In the modern world, there are many forms of economic activity organization, each with its characteristics, advantages, and disadvantages. Self-employment, individual entrepreneurship and legal entities represent three approaches to business organization. Understanding the main characteristics of these forms of business organization allows you to choose the best way to organize a business and assess financial opportunities and obligations. This article will examine the main differences between the self-employed, individual entrepreneurs and legal entities. We will also compare them according to some characteristics that will help you choose the optimal form of economic activity.
Why is it Important to Understand the Differences in the Forms of Business Organization
Understanding the differences between the status of a self-employed person, an individual entrepreneur and a legal entity is important for effective business management, compliance with laws and optimization of tax obligations. Here are some reasons why it is important to understand the differences between the forms of business organization:
1. Legal Framework
Each of these statuses is regulated by different legislation. For example, self-employed citizens have the right to a simplified tax regime but cannot conduct certain activities. Individual entrepreneurs (sole traders) can engage in a broader range of businesses but must submit tax reports.
Legal entities, in turn, have several responsibilities, such as accounting, reporting and paying taxes.
2. Taxes and Deductions
Each status has its taxation features. The self-employed pay a tax on professional income or a single tax, sole trader pay taxes depending on the taxation system (simplified system, general system, etc.), and legal entities pay all generally established taxes. Understanding these differences allows you to choose a more favourable tax regime.
3. Responsibility
The responsibilities for different statuses also vary. The self-employed and sole traders are fully responsible for their property. In contrast, legal entities are usually responsible for their obligations with property that belongs to them, not the owners’ personal property.
4. Opportunities for Growth
Legal entities are more attractive for attracting investments and loans since they can issue shares and attract investments by allocating a share of ownership to an investor. At the same time, the self-employed and sole traders have restrictions in this regard.
5. Social Guarantees
Different statuses can affect access to social guarantees such as pensions and health insurance. Compared to employees, individual entrepreneurs and the self-employed exercise their rights to pensions and other social guarantees differently.
6. Interaction with Business Partners
For some companies, the presence of a legal entity is a mandatory requirement for doing business. In addition, business partners may consider the company a more reliable partner than an entrepreneur or self-employed individual.
Understanding these differences helps an entrepreneur choose the most appropriate status for his business, which, in turn, can affect the success of the business COMPANY, its growth and sustainability.
What is Common Between All These Forms of Business Organization
Despite the significant differences between such forms of business organization, such as the self-employed, individual trader, and a legal entity, they also have common features. Here are some of them:
1. The Purpose of Business
All three forms of business organization are designed to carry out entrepreneurial activities and make a profit. They can engage in various activities, from providing services to trade and manufacturing.
2. Registration
Self-employed individuals, sole traders, and legal entities must register with government agencies. It guarantees the legality of their activities and compliance with the law.
3. Payment of Taxes
All business forms are subject to taxation and must meet certain tax obligations. The established rules and procedures may vary, but all businesses are responsible for paying taxes.
4. Customer Base
All three forms can have clients and counterparties on whom their financial results depend. Regardless of its form, business is based on interaction with the external environment, including customers, suppliers and partners.
5. Restrictions and Rights
All forms of business have rights and restrictions established by law. For example, they must comply with consumer protection requirements, labour rights, and other regulations.
6. Market and Competition
All three forms exist in the same market and can compete. Competition can exist between the self-employed, sole traders, and legal entities.
7. The Possibility of Expansion and Growth
All forms can develop and change the structure or type of activity (for example, a self-employed person can register as an individual entrepreneur, and an individual entrepreneur can transform into a legal entity).
These common features help to understand that, despite differences in legal status and tax obligations, all business forms have much in common at their core.
Next, let’s look at how the forms of business organization differ.
Features of the Types of Activities
Officially, there is no such thing as “self-employed.” Self-employed individuals are not employees or individual traders.
Self-Employed and Individual Entrepreneurs
The types of activities allowed for self-employed and individual entrepreneurs are set out in separate lists. For the same kind of activity, an individual cannot be self-employed and an individual entrepreneur, but this is possible when a person conducts activities from different lists.
