LLC vs PRIVATE ENTREPRENEUR
Those who have made a decision to do business in Ukraine need to decide regarding the most beneficial way of running it. Very soon they find out that there are 2 ways of doing business in Ukraine, i.e.:
- as a company (usually as LLC); or
- as a private entrepreneur (PE).
Which one of them is better? The correct answer is none. If one of them was better than the other one, then everyone would do the best way, right? So, choosing between the 2 is all about your particular situation and your choice.
Now let’s find out when it is better to have an LLC, when a PE, and when, maybe, both.
PRIVATE ENTREPRENEUR OPTION
A private entrepreneur is a special legal status that allows a natural person (private individual) to do business without setting up a company in Ukraine. How to get registered as private entrepreneur is explained in detail here.
By being a PE you do NOT have expenses that you would bear having a company.
1) Legal address (aka nominated or official or registration). A PE can work from home so he/she does not need any special business address. In Kyiv, for instance, it will save you around USD 150 per year.
2) Office. Again, a PE can work from home and so a separate office is not necessary.
3) Director’s salary and social taxes. A company has to have a director. Even when you are the company’s sole owner and its director at the same time the company is obliged to pay you salary anyway. E.g., the minimum salary and social taxes the company has to pay monthly as of is UAH 3359.27 net which is what Foreigner must receive + UAH 918.06 social security tax + UAH 751.14 income tax + UAH 62.60 military duty. It does not matter whether your company receives income or not – it has to pay those monthly. So, being a PE relieves you from this financial burden that is very nice, isn’t it?
4) E-signature. It is not obligatory to have an e-signature but otherwise you will have to prepare your monthly tax returns and to report to the tax office in paper, either sending them by post or by submitting them in person. It is much easier to do this online but this costs around USD 50 per year. Not much but this is money anyway. Being a PE you do not need this.
5) Accounting support. Accounting of a company is more complex and difficult than the one of the PE. Less complex – less expensive. Thus, being a PE you also save on your accountant’s fee.
6) Cash withdrawing. A PE can simply cash his/her business account when they want and how much they want. Companies cannot do this at all so it is always a problem for a company to get some cash off its bank account. The problem can be solved though…
7) Operational simplicity. To keep a company alive some matters can be solved only by a decision of the sole shareholder or by a General Meeting of Shareholders, sometimes you need to amend the charter, etc. All such formalities cost money as there are notary fees, state registration fees, translation fees, apostillization / legalization costs, etc. involved. Plus, all of this takes time. Being a PE you simply do what you need and when you need it.
As you see there are many fairly important PROs to run your business as a PE rather than setting up a company. Why then people often register a company instead of becoming a PE? Let’s clear this out now!
Above we’ve learned when a PE is better than an LLC. Now we are going to learn when the company is better than the private entrepreneur:
a) Partnership. When your business needs partners / investors. In such cases you give them a share in your company. You cannot do this with a PE.
b) Management. When you do not have time to work full time on your business and need some hired manager (director) who represents the company and bears legal responsibility for his/her actions.
c) Liability. LLC is a company with limited liability. This means that its shareholders are not liable for the company’s obligations. For example, when your company gets bankrupt now one will go after your personal house, car or bank account. A PE is not protected this way.
d) Limitations. There are some businesses that cannot be done by PEs yet most of businesses can be carried out by Pes without any problem.
e) Residence. Having a company and being its director or taking any other post in it allows a foreigner to obtain Ukrainian residence for up to 3 years. Unfortunately, the PE status does not provide for such a bonus.
f) Customs and taxation exemptions. If you have some equipment, cars, machinery abroad and want to bring them to Ukraine to use in business, then putting them into your company will help to save a lot of VAT and customs clearance duties.
BOTH OPTIONS SIMULTANEOUSLY
It is a common practice when a business uses both a company and a private entrepreneur at the same time.
There are 2 reasons for this:
1) Tax minimization. The LLC is used as a core as it provides more security and look more serious at your business partners’ eyes. But a private entrepreneur allows them to enjoy all those benefits we outlined above. So, the private entrepreneur in this scheme does most of work.
2) When the LLC needs to withdraw cash, it transfers it to the PE and he/she withdraws it. As you remember from above the LLC is very limited in withdrawing cash.
Here we should stress that the new Ukrainian President and Government are working now on eliminating this legal loophole and very soon this scheme will probably stop existing.
People often think that companies pay higher taxes than private entrepreneurs. This is not always true.
In very general terms you can learn that there 2 taxation systems in Ukraine you can choose from:
- General taxation system. It is when a you pay 18% profit tax. It is paid out of profit. No profit – No tax.
- Simplified (aka Single) tax. It is when a company pays 5% single tax. It is paid out of the cash flow. It does not matter if you got profit or not – you received money on your bank account so please pay 5% out of it.
If to be more precise, taxes depend on profit, a number of employees and the business you do. We will explain the taxes in our next article dedicated to this topic.
Contact Legal Ideas law firm to get advice on your personal case.