Comparative characteristics of individual entrepreneur taxation systems

Who can open an IP

The basic principles of the organization and work of an entrepreneur are set out by the legislator in the Federal Law “On State Registration of Legal Entities and Individual Entrepreneurs,” which came into force more than 17 years ago. There are no age restrictions; this step can be taken by a competent adult citizen of the Russian Federation. If such an initiative comes from a teenager (at least 16 years old), then it is supported by the consent of his parents, or if there is a marriage certificate.

There is also a list of citizens for whom entrepreneurship is prohibited: these are “sovereign people”, military personnel, foreign nationals, without temporary or permanent registration in the territory of the Russian Federation.

A specific limitation is the possible refusal of registration to those persons who, having a sentence entered into force for committing a crime from a certain list, intend to engage in work and services listed in paragraph “k” of Article 22.1. Federal Law No. 129 dated 08.08.2001.

A special feature is the incompatibility of the work of a lawyer and entrepreneurship. It is not directly specified in any law, but in accordance with the laws of legal ethics, such a combination is impossible.

In addition to the entity having the right to engage in business, there are restrictions regarding its types:

1. Alcohol products are sold legally only by an entity that has a special license to do so.
2. The provision of tourism services is exclusively the responsibility of legal entities; this is based on the mandatory requirement to insure possible risks associated with these services.
3. The sale of weapons is also not a personal business for individual entrepreneurs. This dangerous type of activity is subject to strict licensing and requires passing a multi-stage verification system.
4. The organization of credit institutions under the management of individual entrepreneurs is also impossible.

A single list of those who do not have the right to become an individual entrepreneur or engage in certain types of activities cannot be found in one legislative act. Before submitting certificates and an application for registration as an individual entrepreneur, thoroughly study the features of an individual entrepreneur.

Advantages and disadvantages of individual entrepreneurs

The main advantageous aspects in opening an individual entrepreneur today are considered to be:

• ease of registration (without legal support and with a minimum package of documents);
• reporting is minimal;
• the cost of registration is low (in 2020 the state duty costs 800 rubles);
• maintaining a cash register according to a simplified scheme;
• there is no property tax (for enterprise property);
• simplified accounting (how to keep a ledger yourself);
• tax accrual under the patent system;
• there are few tax audits;
• minimum number of taxes and low rates;
• fines for any violations are small;
• the manager makes decisions regarding the activities of the enterprise himself;
• The procedure for liquidating a company is simple.

Disadvantages of IP:

• attracting investments for the development of the enterprise is excluded;
• debt liability remains after the closure of the enterprise;
• The pension fund needs to pay contributions even in the absence of profit;
• the general taxation system provides for the need to pay income tax without taking into account losses for past years;
• the management of the enterprise is carried out only by the individual entrepreneur himself or his notarized representative;
• It is prohibited to promote a brand without registering it;
• distrust of large companies, difficulties in cooperation;
• existing restrictions on activities;
• IP cannot be sold or re-registered;
• the risk of losing personal property in bankruptcy.

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Advantages of IP

The advantages of individual entrepreneurs are diverse and numerous, their presence explains the popularity of this form of doing business:

1. Simplicity and speed of the registration procedure. A minimum package of documents and paid state duty is what is required to start work. The presence of a separate area is also not required, which will please stay-at-home businessmen. Registration in the Russian Federation is sufficient. By the way, you can conduct business in any corner of our vast country, but the opening of an individual entrepreneur takes place at the place of residence.
2. The material side of registration also matters for each person. The cost will be 800 rubles for state duty. There is no requirement to form an authorized capital. The size of the starting one depends only on the field of activity and the capabilities of the person.
3. The requirements for maintaining accounting and tax records are incommensurate with those imposed on legal entities. Figuratively speaking, maintaining a “Book of Income and Expenses” cannot be called accounting, it is some kind of similarity. As for taxation, most businessmen choose UTII or simplified tax system. And the patent system of work finally eliminates the headaches associated with reporting. A businessman whose work is on the appropriate list can switch to it. For many people, this point is decisive in choosing an organizational form of work. Every adult citizen of our country knows about the speed and how many times a year tax legislation changes.
4. All profits go to the individual entrepreneur. There is no need to report on its size and method of formation. He can transfer them to another bank account or withdraw them from an ATM at any time. This is explained by the fact that the individual entrepreneur is an individual, and the account is his personal property.
5. There is no need to maintain an online cash register for individual entrepreneurs without employees (the deadline for their mandatory presence has been postponed until July 1, 2020). For employers, it is now necessary to keep in mind the cost of purchasing and maintaining this device. At the end of the year, individual entrepreneurs are entitled to a tax deduction of 18,000 rubles.
6. In case of violation of legal requirements, the penalties imposed on individual entrepreneurs are significantly lower than on legal entities and their managers. We'll talk about this in more detail below. Individual entrepreneurs have more reasons to count on tax benefits than legal entities.
7. The liquidation process is a simplified procedure in the form of submitting an appropriate application to the registration authority and paying a state fee of 160 rubles. Provided there are no claims from the fiscal authorities.