The Company
Legal entities can conduct any activity in the National Classifier “Types of economic activity“.
Licenses are required to conduct certain types of activities. Licenses are usually issued only to companies. The self-employed cannot obtain licenses.
Features of the Business Location
The location of the business entity is indicated in the state registration of the business, in contracts, and correspondence. For companies, the concept of “legal address” is often used.
Self-Employed and Individual Entrepreneurs
The location of the self-employed person is the place where he lives (registered at the place of residence). The location of the individual entrepreneur is also determined. These business entities can rent premises to provide services and perform work. The addresses of such premises are not indicated during state registration.
Legal Entity
The company’s location cannot be the owner’s home (except for a private unitary enterprise). For state registration, the company must find non-residential premises and agree with the owner on a future lease (receive a letter of guarantee for inclusion in the company’s location charter) or purchase such premises. The company’s management (the management board or the head) must be located at the company’s legal address. It is usually a company office.
The company (and other business entities) may rent other premises to conduct business in the future. These premises will not be the company’s location.
Features of State Registration
Before starting any business, register it and inform the state about its creation. Only in this case can we talk about a legal business. The main thing that confirms a business’s registration at any level is the presence of a payer’s registration number, which can be checked in publicly available sources.
The Unified State Register of Legal Entities and Individual Entrepreneurs (USR) records the state registration of individual entrepreneurs and companies.
State Registration of the Self-Employed
The method of state registration of such persons depends on the type of activity they are engaged in and the taxation system. State registration for self-employment is free of charge.
1. Tax on Professional Income
The self-employed can pay a tax on professional income for certain types of activities. In this case, you need to download the “Profdohod” application and register for it. There are video instructions on how to do this on the Ministry of Taxes and Duties of Belarus website. The fact that an individual has received the status of self-employed is evidenced not by downloading the application but by registering in it.
2. Single Tax
You must apply to any tax inspectorate for state registration as a single taxpayer and submit your passport. Before starting the activity, you must submit a notification of the start of the activity to the tax inspectorate. You can interact with the tax service in person (offline) or through the payer’s account on the Ministry of Taxes and Duties of Belarus’s website.
State Registration of Individual Entrepreneurs
Individual entrepreneurs submit documents to the territorial administration at their place of residence for state registration. The documents are an application in the prescribed form, photographs and a passport.
For state registration, you must pay a state fee of 0.5 basic value (20 Belarusian rubles or about 6 euros).
As of September 2024, individual entrepreneurs are not registered in Minsk.
State Registration of the Company
For the state registration of a company, you need to determine your location (legal address) and contact the registration authority (local administration) at the location. For state registration, it is necessary to prepare several documents, particularly the owner’s (owner) decision on establishing the company and the charter. It is also required to resolve the issue of the size of the company’s authorized capital, its formation, and the appointment of a management body.
There is a state fee for registering a company: 1 base value (40 Belarusian rubles or about 11 euros).
Features of Hiring Staff
The small scale of the business means that it can only be conducted personally without hiring employees. The larger the business, the more employees it can hire. When hiring employees, you need to pay all “salary” taxes:
- Income tax at the rate of 13%.
- Contributions to the Social Protection Fund for Social and Pension insurance.
- Contributions to the Belgosstrakh for compulsory insurance of employees.
Also, sole traders and companies that have employees need to:
- Submit employment-related reports to the Belgosstrakh, the Social Protection Fund, and military enlistment offices.
- Pay employees the benefits accrued by the Social Protection Fund.
- Draw up documents related to employee hiring, such as hiring, vacations, transfers, and dismissals. In particular, I need to fill out workbooks and issue orders.
Self-Employed
The self-employed can only operate in person; they do not have the opportunity to hire employees.
Individual Entrepreneurs
Individual entrepreneurs can hire up to three persons under labour and civil law contracts.
Legal Entities
Companies can hire the number of employees they need and enter civil law contracts with individuals.
