companies and in other cases including both in analysis of the informal sector. There is an argument to be made that many household enterprises no longer qualify as informal enterprises since they have been recognized and registered under the 1999 Enterprise Law. Furthermore, many household enterprises differ only from private companies in that authorities in their locality have not made efforts to bring them into the formal economy. Nevertheless, to ensure maximum clarity, this report chooses to keep household enterprises separate. Chief among reasons for doing so is the very different treatment informal enterprises receive from authorities and their inability to engage in certain business activities such as direct exporting. Collectives are also not included, despite sharing many similar operating features with private companies.

# **Box 2.1 The Four Forms of Formal Domestic Private Companies**

**_<mark>Sole Proprietorship.</mark>_** <mark>A sole proprietorship has only one single owner who has unlimited liability for both business and non-business debts. Full liability matters less for such firms as they are small and rarely access bank financing, relying instead on savings and informal borrowing.  Sole proprietorships also enjoy a special exemption from taxation during times of inactivity—a benefit of particular value for small firms in industries with seasonal fluctuations.</mark>

**_Limited Liability Company (with one or more owners)._** Limited liability companies come in two <mark>forms. The first form has only one owner, which must an organization, not an individual.  The second, and more common, form is legally required to have two or more individuals as its owner. Owners’ liability is limited to the owners’ capital contributions. Financing can be obtained from family or banks (like sole proprietorship) but also by increasing capital through existing and new owners.</mark>

**_Shareholding Company._** Shareholding companies have two or more owners. They have the same <mark>limited liability as Limited Liability companies but differ from the latter in a number of respects. First, they are unaffected by death or bankruptcy or withdrawal of the shareholder. Second, management is carried out by a Board of Management and Meeting of Shareholders. Apart from family, banks and owners, financing can also be obtained by issuing bonds or shares.</mark>

**_Partnership._** This new form of private enterprise was introduced for the first time in the 1999 <mark>Enterprise Law. It offers an alternative to sole proprietorship in case there is more than one owner. Partners are unlimited and jointly liable for all obligations of the partnership. Liability of capital contributors is limited to the amount of capital contributed. Financing can be obtained through family and bank loans, capital mobilization through owners and issuing of bonds.  This form has so far not proven very popular among entrepreneurs.</mark>

_Source:_ CIEM (2001) 12. At present, Vietnam’s domestic private sector is mainly composed of small and medium sized enterprises (SMEs). The average domestic private company employs 25 workers. The Vietnamese government defines SMEs as enterprises with a maximum capital of VND 5 billion and less than 200 employees (Document 681/CP-KTN).<sup>11</sup> About 98 percent of domestic private companies in Vietnam fall into this category. While SMEs do indeed make up the greater part of the domestic private sector grouping that is the focus of this report, the report should not be seen to be speaking about issues

> 11 Classification criteria regarding small and medium enterprises vary form country to country. Some criteria are based on number of employees, some are based on capital size and others use both employees and capital.

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