There are enough advantages for individual entrepreneurs that every year thousands of people express a desire to join their ranks and try to work for themselves.

Is it worth opening an individual entrepreneur in 2018?

To understand whether it is worth opening an individual entrepreneur in 2020, let's look at the main changes that will occur with this organizational form.

Firstly, starting from 2020, contributions to extra-budgetary funds are taken under its management by the Federal Tax Service, therefore, the methodology and method of paying contributions to extra-budgetary funds is subject to fundamental changes.

Moreover, there is information that even the scheme for calculating contributions will change, which implies some increase. Good news for those who planned to conduct their activities as an individual entrepreneur with the UTII tax regime. The validity of UTII has been extended until 2021. The declaration for this tax system has changed for 2020.

What are the pros and cons of individual entrepreneurs and LLCs relative to each other, you will learn from this video.

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Flaws

Like any medal, this one, called IP, also has negative sides. The most global of them are based on the same thing as the advantages, on the recognition of individual entrepreneurs by individuals. From this follow the conditions of responsibility that entrepreneurs bear in the event of violation of norms or bankruptcy. But this will be discussed in more detail in the next paragraph.

Another “minus” can be considered the prevailing opinion about the unreliability of private traders, which is why an individual entrepreneur has a lower chance of concluding a global and profitable contract than a legal entity.

The disadvantages of individual entrepreneurs are also manifested in the reluctance of credit institutions to provide borrowed funds on the same favorable terms as for organizations. This is explained by the fact that, as a guarantee of fulfillment of obligations, a businessman can only provide his personal property, with which he is free to do as he sees fit. It cannot provide any fixed assets in the form of authorized capital, real estate and equipment. Only as private property.

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Advantages and disadvantages of the civil legal status of an individual entrepreneur

Restrictions also arise if you want to participate in procurement. In very, very rare cases, IPs are allowed to approach them. The number of documents proving the solvency and reliability of a businessman is small, unlike legal entities.

An entrepreneur cannot sell his brainchild, his business, to another person; he will have to stop his activities and then resume them, subject to registration again. Equipment, goods and components can be sold, but the right to continue the business cannot.

We have already mentioned the difficulties and prohibitions on certain types of work and services. So, if a person planned to turn his passion for weapons or love for increasing money by issuing at interest, he is unlikely to succeed in his life’s work. You will have to register a legal entity.

The relationship with the Pension Fund for a private entrepreneur is also not easy: regardless of whether he works or not, how profitable he is, he must pay contributions regularly and without delay.

Businessmen are reluctant to be considered as suppliers to legal entities, since they work (for the most part) without VAT, and this is unprofitable in terms of refunding this tax.

If we analyze the negative aspects of individual entrepreneurs, it is clear that most of them are based on the impossibility of confirming good intentions and business reputation. The opinion of individual entrepreneurs as something frivolous has not gone away.

Options for registering a joint business

There are several possibilities for organizing a joint business. Each direction has its own strong and weak features and design features.

Individual entrepreneur for one of the partners

Subject to the trust of both parties, an individual entrepreneur can be opened for only one partner. This informal partnership has certain advantages:

• registration of individual entrepreneurs is very quick and simple: this form of business requires a minimum package of documents;
• registering as an individual entrepreneur is beneficial in terms of taxes: for example, you do not need to pay property taxes;
• simplified accounting: individual entrepreneurs are not required to open a bank account;
• the second partner can get an official job;
• two people invest in one business, that is, each of them incurs fewer expenses;
• no authorized capital required;
• this option is attractive if one of the partners is a civil servant who is prohibited from doing business at the legislative level;
• ease of liquidation: if you need to close an individual entrepreneur, it is much easier compared to other forms of doing business.

The main disadvantages of such informal partnerships based on trust include:

• the risk that the person who registered the individual entrepreneur will decide to appropriate all the profits for himself - this is his official right, therefore, at the legislative level, the injured partner will not be able to do anything;
• the other side of the coin, possible if the business fails. In this case, financial responsibility falls on the party that registered the IP. In this situation, not only the money invested in the business and purchased materials and equipment, but also the personal property and finances of the entrepreneur may suffer. An unscrupulous partner may not participate in covering losses, losing only the amount previously invested;
• Another unpleasant but possible situation is the death of the partner who registered the individual entrepreneur. In this case, the business passes to his heirs, among whom the trustee partner may not be.

