulsory regulation that any household business regularly employing over 10 employees MUST register a corporate establishment. Despite such compulsion, such law neither imposed any penalty when a household business is involuntary in changing to the enterprise model, nor provided for any mandatory time limit for converting a household business into an enterprise.
More importantly, the law has no guidance on the procedures for converting a household business into an enterprise. In a phone conversation with my friend, when I mention about the contents of the said Article 170, my friend immediately retorted: “Do I must apply for re-issuance of all current licenses upon conversion into an enterprise? So I am exempted from all licensing fees by the state authorities?”. From a business perspective, I must admit his pressing reaction is right. Currently, in order to run such a karaoke household business, he shall beg for dozens of different licenses or go through various procedures such as certificate of household 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. . . In case of conversion into an enterprise, my friend shall apply for all related licenses (As he said, it is quite a headache and this costs him a bunch of money!).
This provision really neither rewards nor harms any subject. Perhaps due to such indecision, few entrepreneurs know it hails from 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 how to implement it going forward.
In making this provision, lawmakers seem to forget one thing that not everyone wants to have and is entitled to the right to establish an enterprise. 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 defense, public security personnel, leaders , professional managers of the state enterprises… to manage any enterprise. However, the said persons have the right to open stores as household businesses to increase their income. Forcing the household businesses to be converted into enterprises (while they are among those banned on enterprise establishment) is like ordering their closure and blocking them from earning their lives.
What do you learn from past failures?
Psychologically idealizing the enterprise model not just is embodied in the Law on Enterprises but also in the Law on Real Property Business 2006[1] that contains similar provisions through its requirements that upon conducting their real property business, organizations, individuals shall establish enterprises or cooperatives, have legal capital and register real estate business as prescribed by law.
Several state agencies base this provision on explaining that house lease lies within the real property business regardless of its large or small scale. Thereby, they eagerly force households to establish a real estate company for the purpose of leasing houses because only doing so can be in accordance with the law (!). However, due to the opposition, this view is untenable and the real property business has been revised as the Law on Real Property Business 2014[2], accordingly, organizations, households and individuals, that sell, transfer, lease, purchase-lease the real property on an irregular, small scale, shall not establish an enterprise.
The Law on Real Property Business 2006 has ever been a failure in imposing the enterprise model on the real estate business. A little farther back, history also showed that the cooperative model was not perfect upon mass application.
Company – Instrument for entrepreneurs
As an ultimate analysis, the company is an instrument codified for entrepreneurs to use. Under this view, the company is of equal standing with any household business, cooperative, private enterprise or other business instrument. There’s good and bad in every instrument. The lawmakers’ mission is to set out those instruments for entrepreneurs to select, and selecting which instrument depends on the entrepreneurs based on their preference or needs rather than the lawmakers’ desire. Forcing household businesses using more than 10 employees to convert into enterprises restricts the entrepreneur’s right to select business instrument. Such forcing is hard to succeed.
In our opinion, it needs an issuance of the clear guidelines on the implementation of provisions on the said conversion. In addition, such implementation also requires a certain flexibility rather than sheer compulsion. At the same time, from now until the effective day of the Law on Real Property Business 2014 LDN is still a considerable duration 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
