Tuan (name changed), the owner of a sole proprietorship in Dong Nai, asked DEDICA:
"I have run a sole proprietorship distributing construction materials for eight years. As orders grow larger, my payables to suppliers keep rising too, and I worry that if anything goes wrong, my house and my family's personal assets could be dragged in. A friend now wants to contribute capital to expand the business with me, but I have heard that a sole proprietorship cannot take on additional capital contributors. Can I convert to a limited liability company, what is the procedure, and once I convert, will my current debts be cleared?"
DEDICA ADVISES You can certainly convert, and it is a sensible step as your business grows. The Law on Enterprises allows a sole proprietorship to convert into a limited liability company. After the conversion, your liability for new debts is limited to the capital you have contributed, and you can admit your friend as a capital-contributing member. But one point must be said plainly: converting does not erase debts that arose beforehand. For your current payables, you remain liable with all of your assets. Below are the legal basis and the specific steps.
The legal basis and practical benefits of converting a sole proprietorship into an LLC
What worries you is no small matter; it is precisely a legal feature of the sole proprietorship form. Unlike a company, a sole proprietorship draws no line between the assets of the business and the personal assets of its owner.
What does this mean for you? As orders and payables grow, the line between business risk and family assets all but disappears. If the business cannot pay its debts, creditors may seek to reach your personal assets as well, exactly the concern about your house that you raised. On top of that, because a sole proprietorship is owned by a single individual, there is no room for your friend to contribute capital and become a co-owner. To have someone contribute capital alongside you, you need a company form.
A limited liability company solves both. The point that matters most to you is the limited-liability mechanism: a member is liable only to the extent of the capital they have contributed to the company.
The law expressly allows the owner of a sole proprietorship to decide to convert into a limited liability company, provided the statutory conditions are met (Article 205, Law on Enterprises 2020). In your case there are two routes. If your friend contributes capital, you set up a multiple-member limited liability company, with each member liable to the extent of their own contribution. If you prefer to remain the sole owner, you set up a single-member limited liability company, in which the owner is liable to the extent of the company's charter capital (Article 74, Law on Enterprises 2020). Either way, from the moment of conversion, your family's personal assets are separated from business risks that arise afterward.
The conversion steps and a key caveat on existing debts
The procedure is not complicated, but a few conditions must be settled before you file. The sequence usually follows four steps.
- Decide to convert and choose the company type: a single-member limited liability company if you remain the sole owner, or a multiple-member limited liability company if you admit your friend as a capital contributor.
- Prepare the documents the law requires: a written commitment to be personally liable with all of your assets for unpaid debts; written agreements with the counterparties to contracts not yet liquidated for the new company to take over and continue performing them; and a commitment or agreement on receiving and using the existing employees (these conditions are set out in Article 205, Law on Enterprises 2020).
- Meet the conditions for issuance of the Enterprise Registration Certificate: the business lines are not prohibited, the company name is valid, the application is valid, and the registration fee is paid in full (Article 27, Law on Enterprises 2020).
- File the application with the business registration authority where the head office is located. Under Decree 168/2025/NĐ-CP on enterprise registration (effective 01/7/2025), this authority sits within the provincial Department of Finance.
Within three working days of receiving a valid application, the enterprise is issued the Enterprise Registration Certificate, and the new company automatically inherits the rights and obligations of the sole proprietorship. Now to the point you care about most: does converting "wipe clean" your current debts? The answer is no.
Conclusion
In short, you can convert your sole proprietorship into a limited liability company, and it is a step worth taking as your scale grows: your liability for obligations arising afterward is limited to your contributed capital, and you can admit your friend as a co-owner through a multiple-member LLC. What to do: (1) choose between a single-member and a multiple-member company; (2) prepare the written commitments and agreements on unpaid debts, ongoing contracts, and labor; (3) meet the conditions for the certificate and file with the business registration authority. As for your current payables, you should have a clear repayment plan, because that portion remains your personal responsibility.
A growing business without its own legal department tends to run into exactly these issues: choosing the company type, drafting commitments, preparing the application, and then the contracts, labor matters, and registration changes that keep coming up. With retainer legal services, DEDICA can handle the entire conversion for you and stay alongside you to resolve day-to-day legal matters thereafter, at a far more reasonable cost than building an in-house legal team. Contact DEDICA for legal advice on the approach that fits your business.
The content above is for reference only; each business has its own lines of business, capital structure, and debts, so please consult a DEDICA lawyer for advice tailored to your specific situation.
