From freelancer to entrepreneur: why open an individual entrepreneur and how to do it

Pros and cons of owning your own business

Like any serious business, your own business is not just a continuous plus in the form of high income and “freedom” from a stupid boss.

Advantages

• Your own business is a unique opportunity to maximize your abilities as an organizer, manager, negotiator, seller, creative and much more.
• The amount of potential income is practically unlimited and depends only on the effectiveness of the chosen business model
• Owning your own business means freedom from the tight confines of hired work. Of course, you will have to work harder and harder for yourself than for someone else. And in the first months after opening, entrepreneurs have neither weekends nor holidays. But those who work for themselves do not depend on the office schedule, nor on the whims of management, nor on the policies of someone else’s company

Flaws

• High risks. Unfortunately, a beginning entrepreneur (especially in Russia) has a lot of risks. Constant changes in legislation, fines and other levies, unfair competition, raider takeovers, fluctuations in exchange rates, lack of demand for a product or service, delivery problems, incompetence of personnel... The potential risks of a Russian businessman can be listed endlessly
• Labor costs. During the period of creating and promoting his own business, its owner has to simultaneously solve a bunch of large and small problems. According to statistics, an entrepreneur spends much more effort and time on his business than a highly qualified employee in a large company
• Capital intensity. Starting your own business requires initial capital, at least minimal. For the first six months or a year, an individual entrepreneur, as a rule, works at a loss. And all this time he needs to pay taxes and rent, buy raw materials and materials, invest money in advertising and promotion
• Attitude to business. In Russia, the attitude towards private entrepreneurs is wary and distrustful. We associate success with working in Gazprom or in an bureaucratic position, and not with our own project. Entrepreneurship is not encouraged by either society or the state. Increasingly, the media is positioning a businessman as a greedy speculator or an outright fraudster.

The difference for the customer

Increasingly, employers are offering full-time employees flexible hours, remote work and piecework wages. Some freelancers sell their services on a monthly basis and agree to work in the client's office for the duration of the project. Then what difference does it make to the customer: to hire an employee or work with a freelancer? Tax difference.

For an employee in a limited liability company (LLC) to receive 100,000 rubles, the employer has 2 options:

1. Set an official salary of 114,942 rubles. This amount is automatically reduced by 13% (14,942 rubles), which the company pays for the employee in the form of personal income tax. Another 34% of the official salary (39,080 rubles) will be taken by the Pension Fund.

In total, the employer will lose 154,022 rubles.

Note: both personal income tax (NDFL) and payments to the Pension Fund are calculated from wages. But at the same time, personal income tax reduces the amount that the employee receives in hand. But the payment to the Pension Fund is not, since it is made by the employer in addition to the salary. In some countries, employees pay their own personal income tax. In Russia, companies do this for employees, acting as tax agents.

2. Set an official salary of 10,000 rubles and give the rest in an envelope. Then the employee will receive 8,700 rubles officially and 91,300 rubles in an envelope. The official payment generates 4,700 rubles of taxes (1,300 + 3,400). Envelope - 10,144 rubles for “related expenses”.

In total, the employer will lose 114,844 rubles.

Note: cashing out is an illegal action, as a result of which an LLC turns money in its account into cash, bypassing all taxes.

The individual entrepreneur lives quietly without cash. Therefore, my calculation of the amount of “related expenses” for cashing an envelope is based on guesswork and may not coincide with reality. I assume that 101,444 rubles should be transferred to the cash-out office account. She will keep 10% for herself and give the required 91,300 rubles.

Both of these options are more expensive than working with a freelancer who has an individual entrepreneur. In order for the owner of an individual entrepreneur to receive 100,000 rubles in hand, he needs to receive a little more than 108,000 rubles from the customer.

Nuance: benefit for IT companies

IT companies can receive benefits and reduce contributions to the Pension Fund from 34 to 14%. More details - Federal Law No. 212 (Article 58, paragraph 6).

I don’t know what requirements applicants for this benefit must meet and how realistic it is to receive it, but even if successful, a total of 27% of taxes will remain.

Russia's place in the Doing Business ranking

Since 2002, the Doing Business project has conducted annual global surveys. Using the methods of the World Bank and the International Finance Corporation, the conditions for doing business in different countries of the world are assessed. Based on the research results, each country is assigned a rating, which is calculated as the arithmetic average of ten indicators (from taxation to investor protection).

In 2020, Doing Business assessed the business environment in 189 countries.

In the overall ranking, Russia took 51st place. We were surpassed not only by the USA, Sweden, Germany, Canada and Singapore, but also by Slovakia, Slovenia, Romania, Mexico, Chile, Peru, as well as Kazakhstan, Georgia, Armenia and Belarus. Among the countries of the former USSR, only Moldova, Azerbaijan, Kyrgyzstan, Ukraine, Uzbekistan and Tajikistan were lower in the ranking than Russia.