With such trusting cooperation, a partner who is officially out of work can insure himself. This is done by drawing up a loan agreement. Thus, it will be documented that the unofficial partner invested his funds. It is better to draw up a loan agreement for large investments. Smaller financial transactions can be documented with receipts. Be sure to keep all these documents, which must be in writing - in the event of a broken trust relationship, they will help you get your money back.

Opening an individual entrepreneur involves choosing a tax system among:

• UTII;
• simplified tax system;
• general taxation;
• patent activity;
• unified agricultural tax.

When registering an individual entrepreneur for one of the partners, it is important to think through and assess all possible risks. It may be worth taking a different route, but protecting yourself legally.

Read more about how to open an individual entrepreneur yourself - here.

Two individual entrepreneurs and a partnership agreement

There is an option when both partners can create an individual entrepreneur. In this case, each of them must register separately, and then they must take advantage of the partnership agreement together. In another way, such a document is called a joint activity agreement. This option is considered by the civil code (described in detail in Article 1041).

To conclude such an agreement, both parties must be registered as an individual entrepreneur or commercial organization. There are many advantages to such cooperation:

• registration is quite simple and takes little time;
• it is possible to materially evaluate the contribution of each participant - such an assessment is made by agreement of the parties;
• when determining the amount of the contribution, you can take into account not only property, but also business reputation, professional knowledge and skills;
• both partners participate fully in the business;
• if joint activities need to be terminated, then both participants remain independent units and can continue their business separately;
• division of profits in proportion to invested funds;
• protection from risks: in the event of bankruptcy, both parties will have to answer, that is, none of the partners will be able to evade responsibility.

This partnership also has some disadvantages:

• each partner needs to keep separate records, not only for individual activities, but also for joint ones;
• the need to maintain accounting and tax records in two areas of activity;
• there are some nuances in accounting that are incomprehensible to beginners, as are some tax issues;
• the need to report on the activities of the partnership;
• expenses increase in comparison with the costs of running one individual entrepreneur: when opening two individual entrepreneurs, double taxation arises.

It is important to know some of the nuances of drawing up a simple partnership agreement:

• such a partnership is not considered a legal entity;
• from the previous paragraph it follows that the partnership is not a taxpayer. Paying taxes is the obligation of each partner; settlements are carried out in proportion to their shares or provide for a different procedure in the contract or other agreement;
• the contract must indicate the type of joint activity, since this is precisely the purpose of concluding such a partnership;
• a simple partnership cannot be created by payers of UTII, as well as the simplified tax system with the object “income” in terms of taxation;
• operations for joint activities are carried out by one of the participants.

A partnership agreement between two individual entrepreneurs is the only legal option for conducting a joint business without creating a legal entity, but it is important to understand some of the intricacies of taxation and accounting.

OOO

One of the best options for a joint business is an LLC. The advantages of such a partnership are obvious:

• more available activities, for example, alcohol sales;
• specifics of constituent documents: the share of each participant must be indicated in the authorized capital;
• the liability of each founder is limited to his share in the authorized capital;
• profits are distributed among participants;
• legal security.

Choosing an LLC has its drawbacks. The main disadvantage is the opening costs. Registration of an individual entrepreneur requires less funds.

Keeping records for an LLC is much more complicated than for an individual entrepreneur. In addition, opening an LLC will require more documentation, which means you will have to spend more time. Read more about what is better and more profitable to open - an individual entrepreneur or an LLC - here.

It is impossible to open an individual entrepreneur for two people by law, but there are options for getting out of this situation. It is important to evaluate all aspects of each partnership option and choose the best path for yourself. It’s worth taking into account the risks in any case - even the strongest friendship or family can collapse, so you always need to think about your safety in financial and legal terms.

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Difference from LLC

Since most legal entities operate in the form of limited liability companies, we will compare individual entrepreneurs with them and their capabilities and disadvantages.
Other legal forms in the form of closed or open joint stock companies are less common and characterize enterprises that are large in terms of the number of employees. We hope that after analyzing our article and this point, it will be easier to decide between an individual entrepreneur and an LLC when organizing a business. In addition to responsibility for the results of the work, which will be discussed in

In the next paragraph of the article, it is necessary to pay attention to a number of other differences:

