Limited incentives hinder household businesses in Viet Nam from registering

HA NOI (ILO News) - Despite their vital role in Viet Nam’s economy, household businesses are classified as informal. They encounter numerous operational challenges due to the ambiguity of their legal status, a new report from the International Labour Organization (ILO) has found.

Household businesses, along with business individuals and other types of individual business entities, currently contribute approximately 30 per cent of Viet Nam’s annual GDP, according to the ILO report “Defining legal status for household businesses in Viet Nam.”

In 2021, the household business sector employed 8.49 million women and men.

Viet Nam had around five million household businesses by the end of 2021. Of these, only 1.7 million were registered and meeting tax obligations, contributing about 1.6 per cent to the State budget, while the remaining 3.3 million were unregistered.

The current legal system lacks any framework that defines household businesses or their legal status.

Household businesses lack interest to transition into private enterprises

In a 2023 online survey conducted as part of this research of enterprises that converted from a household business, the majority opted to register as single-member limited liability companies during their conversion. These businesses represented 60.5 percent of the 100 household businesses and enterprises surveyed in major cities such as Hanoi, Ho Chi Minh City, Hai Phong, and Can Tho.

The primary reason for this choice is that the single-member limited liability company model is easy to manage, fits their business scale, and meets their operational needs.

When asked why they did not register as private enterprises, 36.7 percent of respondents indicated that they did not understand the nature and regulations governing private enterprises.

This is one of several factors constraining household businesses from formalizing.

In fact, some household businesses that wish to expand have transitioned to private enterprises. Fifty percent of respondents indicated that they sought to establish a legal status to conduct transactions and grow to a higher level and larger scale.

They suggested that policymakers need to provide clear and easily understandable regulations to encourage the conversion of household businesses into formal enterprises.

Out of 4,185 household businesses that converted into enterprises between 2018 and 2022, 77 per cent opted to become single-member limited liability companies, while only 2 per cent chose to register as private enterprises, according to the report, based on analysis of data from the Ministry of Planning and Investment.

Drawbacks of remaining in the household business sector

In the above survey, the primary challenge faced by household businesses was the difficulty in mobilizing capital from other investors, as cited by 71.4 per cent of the respondents.

They are also ineligible for loans as household businesses lack legal status, which creates challenges in transactions and hinders the formal registration of a different business location.

In terms of operational scope, household businesses have limited opportunities to access large and international markets and thus to expand operations.

Most of the surveyed household businesses had capital of 500 million Vietnamese dong (US$20,000) or less (66.7 percent) and were in their first or second year of operation (44.4 percent). All employed fewer than ten people.

A separate regulatory framework needs to be established

The author team of the ILO report recommended that Viet Nam create a separate regulatory framework for sole proprietorships to facilitate the conversion and formalization of household businesses.

The report proposes two options: either amending the Enterprise Law to establish a separate legal framework for sole proprietorships and individual businesses or enacting a specific law on sole proprietorships in the near future.

“Amending the Enterprise Law is the best option given the current context in Viet Nam," the author team stressed.