Is it permissible to merge a sole proprietorship (a private enterprise) into other types of enterprises? If not, what needs to be done to enable such a merger? Follow the article below to find out necessary matters regarding the merger of sole proprietorships.
I. Legal regulations on merger of sole proprietorships
1. What is a merger of sole proprietorships?
Pursuant to Clause 1, Article 201 of the Law on Enterprise 2020, legal regulations on a merger of enterprises are as follows: One or more enterprises (hereinafter referred to as the merged enterprise) may merge into another enterprise (hereinafter referred to as the merging enterprise) by transferring all assets, rights, obligations, and lawful interests to the merging enterprise, thereby terminating the existence of the merged enterprise(s).
Accordingly, it is understandable, the merger of sole proprietorships means transferring all assets, rights, obligations, and lawful interests of the merged sole proprietorship(s) to another enterprise (the merging enterprise), simultaneously terminating the existence of the merged sole proprietorship(s).
2. Conditions for merging sole proprietorships
Sole proprietorships do not have legal entity status and do not possess separate assets, making it impossible to transfer rights, obligations, and assets to another enterprise as defined by Clause 1, Article 201 of the Law on Enterprise 2020. Therefore, to merge a sole proprietorship, it is first necessary to convert it into another type of enterprise that meets the conditions for a merger.
Mergers are prohibited in cases where the merging company holds more than 50% of the market share in the relevant market, except in circumstances specified by the Law on Competition, such as: One or more of the enterprises involved in the merger are at risk of dissolution or bankruptcy; The merger contributes to export expansion or socio-economic development; and The merger promotes technological or scientific advancement. Accordingly, in the above cases (where the merging enterprise would hold between 30% and 50% of the market share in the relevant market), the legal representative of the enterprise must notify the competition authority before proceeding with the merger.
Therefore, besides compliance with regulations on the merger of the Law on Enterprise, enterprises also must ensure the provisions of the Law on Competition; and the merged enterprise will cease to exist after the merger.
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3. Procedures for merging sole proprietorships
Pursuant to Clause 2, Article 201 of the Law on Enterprise 2020, the merger process includes the following steps:
Step 1: The involved enterprises prepare the merger Agreement and draft the Company charter for the merging enterprise.
Step 2: Members, owners, or shareholders of such enterprises approve the merger Agreement and the Charter of the merging company, and proceed with the enterprise registration for the merging company as prescribed by regulations.
Step 3: Completing the enterprise registration for the merging company in accordance with the Law.
4. Cases where the merger of sole proprietorships are prohibited
The following cases prohibit the merger of sole proprietorships:
* Proprietorships have any of the following violations:
- Lack of the enterprise registration certificate.
- Suspension of operations by a decision of the competent state authority.
- Currently in the process of dissolution.
- Currently undergoing bankruptcy proceedings.
- Possession of assets, rights, obligations, or lawful interests that do not meet the transfer conditions as prescribed by law.
* Sole proprietorships participating in the merger for the purposes of:
- Market manipulation.
- Unfair competition.
- Harm to the interests of the State, organizations, or individuals.
* Merger of sole proprietorships that results in:
- Affecting national security or defense.
- Disrupting public order.
- Causing environmental damage.
II. Answers to some questions about merging sole proprietorships
1. Which authority handles the merger of sole proprietorships?
The authority responsible for handling the merger of sole proprietorships depends on several factors, including:
- Single-member limited liability company (LLC), multi-member limited liability company, and joint-stock company: The merging enterprise must complete the merger registration procedures with the Department of Planning and Investment at the provincial level where the merging company’s headquarters is located.
- State-owned enterprises: The Prime Minister shall make the decision regarding the merger.
2. Fees for merging sole proprietorships
The fees for merging enterprises (applicable to LLCs, joint-stock companies, and partnerships) are as follows:
- Enterprise registration fee: 50,000 VND per application (as specified in Circular No. 47/2019/TT-BTC dated August 5, 2019, issued by the Minister of Finance, which regulates the collection rates and regimes, submission, management, and use of enterprise information and registration fees).
- Fee for publishing enterprise registration information: 100,000 VND per publication (as specified in Circular No. 47/2019/TT-BTC dated August 5, 2019, issued by the Minister of Finance, which regulates the collection rates and regimes, submission, management, and use of enterprise information and registration fees).
- Fee exemption for online registration (according to Circular No. 47/2019/TT-BTC dated August 5, 2019, issued by the Minister of Finance, which regulates the collection rates and regimes, submission, management, and use of enterprise information and registration fees).
3. Is it permissible to merge sole proprietorships into other types of enterprises?
In theory, a sole proprietorship is not allowed to merge directly into other types of enterprises.
Reasons:
- A sole proprietorship does not have legal entity status, meaning its owner is personally liable for all the enterprise’s activities with their entire personal assets.
- Other types of enterprises, such as joint-stock companies or multi-member limited liability companies, have legal entity status, meaning the company itself is liable for all its obligations using the company’s assets.
However, there are two methods to merge a sole proprietorship into other types of enterprises:
Converting such a sole proprietorship into a type of company:
- The owner of the sole proprietorship has to implement the procedures for converting the sole proprietorship into a type of company in accordance with the Law on Enterprise.
- After the successful conversion, the new company can proceed with merging into other enterprises as per legal regulations.
Asset consolidation:
- The sole proprietorship and the merging company enter into the asset consolidation agreement.
- The sole proprietorship transfers all its assets, rights, obligations, and lawful interests to the merging company.
- The sole proprietorship ceases its operations.
The above information covers the topic of proprietorship mergers. For further assistance and detailed legal regulations on merging proprietorships, you may contact NPLaw for consultation from our team of experienced lawyers and legal professionals.