1. If it is necessary to involve partners in joint work, this is only possible if the legal entity is functioning. Partners are included in the list of founders with a corresponding contribution to the authorized capital. An individual entrepreneur is only the private business of one person, as can be seen from the name.
2. Attention from credit institutions and banks related to the function assigned to them to control the circulation of funds under Federal Law No. 115. Since the bulk of cash is withdrawn from the accounts of individual entrepreneurs, most of the control on the part of the bank falls to their share.
3. The management of finances in the current account shows the difference between the two types of business. Freedom to manage money is present only for individual entrepreneurs; LLCs withdraw money from the current account only in the form of dividends (13%), having previously paid the taxes due. There are many schemes, legal and not, designed to help LLC founders get money from a bank account.
4. The attitude of counterparties at the stage of concluding contracts. In addition to the still widespread opinion that individual entrepreneurs are not serious, banking control over the movement of financial funds is important. Considering the unlimited possibilities of individual entrepreneurs to withdraw cash or transfer it to other details, transactions with them are assessed from the angle of “illegal cash withdrawal.” And the impossibility of VAT reimbursement negatively affects the likelihood of signing a profitable contract.
5. Interaction with tax authorities and accounting. Let's start with the fact that there is no difference between the tax regimes for individual entrepreneurs and LLCs, with the exception of the right of an individual entrepreneur to work on a patent. An LLC is required to keep full accounting records; an individual entrepreneur does not have such an obligation. Here the advantages of an individual entrepreneur are undeniable. Everyone keeps tax records.

An individual entrepreneur has both advantages and disadvantages, and many subtleties arising from a specific type of activity, so it would be a prudent thing to seek advice on registering a business from a company specializing in such a service.

Restrictions and withdrawal of funds

The winner in this category is the limited liability company. There are certain restrictions for individual entrepreneurs, that is, this organizational and legal form does not have the opportunity to engage in certain activities.

The most common option is the production and trade of alcoholic beverages, insurance services, banking, pawnshops, travel agencies and investment funds. There are no such restrictions for LLCs. Entrepreneurs have the opportunity to do whatever business they want.

Both individual entrepreneurs and LLCs are created solely for the purpose of making money. However, not every system allows you to freely dispose of earned capital. If for individual businessmen there is no problem with withdrawing funds, then legal entities sometimes have difficulties.

An individual entrepreneur has no restrictions, that is, he has the opportunity to take money from the cash register or withdraw it from his work account and spend it on his needs. However, the maximum amount of funds is not determined by Russian legislation. The only rule that a businessman must follow is to avoid arrears in pension and insurance contributions, which can lead to blocking of the account.

In the case of a limited liability company, things are somewhat different. Even in cases where an LLC has only one founder, he still does not have the right to freely dispose of the money that was earned by the company. In this case, withdrawal of funds is possible in only two ways, namely in the form of wages or as dividend payments, but this is possible no more than once every 4 months. It should be taken into account that a tax of 13% is withheld from wages and dividends.

Advantages and disadvantages of LLC

The advantages of Limited Liability Companies include:

• a high degree of protection for the founders (each of them is solely responsible for their debt obligations, this is prescribed by the authorized capital of the enterprise);
• the ability to attract investments and additional founders, including foreign ones;
• the right to regulate the degree of influence on the management of the individual entrepreneur by increasing/decreasing the share of the founders of the LLC;
• the right to create the necessary governing bodies for any organization;
• no restrictions on the authorized capital;
• the ability to invest assets, both tangible and intangible, into the authorized capital;
• each of the founders can, by voluntarily leaving the founders, receive their income for up to four months after that;
• the ability to appoint a person not from the founders as the head of the LLC;
• the income of the enterprise can be distributed regardless of the size of the founders’ shares;
• in case of loss, taxes are not paid;
• the ability to cover losses from previous years with real profits;
• in the constituent documents of the enterprise, it is possible to prescribe a ban on the sale of the founder’s share to third parties who are not founders;
• investment attractiveness due to the opportunity to become one of the founders;
• availability of the right to re-register and sell.

The LLC is liable only to the extent of the property owned by the company. The personal property of the founders is not subject to execution.

Disadvantages of LLC

• the maximum number of founders should not exceed 50 people;
• in case of changes in the composition of the founders, it is necessary to update the documentation;
• the registration procedure is complex, and the package of required documents is larger (what documents are needed);
• high cost of registration (state duty will be 4,000 rubles);
• the need to contribute authorized capital upon registration (minimum 10,000 rubles);
• additional costs for searching for a legal address;
• compliance with cash discipline;
• complex reporting system;
• mandatory accounting (regardless of the type of taxation);
• quarterly payment of dividends;
• payment of property tax;
• complex process of cash settlements when one of the founders leaves;
• the need to record decisions of any business actions;
• penalties are more severe;
• complex liquidation procedure (read more about LLC liquidation here).