Oddly enough, such indicators as “Contract Enforcement” (5th place) and “Property Registration” (8th place) were highly rated in Russia. And the most problematic parameters turned out to be “Obtaining construction permits” (119th place) and “International trade” (170th place).

The Doing Business ranking is led by Singapore, New Zealand, Denmark, South Korea, Hong Kong, Great Britain, USA, Sweden, Norway and Finland. And it is closed by such countries as Chad, Venezuela, Libya, Eritrea, South Sudan, Liberia and Angola.

Taxes and fees

The “6% of income” tax means that you must pay 6% of all income you receive to the Tax Office. For example, your personal funds that you deposited into your account to pay for bank services are not considered income.

The formula for calculating insurance contributions to the Pension Fund is constantly changing. In 2014, this is a fixed amount of 20,727.53 rubles per year, plus 1% of income over 300,000 rubles.

All the money that the individual entrepreneur received, minus the above taxes, is already his net income. It can be sent to a personal card. For such payments, I indicate the name of the payment “Withdrawal of funds from business activities.”

A nuance: Alfa Bank began to charge a commission for an intrabank transfer from itself (IP) to itself (an individual) - 100 rubles. Get yourself a personal card at some other bank and withdraw your earnings to it. Processing such a payment will cost the standard 16 rubles.

Small business in Russia and abroad

Despite a good rating from Doing Business, Russia can hardly be called “friendly” for small businesses. In 2015, the share of small and medium-sized Russian enterprises was about 20% of the total number of registered companies.

For comparison: the percentage of small businesses abroad, on average, reaches 50%. And in some Western countries this figure is close to 90%! Mainly where business (including foreign) receives good support from both the state and private financial institutions.

For example, in the UK, a new entrepreneur has the right to free business advice. In China, small businesses involved in innovation can count on low-interest loans. In the United States, entrepreneurs are helped to enter into contracts with large companies and receive government orders.

Some more statistics on Russia. Only 3.4% of domestic individual entrepreneurs have been operating on the market for more than three years - the rest close earlier. Every year the number of registered individual entrepreneurs grows by 4%. And those who ceased their activities - by 11%. Every month, about 43 thousand small businesses close in Russia. In our GDP structure, the share of small and medium-sized businesses is only 21%.

Why is Russia such an “aggressive” climate for entrepreneurs? There are many reasons: corruption, high tax burden, endless inspections, problems with raising finance, difficulties with logistics, low qualifications of personnel. Last year, this list was supplemented by sanctions, a sharp devaluation of the ruble and high inflation rates, which caused a serious decline in the solvency of the population and increased prices for raw materials.

It is not surprising that every fifth entrepreneur in Russia today is ready to sell their business...

Repetitive tasks

Let me remind you that the article specifically discusses my case, which involves an individual entrepreneur with a simplified tax system under the “6% of income” scheme. I had the following recurring tasks:

1. Pay insurance contributions to the Pension Fund four times a year based on the results of each quarter.

It happens like this: after receiving the notification, you go to Elba, go to the corresponding task, click “Next”, “Next”, “Next” and, after integration, upload payments to the client bank. Go to the client bank, sign them and send them for processing.

Insurance premiums can be paid at the end of the year, that is, once a year. The digital accountant recommends doing this every quarter to maximize your tax deduction. The essence of the deduction is that you can reduce tax under the simplified tax system by the amount of payments made to the Pension Fund.

2. Four times a year, following the results of each quarter, after paying insurance contributions to the Pension Fund, pay tax according to the simplified tax system to the Tax Office.

The process is the same.

3. Report to the Tax Office at the end of the year.

The process is different: after receiving the notification, you go to Elba, go to the corresponding task, click “Next”, “Next”, “Next”. Without leaving Elba, you sign the report sent to the Tax Office and after a while “sign for receipt” of the response documents.

What awaits small businesses in Russia in the near future?

According to Forbes, since the beginning of the crisis the number of bankruptcies has increased by 15%. Small and medium-sized businesses are being persistently squeezed out of the economy by large private and public companies.

The results of a VTsIOM survey show that in 1990, about 33% of respondents under the age of 34 wanted to become entrepreneurs. In 1991, such applicants were already 49.8%. But in 2015, less than 3% of respondents want to open their own business in Russia...

You can correct the situation at any time by adopting the successful experience of a dozen countries: Singapore, Georgia, New Zealand, Taiwan, Hong Kong. What is needed is “just” a transparent and loyal tax system, a fair trial, reliable protection of property rights (including intellectual property), access to inexpensive loans and conditions for fair competition...

