What is better to choose: registration as an Individual Entrepreneur or opening an LLC?

НДС при списании кредиторской задолженности: проблемные ситуации

One of the first questions that arise when starting your own business: what has more benefits and is more convenient - register as an individual entrepreneur (IE) or create an organization (usually a limited liability company)?

The choice of legal form depends on the development plans and the expected size of the business. If the scale is small (for example, opening one store), and further expansion is not planned, you can register as an individual entrepreneur. It is easier and has more benefits.

If the business plan offers a large-scale project with further development, a company registration will be required to manage it.
It is possible to combine these forms of activity, for example, the sale of one type of goods can be carried out on behalf of an individual entrepreneur, and another on behalf of an LLC. In order to avoid tax risks in this case, it is necessary to provide for separate accounting for these streams of activity.

Let’s consider the main differences IE from LLC to understand what is needed for your business.

Criterion	Individual entrepreneur (IE)	Limited liability company (LLC)
Number of participants	The IE status is assigned to a specific person. Therefore, if the business is joint and will be conducted by two or more people, this form is not suitable	The possible number of participants in an LLC is from 1 to 50 (clause 3 of article 7 of the Federal Law of 08.02.1998 No. 14-FZ)
Responsibility	IE is liable for obligations arising in connection with the conduct of entrepreneurial activity with all their property (clause 3 of article 23 and article 24 of the Civil Code of the Russian Federation). Removal of a person from the register as an individual entrepreneur does not relieve him of such obligations, therefore creditors may demand collection of the debt after the removal.	Only the legal entity itself is responsible for the obligations of the LLC, and not its participants (clause 1 of article 3 of the Federal Law of 08.02.1998 No. 14-FZ). After the liquidation of the company, the obligations cease (Article 419 of the Civil Code of the Russian Federation). However, if the participants in the company are guilty of bankruptcy, they may be entrusted with subsidiary liability for the obligations of the LLC (clause 3 of article 3 of the Federal Law of 08.02.1998 No. 14-FZ)
Restrictions by type of activity	An entrepreneur cannot engage in certain types of activities, for example: - production of alcohol, wholesale and retail trade in alcohol (except for beer and beer drinks) (clause 1 of article 11 of the Federal Law of 22.11.1995 No. 171-FZ); - insurance (clause 1 of article 6 of the Law of the Russian Federation of 27.11.1992 No. 4015-1); - activity of pawnshops (part 1 of article 2 of the federal law of 19.0.2007 No. 196-FZ); - tour operator activity (paragraph 14 of article 1 of the federal law of 24.11.1996 No. 132-FZ)	Organizations can engage in any type of activity subject to the conditions established by law.
What is required for state registration	It is easier to register an individual entrepreneur than an LLC. To register, you will need (clause 1 of article 22.1 of the Federal Law of 08.08.2001 No. 129-FZ): - Application for registration Form R21001; - a receipt for payment of the state fee in the amount of 800 rubles. (sub-clause 6 of clause 1 of article 333.33 of the Tax Code of the Russian Federation); - a document confirming the identity of the applicant. To register an individual entrepreneur, the charter and authorized capital are not required.	LLC registration is carried out on the basis of (Article 12 of the Federal Law dated 08.08.2001 No. 129-FZ): - application for registration form R11001; - a receipt for payment of the state fee in the amount of 4,000 rubles. (subparagraph 1 of paragraph 1 of article 333.33 of the Tax Code of the Russian Federation); - the decision of the general meeting or the sole founder to create a company. An LLC must have a charter and authorized capital of at least 10,000 rubles. (Article 12, Clause 1, Article 14 of the Federal Law of 08.02.1998 No. 14-FZ)
Place of registration	The individual entrepreneur is registered at the place of residence (clause 3 of article 8 of the Federal Law of 08.08.2001 No. 129-FZ), but is not tied to it. An entrepreneur can carry out his activities throughout the territory of Russia without additional registration in each region.	An LLC is registered at the location of a permanent executive body, and if it does not exist, then at the location of another body or person who has the right to act on behalf of the LLC by virtue of the law, other legal act or constituent document (clause 2, Article 8 of the Federal Law of 08.08.2001 No. 129-FZ). To carry out activities in other regions, you will have to register branches, representative offices or separate divisions.
Disposal of the received income	The individual entrepreneur is free to dispose of his personal funds, which he received as income from entrepreneurial activity. In particular, an individual entrepreneur has the right to spend money from the cash register for personal needs, not taking into account such expenses anywhere (clause 2 of the Bank of Russia Directive No. 3073-U dated 07.10.2013)	The funds are the property of the company and the founder cannot withdraw or spend them at any time. This can be done only by paying dividends to the LLC participants. They can be paid no more often than once a quarter (clause 1 of article 28 of the Federal Law of 08.02.1998 No. 14-FZ). Having received dividends, the members of the company are obliged to pay personal income tax from them in the amount of 13% for residents and 15% for non-residents of the Russian Federation (clauses 1, 3 of article 224 of the Tax Code of the Russian Federation).
Accounting	An entrepreneur is not obliged to keep accounting records (clause 1, part 2, article 6 of the Federal Law of 06.12.2011 No. 402-FZ). It is enough to maintain the Book of Records of Income and Expenses and Business Transactions of an individual entrepreneur. For entrepreneurs on the general taxation regime, the form of the book was approved by order of the Ministry of Finance of Russia dated 13.08.2002 No. 86N, for the USN and PSN - by order of the Ministry of Finance of Russia dated 22.10.2012 No. 135N.	LLC is obliged to keep accounting records and submit financial statements regardless of the taxation regime (part 1 of article 6 of the Federal Law dated 06.12.2011 No. 402-FZ). A qualified accountant is required to keep records.
Possibility of accounting for losses in the general tax regime	An entrepreneur cannot take into account losses for previous tax periods (clause 4 of article 227 of the Tax Code of the Russian Federation).	An organization can reduce taxable profit by losses incurred in previous tax periods (clause 1 of article 283 of the Tax Code of the Russian Federation).
The possibility of using special tax regimes	In addition to the unified agricultural tax, the simplified taxation system and the UTII, an entrepreneur can apply the patent taxation system (PSN).	LLC can only use the Unified Agricultural Taxation, the simplified taxation system and the UTII.
Payment of insurance premiums	In addition to insurance contributions paid from payments to their employees, an entrepreneur is obliged to pay a fixed payment for himself for compulsory pension insurance. If the individual entrepreneur's annual income exceeds 300 thousand rubles, he also needs to pay 1% of the income in excess of this amount. Also, an entrepreneur must pay a fixed compulsory medical insurance payment for himself (subparagraphs 1, 2, paragraph 1 of article 430 of the Tax Code of the Russian Federation).	They pay insurance premiums from payments to employees within the framework of labor relations and under civil law contracts in accordance with the established tariff (Article 420 of the Tax Code of the Russian Federation).
Reporting to the Pension Fund and Federal Insurance Service	If an individual entrepreneur does not have employees, he is exempt from reporting on personalized accounting and contributions (including contributions in a fixed amount that he pays for himself).	The LLC is obliged to report to the FSS in the form 4-FSS, approved. by order of the FSS of the Russian Federation dated September 26, 2019 No. 381. The PF provides reports SZV-M (approved by the Resolution of the Board of the PF RF dated 01.02.2016 No. 83p) and SZV-STAZH (approved by the Resolution of the Board of the PF RF dated 06.12.2018 No. 507p).
Working with cash	The entrepreneur is not obliged to observe cash discipline and monitor the cash limit p. 2, 4.1 of the Bank of Russia Directive No. 3210-U dated March 11, 2014	All legal entities, including LLCs, are obliged to observe cash discipline (keep a cash book, fill out incoming and outgoing cash orders), as well as monitor the cash limit (clause 2, clause 4.1. Clause 4, clause 4.6, clause 5 Bank of Russia Instructions dated March 11, 2014 No. 3210-U)
Termination of activity	An entrepreneur can stop activities quite simply by submitting one application to the registering authority and paying a state fee (Article 22.3 of the Federal Law of 08.08.2001 No. 129-FZ)	The liquidation of a legal entity is carried out according to a certain procedure that provides for the collection of many documents (Chapter VII of the Federal Law of 08.08.2001 No. 129-FZ).
Amount of fines	Fines imposed on entrepreneurs are often significantly lower than fines imposed on organizations for similar violations.	In some cases, the fines imposed on a legal entity are two or more times higher than the fines for entrepreneurs.