Features of Opening Bank Accounts
All business entities usually operate with bank accounts. There are some features of opening accounts for different entities.
Self-Employed
Self-employed professional income tax payers can use the bank account they opened earlier to receive revenue, for example, in hiring or at the bank’s suggestion, or receive income in cash.
In some cases, self-employed single taxpayers may not open a bank account.
Individual Entrepreneurs and Companies
Individual entrepreneurs and companies can open bank accounts after state registration. To do this, they submit a package of documents to the selected bank, which issues a bank card with signature samples.
Peculiarities of Paying Taxes, Тaxation and Accounting
Taxation of business entities varies depending on their scale. The most straightforward procedure for paying taxes is for the self-employed.
Self-Employed
The self-employed do not keep accounting records or file tax returns with the inspectorate.
1. Professional Income Taxpayers
The self-employed pay a monthly professional income tax or a flat tax.
The tax rate on professional income is 10% of the income registered in the “Professional Income” application. The tax amount includes income tax and social security contributions. For income from Belarusian companies over 60,000 Belarusian rubles per year, the tax rate is 20%.
A tax deduction was provided for the self-employed, who registered for the first time in the “Professional Income” application. From the received payments in the amount of the first 2000 rubles, you do not need to pay tax on professional income.
2. Single Taxpayers
The state determines the single tax rates (in rubles per month) for each type of activity for a month, as a rule, for a year. That is, the rates may vary by year. The single tax rates decrease depending on the locality in which the self-employed operate. The highest rates are in Minsk, lower in regional cities and in the Minsk region, even lower in certain regional cities, and the lowest in other localities.
Individual Entrepreneurs
Individual entrepreneurs pay several taxes depending on what kind of activity they conduct. You need to file tax returns and keep tax records for all taxes. Individual entrepreneurs are not required to keep accounting records.
1. Single Tax
Individual entrepreneurs pay this tax monthly only in certain cases:
- When they fulfil personal orders of individuals.
- When retailing certain goods.
The state determines the single tax rates. Regional Councils of Deputies (Minsk city) have the right to increase or decrease such rates no more than twice, depending on the territory where entrepreneurial activity is conducted.
A benefit is provided for the first three months of doing business: the single tax is reduced by 25%. Several categories of individual entrepreneurs have a single tax benefit: it is reduced by 20% for pensioners, parents with many children, and parents of disabled children. Some categories of people with disabilities are exempt from paying this tax.
The single tax rates for individual entrepreneurs are determined in the same way as for self-employed persons who do not belong to individual entrepreneurs.
2. Income Tax
Individual entrepreneurs pay income tax every quarter for certain types of activities and file tax returns with the tax office every quarter.
The income tax rate is 20% of the income from entrepreneurial activities.
Some individual entrepreneurs are entitled to several benefits and monthly deductions when calculating income tax amounts. The tax inspector provides deductions based on supporting documents. Deductions can be associated with the individual entrepreneur and his family members.
If the income from entrepreneurial activity exceeds 500,000 Belarusian rubles (about 136,760 euros) during the calendar year, the tax must be paid at a rate of 30%.
Legal Entities
Companies pay all taxes provided by the general taxation system or use the simplified taxation system (STS). All companies are required to file tax returns.
Simplified Taxation System
The STS can be used only in certain cases, depending on the type of activity, the revenue amount, and the number of employees. Companies with branches with a payer’s account number cannot use the STS.
Accounting is maintained by companies that use a generally established tax system. Companies that use the STS do not always have to keep accounting records.
The tax rate for the STS in 2024 is 6% of gross revenue.
The General System of Taxation
Under the general taxation system, companies pay several taxes:
- Income tax – 20%.
- Value-added tax (VAT) -20%.
- Taxes on the income of foreign owners of the company, taxes on land and real estate, and others.
- Tax benefits have been established for companies resident in the Hi-Tech Park in Belarus, in particular:
- Exemption from income tax and a 9% tax rate on certain types of income.
- Exemption from VAT in some cases.
- Income tax on foreign company owners is at a rate of 0% or 5%.
Contact us
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