Please note in this article I use only dry statistical figures, without any emotional overtones. The situation is not the best?

Believe me, even in such an environment, you can create your own small business. And I proved it to myself, now it's your turn! For today, this is all the food for thought that I have prepared. You can read more about me in the “About the Author” section. Subscribe to updates and don't forget to share links to the most interesting posts with your friends on social networks!

PS What, in your opinion, hinders the development of small businesses in Russia?

What is IP

To the question: “What does the status of an individual entrepreneur give?” — there are at least five answers. But first, let's talk about what an individual entrepreneur is.

Although this abbreviation is well known, not everyone deciphers it correctly. An individual entrepreneur is an individual entrepreneur, not an individual enterprise. This means that a specific person receives the right to conduct business to make a profit.

You can waive this right at any time, and later, if you wish, register again with the tax office. That is, an individual entrepreneur is the simplest form of doing business, but at the same time it has many advantages.

Summary table of advantages and disadvantages of individual entrepreneurship

BSO for individual entrepreneurs - what is it and in what cases is it necessary

Important! The table shows that the advantages of individual entrepreneurs exaggerate the disadvantages. The difference lies not only in quantity, but also in their significance.

Who is offering to register a company in my name?

Increasingly, modern youth strive to be independent and self-sufficient; they do not want to go to work according to a schedule and work for someone else’s uncle. Many are trying to open their own business and want to choose for themselves the direction of activity, the volume of work, and most importantly, the size of future profits. Such independent people open their own individual entrepreneurs and begin to study the world of business from the inside. Some people are successful at this. Someone gets the necessary experience to create further larger enterprises and projects. And someone simply drowns and returns to work with his hated employer, realizing that independence is not for him.

The first category of simply successful people, as a rule, opens a business for themselves, and runs it, expands, improves and, accordingly, increases their well-being honestly, or almost honestly, with the least likelihood of going broke and “getting money.” They sometimes need to open an additional business, an individual entrepreneur or even an LLC. But if for some reason you can’t open another business for yourself, say your position doesn’t allow it or you need to reduce the tax burden, then an additional business is opened in the family circle: for your wife, children, parents or close relatives. And if you are the same relative who was asked to support the family business, then the likelihood that they will want to frame you is not too high. Although such cases have happened in practice.

The second type of entrepreneurs who have become business sharks and have learned all the intricacies of obtaining super-profits can be divided into 2 categories:

• the first create corporations that work for the future and actually receive a relatively fair income from their experience and property, while they also provide jobs;
• the latter, without risking their own property, come up with schemes for which they attract a third party and create a fictitious business, from which they receive their income, and as a result, the gullible “partner” is not only left without pseudo-work, but also receives a whole load of debts, problems and troubles.

Most often, an offer to open a business at someone else’s expense comes from acquaintances, friends of your “friends”, work colleagues and simply strangers offering to open a business in their name for money.

But here the third group of “entrepreneurs” often tries to prove themselves; they either don’t really have the skills to run a business, or they don’t have their own money with which to get promoted. They then become prey for experienced “businessmen”. Not seeing the pitfalls, people happily register an individual entrepreneur or LLC for themselves, become the promised “director” and think that their lives are getting better, but as a result, most of them are future bankrupts with broken lives.

Why do they need this?

Approximately half of the citizens who receive an offer to create an individual entrepreneur or LLC in their name, who have not previously encountered a fake business, have not heard of scammers and have never gotten into trouble due to the fault of third parties, will think that they are very lucky and finally have their there will be a holiday on the street. And, of course, in response to warnings from friends, they will ask the question: “why would someone set me up?” And really: “Why”? And you will get the answer: “There are no people in the world who are ready to invest their money in a stranger for nothing.” No real entrepreneur will ever open a business for someone else, an unverified person. And if strangers offer you to open a business, and even give you money for its implementation, feel free to refuse, so as not to be left in the near future not only without money, but even without freedom.

Most often, shell companies are opened to remove dirty, ill-gotten money and “launder” it among the common people. Possible options for working “sea”:

• obtaining non-repayable loans for a large amount for the implementation of seemingly profitable projects;
• purchasing goods and receiving services with deferred payments from contractors for which they will not pay in the future;
• conducting fictitious transactions for which your company will receive money from the same shell companies;
• hiding real profits;
• non-payment of taxes for large transactions, which entails liability to the state and a real trial period;
• use of schemes to merge shell companies (provided for under criminal law);
• An LLC can open an individual entrepreneur, and in case of errors and failures, all responsibility lies with the individual entrepreneur (for example, contractors);
• hiring of employees and non-payment of wages and corresponding contributions to NI.