Not so long ago, Ukraine entered the top 10 countries in terms of ease of doing business considering legal requirements. The country ranked sixth. Do not overestimate this fact. After all, besides legal conditions, there are a lot of nuances that need to be taken into account. It is difficult to consider them all in one article. Now we will tell you what form of business is better to choose: LLC or individual entrepreneur.
There are two types of companies in Ukraine when it comes to small business: Ltd and individual entrepreneur. The choice depends on several factors, primarily, on the amount of income.
Novice entrepreneurs often make a mistake. They think that doing business as individual entrepreneur is easier and cheaper. It is not always so. Individual entrepreneur status will suit you in case your business income for the year does not exceed 1 million hryvnia and you do not want to use a cash register when accepting cash from customers. Company law in Ukraine assumes that FLP on a simplified tax system with an income of up to 1 million hryvnia per year is exempted from the use of cash registers.
The second group of the simplified taxation system (single tax) is allowed to those who are engaged in trade. If you provide services, then you can render them only to customers - individuals or other single tax payers. If the services are provided to legal entities, it is necessary to register company as individual entrepreneur and choose the third group of the simplified taxation system.
Individual entrepreneurs on the 2nd group can work until it reaches 1.5 million hryvnia revenues per year. They pay a flat single tax rate and a single social contribution. In 2018, this total amounts to about 1600 hryvnia per month, but this figure is growing. And you pay taxes, even if you do not have revenue.
Individual entrepreneurs on the 3rd group can work until they reach 5 million hryvnia per year. But you’ll have to use a cash register when accepting cash, if the amount of income for the year exceeds 1 million hryvnia. The tax rate for group 3 is 5% of income. There is another option - 3% single tax plus VAT. In determining the tax base, the amount of expenses of your business is not taken into account, that is, you pay 5% of the tax on all receipts excluding expenses, so this may be unprofitable.
In which case you need to create a legal entity (LLC)?
It needs to be created in case the amount of your income exceeds 5 million hryvnia per year. But sometimes, even with lower incomes, it makes sense to consider the registration of an LLC. There is one big advantage of LLC in comparison with individual entrepreneurs. If the documented expenditure item of your business is high (rent, employee wages, the cost of purchasing goods and others), then these amounts will reduce the tax base for income tax. An LLC on the general taxation system pays 18% of the income tax, but the tax is paid on an amount that is counted as income minus expenses. If the confirmed expenses are large, in practice the amount of income tax will be insignificant or even tend to zero.
Please note that LLC on the general taxation system may not be a VAT payer until it has reached 1 million hryvnia taxable VAT transactions per year. If your buyers are legal entities and they require a tax credit on VAT, then you can register as a VAT payer voluntarily.