Despite contributing around 30% of Vietnam’s GDP and creating 8.5 million jobs, the household business sector remains legally undefined and insufficiently supported. So how can it thrive under the Party’s policy that the private sector should be the main driver of the economy?

Dr. Le Duy Binh, Director of Economica Vietnam, shared with VietNamNet insights and policy recommendations to strengthen this critical yet under-recognized sector.

A vast yet vulnerable sector

The individual household business sector accounts for a significant share of Vietnam’s GDP but seems overlooked in policy. What are your views, especially as the Party has emphasized private sector-led growth?

Le Duy Binh: Household businesses contribute about 30% of Vietnam's GDP - the largest among all economic sectors. There are roughly 5 million household businesses in Vietnam, but only 1.7 million are registered and have tax codes. The remaining 3.3 million remain unregistered.

Surprisingly, the 1.7 million registered household businesses contribute only 1.6% to total state budget revenue. On average, each pays just VND 2.7 million (around USD 110) per year in taxes.

Yet they generate close to 8.5 million jobs - about 37% of all employment in the business sector - more than non-state enterprises (37%), FDI firms (22%), and far more than state-owned enterprises (4.3%).

That means for every 20 Vietnamese citizens, there’s one household business. This clearly shows how deeply embedded this model is in everyday economic life.

These figures highlight the rapid growth of household businesses, whose population density far exceeds formal enterprises. They play a vital role in job creation - arguably the nation’s most important social safety net.

What can you say about the size and resilience of this sector?

Roughly 80% of household businesses operate in commerce and services - particularly wholesale and retail trade, vehicle repair, and hospitality.

In contrast, household businesses account for only 0.2% to 0.3% in sectors like finance, insurance, science, technology, education, and training. These fields require highly skilled labor, significant capital, and professional management, which many household businesses cannot provide.

Why household businesses resist growth

There are policies - especially under the Law on Supporting Small and Medium Enterprises - designed to encourage household businesses to formalize. What has the transition looked like?

Although I don’t have precise figures, surveys indicate very few household businesses have transitioned into registered enterprises.

Between 2018 and 2020, despite support policies, only 1,875 businesses were established through such transitions.

In another study by Economica Vietnam and provincial statistical offices, just 0.8% of household businesses in Hoa Binh and Lao Cai, and 0.4% in Soc Trang expressed interest in becoming enterprises. In a 1,000-household survey in An Giang, not a single business intended to transition.

Why is there such hesitation?

Because current legal frameworks do not offer them benefits. Incentives are reserved only for registered enterprises.

Also, the formal registration process is too cumbersome - both in time and effort.

Household businesses fear the strict regulations they’d face as enterprises: procedures for asset transactions, leasing, and bankruptcy. These impose compliance costs they find unaffordable.

They now benefit from a simplified presumptive tax system and lenient requirements for accounting and reporting. Becoming a formal business would strip them of these advantages.

Under the Enterprise Law and related legislation, compliance costs become overwhelming once they register. One of our surveys found 60% of transitioned businesses struggled with complicated legal, administrative, and accounting obligations; 22% had to pay more taxes and could no longer negotiate rates; and 38% saw no benefit from formalization.

In short, existing laws discourage household businesses from transitioning into official enterprises.

Would they be more willing to transition if given tax exemptions or other incentives?

Interestingly, businesses that transition from household operations have twice the survival rate of regular startups. After five years, 97% of such businesses remain active - compared to only 52% across all newly registered companies.

This resilience and popularity among new entrepreneurs should be central in shaping future legal reforms.

If 500,000 out of the 1.7 million registered household businesses transitioned, Vietnam would have nearly 1.5 million private enterprises - meeting the target set in Resolution 10-NQ/TW (2017).

A legal gray zone

Many say household businesses operate “outside the law.” What do you think?

Currently, apart from Decree 01/2021/ND-CP on business registration, Vietnam has no legal definition or formal recognition of household businesses. So while registration is possible, their legal status remains unclear.

Furthermore, this decree states household businesses do not possess separate legal assets. Personal assets of the business owner and family members are indistinguishable from the business’s assets.

As a result, household business owners and family members have unlimited liability - similar to sole proprietors. If business assets can’t cover debts, personal property must be used.

Laws such as the Enterprise Law and related decrees do not clarify whether household businesses are legal persons or natural persons. This is the crux of the issue. Future legal reform must start by clearly defining the legal identity of household businesses.

Building a legal home for Vietnam’s biggest informal sector

What reforms are necessary to create a legal space for this sector, which contributes nearly one-third of GDP?

First, we need a clear legal framework recognizing household businesses. It must reflect both practical realities and international standards, laying a foundation for sustainable development.

Laws should encompass sole proprietors, individually owned enterprises, and other personal business models that are expanding rapidly in Vietnam.

A separate legal framework for sole proprietorships - distinct from corporate law - would resolve the identity issue. It would accommodate individual entrepreneurs and personally-owned enterprises growing in number and importance.

The most effective reform would be to restructure the current private enterprise model under the Enterprise Law into a “sole proprietorship” or “individual enterprise.” This would involve simplifying regulations, reducing compliance costs, and allowing registration at the commune level - especially relevant given ongoing district-level reforms.

Under such a system, business registration, company management, accounting, social insurance, tax reporting, and other obligations would be tailored to suit small, individual operations. Compliance and tax burdens would decrease significantly compared to today’s formal private enterprise model.

On one hand, this would facilitate household business growth by lowering legal barriers. On the other hand, there should be clear thresholds - such as business scale or sector - at which owners must consider transitioning to a formal legal entity like an LLC or joint-stock company.

Countries in the EU, OECD, and Southeast Asia (e.g., Singapore, Malaysia) rely heavily on sole proprietorships. In many cases, they represent over half - or even two-thirds - of all new business registrations.

Even China recently introduced a separate legal framework for sole proprietors. Vietnam must build a welcoming legal “home” to attract household businesses - rather than coercing them into unsuitable corporate structures, as failed past attempts have shown.

A clearly defined and effective legal status will unlock the full potential of household and individual business entities. These reforms are not only economically vital - they also carry major social significance. Only then can we realistically expect to add one million new businesses over the next five years.

Tu Giang & Lan Anh