Legal Entities vs Individual Entrepreneurs vs Self-Employed
In modern business, there are many forms of doing business, each with its own characteristics, advantages, and disadvantages. Among them are legal entities, individual entrepreneurs (sole proprietors), and the self-employed. These categories differ not only in legal status but also in tax obligations, business opportunities, and the legal norms that govern them.
In this article, we will examine in detail the differences between legal entities, individual entrepreneurs, and the self-employed and help you determine which form of activity is most suitable for your purposes. Understanding these aspects is important for starting and running a successful business, minimizing risks, and resolving legal issues. Before registering a business, we recommend that you seek the advice of our experienced specialists: a lawyer and an accountant.
Why does the Form of Doing Business Matter?
Choosing the form of doing business is one of the key decisions in building a business strategy, which affects many aspects of entrepreneurial activity. In Belarus, as in other countries, each form — a legal entity, individual entrepreneur or self-employed (a person who is a payer of professional income tax) – has its characteristics that determine not only the legal status but also financial, tax and administrative working conditions. Choosing the right form allows you to optimize costs, minimize risks and ensure sustainable business development. Here are some criteria related to the differences in business forms:
1. Tax Burden
Firstly, the way businesses are run affects the tax burden. For example, the self-employed in Belarus pay a tax on professional income – 10% of income or a fixed tax rate, which is beneficial for small incomes. Individual entrepreneurs pay 20% income tax, and legal entities must maintain full accounting records and pay taxes on profits, value-added, and others. Choosing the wrong form can lead to excessive tax payments or, conversely, to problems with the tax authorities.
2. The Level of Liability for Obligations
Secondly, the form of the business determines the level of responsibility. Legal entities are responsible for their obligations within their authorized capital, which protects the founders’ personal assets. Individual entrepreneurs and the self-employed are liable for their obligations with all their property, which increases the risks in case of financial difficulties.
3. The Opportunity to Attract Investments
Thirdly, the form affects the possibilities of attracting investments and partnerships. Legal entities are more likely to gain the trust of banks, investors, and large counterparties, as their activities are more transparent and regulated. Individual entrepreneurs and the self-employed may face restrictions when concluding contracts or obtaining loans.
4. Administrative Burden
Finally, the form of the business determines the administrative burden. Legal entities are required to maintain complex accounting records, submit more reports, and comply with corporate procedures. Individual entrepreneurs and the self-employed have simplified requirements in this sense, which makes their form more attractive to small businesses.
5. Hiring Staff
Legal entities have no restrictions on hiring employees, whereas individual entrepreneurs can hire no more than three persons under underemployment and/or civil law contracts. The self-employed do not have the right to hire staff under employment contracts.
6. Meeting the Requirements of the State on the Types of Activities
A number of activities can only be conducted in a specific form of business organization, such as an individual entrepreneur or a legal entity. Legal entities can engage in any permitted activity—in this sense, they have more opportunities than individual entrepreneurs and the self-employed. It should be taken into account at the stage of determining the type of business.
7. Licensing
Some types of businesses require a government license. For example, this applies to securities, medical, and financial activities. These types of activities are called licensed. Licenses are usually issued to legal entities and, in rare cases, individual entrepreneurs. The self-employed will not be able to obtain a license.
Thus, choosing a form of doing business is not just a formality but a strategic decision that affects the success and sustainability of entrepreneurial activity.
What is a Legal Entity
Legal entities are organizations that have passed state registration as a legal entity.
Signs of legal entities:
- They have property allocated to them by their owners or acquired.
- They are responsible for their obligations.
- They acquire rights and responsibilities on their behalf
- They may be parties to legal proceedings.
State Registration of Legal Entities
A legal entity is considered established from the moment of its state registration. The state registration procedure does not take much time – 1 day, but you must prepare properly:
1. Find a room in which the management body of a legal entity should be located (it must necessarily be a physical room, even when the company has a virtual office and remote employees). It cannot be a residential building (except in the case of a private unitary enterprise).
2. Create a company name and coordinate it with the registration authority.
3. Form the authorized capital and prepare the charter’s constituent document.
4. Check whether potential founders can be actual founders. In Belarus, there is a rule that certain categories of individuals and legal entities cannot be founders. You can sort this out by consulting with our experienced lawyer.
4. Fill out an application for state registration, including information about the founders.
After state registration, a legal entity representative is issued a certificate of state registration and information about the established organization is entered into the Unified State Register of Legal Entities and Individual Entrepreneurs.
