Ukrainian legislation provides various organizational and legal forms for entrepreneurs. The most common ones are LLC (ТОВ) and Sole Proprietorship (ФОП), as they best meet business needs. For a company to operate effectively, it is crucial to choose the optimal taxation system that ensures convenience and financial benefits.
What to choose: a Sole Proprietorship (FOP) or an LLC (TOV)?
This is a question faced by almost every new entrepreneur. One that requires understanding financial goals, analyzing the current situation, and assessing the prospects of a new business structure. You will learn about the pros and cons of each option below.
So, let’s compare the advantages and disadvantages of each structure based on their business purpose:
Choosing a Sole Proprietorship (FOP)
Sole Proprietorships offer the advantages of legalizing activities, the ability to work with clients via cashless payments, and quick access to cash for future expenses.
- You work independently or have no more than 10 employees. Exception: The 3rd group allows an unlimited number of employees.
- Your annual income does not exceed:
- 6,672,000 UAH – for the 2nd group of the simplified tax system.
- 9,336,000 UAH – for the 3rd group of the simplified tax system or the general taxation system.
- If your client requires VAT, this is not a problem, as a Sole Proprietorship (ФОП) under the 3rd group can register as a VAT payer.
- If your business is just starting to grow and you don’t want to complicate things, ФОП is the simplest way to legally operate and keep records.
Advantages of Sole Proprietorship (FOP):
Free use of funds – Funds can be withdrawn from the account for personal expenses without reporting, except under the general taxation system, where expenses must be documented to reduce taxable income.
Simplified bookkeeping – A Sole Proprietorship (ФОП) under the simplified tax system is not required to maintain complex accounting, only keeping a record of income (ledger, bank statements).
Simplified taxation system – The ability to choose the unified tax, which significantly simplifies tax administration.
Possibility to be a VAT payer – A Sole Proprietorship (ФОП) under the 3rd group can voluntarily register as a VAT payer.
- VAT registration is possible immediately upon opening a Sole Proprietorship (ФОП) or after reaching a turnover of 1 million UAH, if operating under the general taxation system.
- After registering as a VAT payer, the unified tax + VAT is paid according to established rates.
Disadvantages of Sole Proprietorship (ФОП):
1. Limitations on Business Activities, Income, and Number of Employees
- Restrictions on types of activities – Certain industries (e.g., financial services, insurance, pawnshop activities) cannot operate as a Sole Proprietorship (ФОП).
- Income limits:
- 2nd group of the Unified Tax System – up to 6,672,000 UAH/year, maximum 10 employees.
- 3rd group of the Unified Tax System – up to 9,336,000 UAH/year, no employee limit.
- Exceeding the income limit – Mandatory transition to a higher tax group or the general taxation system.
2.Working with Legal Entities on the General Tax System
- Restrictions for Sole Proprietorship (ФОП) under the 2nd group:
- Allowed to sell goods to legal entities on the general taxation system,
- But cannot provide services to them – can only work with other unified tax payers.
- Difficulty tracking contractors: Entrepreneurs must constantly verify the taxation system of their clients and suppliers.
3.Tax Burden is Independent of Profit
Sole Proprietors (ФОП) under the 1st and 2nd groups pay a fixed tax regardless of income level. This means that even if there is no profit, the entrepreneur must still pay the unified tax, military tax, and USC (Unified Social Contribution).
For the 3rd group, tax is calculated based on revenue (Unified Tax 5% or 3% + VAT, military tax 1%), but no tax is paid if there is no income.
4.Personal Liability for Debts
A Sole Proprietor (ФОП) is fully responsible for debts with all personal assets, including an apartment, car, and bank accounts.
In the event of bankruptcy or legal claims, financial penalties can be imposed on the entrepreneur’s personal property.
