jan 31

FOP or TOV, that is the question

Individual entrepreneur or LLC form IT?

IT, Taxes, Ltd., Ukraine, Private individual

Probably every entrepreneur in Ukraine faced the problem of choosing the legal form for their future company. Indeed, it is very important to pay maximum attention before registering, because an incorrect choice may entail huge taxes, fines and just the employer’s unwillingness to pay the entire list of state fees.

Let’s talk about choosing: Individual entrepreneur or LLC?

It would probably be the best to start with advantages and disadvantages of each form in order to sort it all out. Let’s get started.For a correct assessment of each form, it is important to ask yourself the question: What is the purpose of my company? What do I want to get, how much to receive to the account and how much I am willing to pay to the government?

The first goal and our choice of Individual entrepreneur

Legalization of activities, the ability to work through bank transfer with clients, quick cash out of money for further expenses.

The best option under the following conditions in 2021:

if you work independently or you have no more than 10 employees;
turnover up to UAH 5 400 000 – choose the second group of the single tax
turnover of more than UAH 7 200 000 per year – choose the third group of the single tax, or the general taxation system.
settlements with counterparties, partners, employees are carried out for cash;
if your client needs VAT– it’s not a problem;
if your business is just gaining momentum and your goal is to avoid complications in your life.

Some specifics about the advantage of Individual entrepreneur:

Money for expenses is simply withdrawn from the account and it is not necessary to report on them, unless of course it is in the interests of your accounting department (and this is necessary if you are a Individual entrepreneur on the general taxation system);
Simplified accounting;
Simplified tax system = single tax;
If you need VAT – the ability to be a VAT payer on your own. It is possible to register the VAT payer during the registration of Individual entrepreneur, or according to the turnover achieved, you open VAT, you pay single tax+ VAT.

Disadvantages of Individual entrepreneur:

Restrictions on activities, income and the number of employees;
Negative nuances of dealing with legal entities on the general system (single tax payers from the 2nd group have the right to sell goods to legal entities on the general system, but provide services only to single tax payers, hence the complexity of tracking not only the tax system, but also the payer group provokes the company to look for contractors under the “general” status) Individual entrepreneur
The amount of tax for payers of the 1st and 2nd groups does not depend on the performance.

Risks when working through Individual entrepreneur

Degree of responsibility. A self-employed person is liable to the law and for his debts with all his property.

Second goal and our choice of LLC

Legalization of income, official employment, complete accounting and making the image of a serious company. To be brief, LLC is your choice, if you left the “childish business” zone and want to go to the larger business area to larger player, to conduct a “white” activity, work with foreign companies.

Some specifics about the advantage of LLC:

Responsibility to creditors and the state – only within the framework of the authorized capital of the company, and today it is not limited by the state, that is, it may be even UAH 10;
Increase of company turnovers;
The ability to fight for a big “fish”;
Confirmation of the seriousness of the company and business in the market;

Shortcomings LLC:

The difficulty with the transfer of money on the account in the real cash. The biggest problem in working through LLC is the withdrawal of money for expenses. No, of course there are legal ways, but business owners do not want to complicate their lives;
For the withdrawal of money in cash, you still need to register Individual entrepreneur. And here double taxation arises. Who benefits?
System accounting and reporting;
Additional business expenses;
Increased requirements for registration and maintenance of personnel documentation;
And do not forget, as soon as the number of your official employees reaches 8 people – you need to employ 1 person with a disability. For failure to comply with this quota a penalty is charged for each workplace not occupied by a person with a disability.

Now let’s summarize all the important points

If it’s just for documents and you are on a business start, then you should choose a single-tax Individual entrepreneur. If your buyer needs VAT, it is a Individual entrepreneur on a single tax + VAT. But remember that Individual entrepreneur has a limit on revenue!

The second option is LLC. Due to lack of the size of the authorized capital, the LLC really looks more solid for the customer, and the responsibility is only in the size of the authorized capital. But there are a lot of pitfalls as well…

As a result, there is no universal solution, but there are qualified specialists who will help you understand everything.

If you still have questions on the choice of LLC, Individual entrepreneur or you need a consultation – just send us a request by click the button below.

Good luck;)

* A complete list of criteria for selecting a group on a single tax can be viewed in the TCU (Tax Code of Ukraine);