Forms of Legal Entities
There are quite a lot of forms of legal entities in Belarus. In particular, there are commercial and non-profit organizations. Commercial organizations are created to extract profit and distribute it among the participants. Non-profit organizations are created without the purpose of making a profit, usually with social goals. These other goals are aimed at the common good or meeting the material needs of individuals and legal entities.
These are the forms of commercial legal entities available in Belarus:
1. Business companies. These are commercial organizations whose authorized capital is divided into shares. Several founders or one founder can organize (establish) a business company. The founders may be legal entities or individuals, including residents of other countries.
Business companies include:
- Joint stock companies. These are legal entities in which the authorized capital is divided into shares.
- Limited liability companies and additional liability companies. These are companies whose authorized capital is divided into shares and in which there are no more than 50 founders.
2. Business partnerships.
3. Production cooperatives.
4. Peasant (farm) farms.
5. Private unitary enterprises.
Business companies and unitary enterprises are the most widespread forms of business in Belarus. Our experienced lawyer can help you choose the optimal form of doing business.
Who is an Individual Entrepreneur
An individual entrepreneur is an individual who has received state registration as an individual entrepreneur. Information about the state registration of an individual entrepreneur is contained in the Unified State Register of Legal Entities.
Individual entrepreneurs operate on their behalf without forming a legal entity.
There are certain restrictions for individual entrepreneurs:
- An individual entrepreneur can operate only from a special list of activities allowed for individual entrepreneurs.
- An entrepreneur can involve no more than three people under labour and civil law contracts to perform work, provide services, and create intellectual property objects.
- The individual entrepreneur’s location, indicated in the certificate of state registration, may be his living room.
Who is Self-Employed
Self-employment is an informal name for the entrepreneurial activity of an individual without registration as an individual entrepreneur, using special taxation regimes. These activities include those for which an individual pays a tax on professional income and handicraft activities for which a craft fee is paid.
These activities can be started after notifying the tax authority. State registration with the registration authority is not required.
The peculiarity of self-employment is that there are two possible types of activities: separately for income tax payers and separately for craft fee payers. You can be self-employed only if the type of activity is included in one of the lists.
Entrepreneurship can be undertaken by individuals or by self-employed people, but these must be different activities (from different lists).
The self-employed are liable for their obligations with all their property.
Some Tips on Choosing the Optimal Form of Doing Business in Belarus
Choosing a form of doing business in Belarus is a decision that requires a thorough analysis of many factors. Making the wrong choice can lead to additional costs, legal difficulties, or development restrictions. Here are a few key circumstances worth paying attention to:
1. The Nature and Scope of the Activity
Self-employed status may be optimal if you plan to engage in freelancing, tutoring, or other small-scale activities. For large-scale projects, especially involving employees or partners, it is better to consider registering an individual entrepreneur or a legal entity (for example, an LLC). A legal entity is suitable for a large business that involves working with counterparties, participating in tenders, or attracting investments. It is also important to consider possible types of activities (especially for individual entrepreneurs and the self-employed) and government licensing requirements.
2. Tax Obligations
The tax burden varies significantly depending on the type of business. The self-employed pay a flat tax of 10% of their income, which makes this form attractive for small projects. Individual entrepreneurs also pay a fixed tax of 20%, but they can use tax deductions and account for expenses. Legal entities can sometimes choose a simplified taxation system (STS) with low rates or a general system suitable for large companies. Keep in mind that the overall system requires more complex accounting and reporting.
3. The Level of Responsibility
A legal entity (for example, an LLC) limits the founders’ liability to the amount of their contribution to the authorized capital. It is important for high-risk businesses. An individual entrepreneur is liable for his obligations with all his property, which increases the risks. The self-employed are also responsible for their property, but their activities are limited in scope.
4. Administrative and Financial Expenses
Registering and running a business as a legal entity requires more time and resources: creating an authorized fund, developing a charter, keeping accounting records and submitting reports are necessary. Individual entrepreneurs and the self-employed have simpler registration procedures and lower administrative costs. If you are not ready for complex accounting, start with simpler forms.
It should be noted that a legal entity must bear the costs associated with hiring employees to a greater extent than an individual entrepreneur, who can attract a maximum of 3 persons. Such expenses include, in particular, payroll taxes.
5. Development Prospects
If you plan to scale your business, attract partners, or enter international markets, it is better to register a legal entity immediately. Individual entrepreneurship or self-employment are suitable for stable work in a small format.
Conclusion
When choosing a form of business, it is important to consider the nature of the activity, the tax burden, the level of responsibility, and growth prospects. It is recommended that you consult with an experienced lawyer and accountant to minimize the risks and choose the best option for starting your business.