 Let us consider the tax burden on an entrepreneur and an LLC using an example.

For example, for comparison, let us take an entrepreneur who does not employ hired workers and an LLC with one participant, who is also its director (the only employee). They received the same annual income in the amount of 2 million rubles, the taxation system is also the same - the simplified tax system with the object "income", the tax rate is 6 percent (clause 1 of article 346.20 of the Tax Code of the Russian Federation).

The above calculations are relevant for 2019.

Criterion	IE	LLC
Income	2 000 000 rub	2 000 000 rub
Single tax on the simplified tax system	120 000 rub.	120 000 rub.
Insurance premiums	The entrepreneur pays insurance premiums in a fixed amount (Article 430 of the Tax Code of the Russian Federation). The entrepreneur can reduce the single tax for the entire amount of paid contributions under the simplified tax system, therefore, they will not affect the amount of income received (clause 3.1 of article 346.21 of the Tax Code of the Russian Federation). The amount of contributions to the PF fixed part - 29 354 rubles, compulsory medical insurance - 6 884 rubles, PF with excess - 17 000 rubles, in total 53 238 rubles.	Insurance premiums paid from the director's salary reduce the single tax, but not more than by 50 percent. Thus, if the amount of paid contributions did not exceed this limit, the actual profit did not change. (ab. 5 clause 3.1 of article 346.21 of the Tax Code of the Russian Federation)
Salary	An entrepreneur is not an employee. All the income received belongs to him.	The director of the LLC is its employee. Consequently, he must be paid a wage not lower than the minimum wage.
Personal income tax paid from salary	No	Personal income tax must be paid from the director's salary at the rate: - 13 percent for residents (clause 1 of article 224 of the Tax Code of the Russian Federation); - 30 percent for non-residents (clause 3 of article 224 of the Tax Code of the Russian Federation).
Personal income tax paid on dividends	No	Dividends are subject to personal income tax at the rate: - for residents - 13 percent (clause 1 of article 224 of the Tax Code of the Russian Federation); - for non-residents - 15 percent (paragraph 2, clause 3, article 224 of the Tax Code of the Russian Federation)
Earned income for the year minus taxes	1 880 000 rub.	The founder-director's income is divided into dividends and salaries. it is necessary to pay personal income tax from these amounts. Let's say the salary of a director (resident) is 50,000 rubles, then insurance premiums of 30% are 15,000 rubles. (reduce the tax of the simplified tax system, but not more than 60 thousand rubles.), personal income tax 6,500 rubles., on hand 43,500 rubles. Next, we distribute dividends, net profit after payment of wages and taxes 1830 thousand rubles, personal income tax upon payment of dividends 237 900 rubles. Total income received 1,635,600 rubles. (1,830 thousand rubles - 237.9 thousand rubles + 43.5 thousand rubles salary).