It is necessary to be registered as an entrepreneur-legal person to start a business (an entrepreneurial activity). Georgia introduced simple procedures for registration as an entrepreneur-legal person and it takes only one day for this. In order to register a business, it is important to choose among various forms of entrepreneur – legal person, which differs from each other by its nature, obligations and responsibilitie
There are the following legal forms:
Most Wide-Spread Form of Legal Entity in Georgia is LLC ( often called as LTD in Georgia) People do not usually consider benefits of EP ( Entrepreneur Natural Person ) This is why I am writing this blog today. Let’s compare LLC and NP and than you can decide which legal form to choose to start a bsuiness in Georgia.
Limited Liability Company
- Personally responsible with all their assets before creditors for the liabilities arisen as a result of their entrepreneurial activities. Individual. Entrepreneurs act on their own behalf in legal relations, bearing personal
liability for any obligation arising from their entrepreneurial activity.
- Liability of an LLC before its creditors is limited to company assets, and partners are not personally responsible for
company’s liabilities. Accounting, reporting and auditing shall be carried out according to the Law of Georgia on Accounting, Reporting and Auditing.2. A Person of Public Interest (the ‘PPI’), and I and II category enterprises defined under the Law of Georgia on Accounting, Reporting and Auditing shall annually ensure that their own financial statements/consolidated statements be audited in compliance with the Law of Georgia on Accounting, Reporting and Auditi
Taxation of Limited Liability Company
There are 6 main taxes in Georgia. You shall not pay all at once. Taxation of your company depends on the nature of your business activities. Each of this taxes, has Its own exeptions that you can claim. More information about Taxation in Georgia to be found by clicking here.
Taxation of Entrepreneur - Natural Person
Only Having this form of Legal Entity you can claim special taxation regime in Georgia. These are Micro and Small Business Status. These Regimes are guarantee for simplified accounting and tax relief. Here you can find main characteristics of these statuses.
- gross income received from economic activity during a calendar year does no exceed GEL 500 000
- Income of an entrepreneur natural person is charged with 1 per cent income tax if an entrepreneur natural person with small business status has a document verifying 60 per cent of expenses (except for employee salary charges) associated with the above gross income gain. Otherwise the income of an entrepreneur natural person with small business status is taxed with 3 per cent rate.
- An entrepreneur natural person with the small business status shall not be taxed at the source of payment for issued salary charges not to exceed 25 per cent of gross income over a calendar year. And for salary amounts exceeding 25 per cent of gross income the entrepreneur natural person will be imposed with the liability of tax agent
- Small business status may not be assigned to a natural person in case the latter is registered as a VAT payer
- An entrepreneur natural person with small business status is bound to pay current tax payments to the budget before the 15th day of a month following each quarter
- In case of payment for the provided services a natural person with small business status is not obliged to withhold tax at the source of payment
- Natural person with small business status is obliged to use cash register for cash payments with consumers
- Small business shall keep a special register for cost keeping where the information on bearing expenses and costs will be entered in chronological order. The above register shall be established per calendar year and a taxpayer shall keep it for at least 6 years period.
- More Info Regarding This Status can be found by clicking here.
- Does not use hired work force
- Independently conducts economic activities and his/her total gross annual income does not exceed GEL 30 000 for a calendar year (Order N999 of the Minister of Finance of Georgia, dated 31th December, 2010)
- Activities Except:
> Activities requiring licensing or permits
> Activities the income gained from which may exceed GEL 30 000 within a calendar year
> Carrying out currency exchange operations
> Medical, architectural, lawyer, notary, audit, consultant (including tax consultant) activities
> Gambling business
> Trading (mentioned prohibition does not concern the cases when treatment and delivery of produced or purchased goods is performed by this person). (Annex 2, Resolution N415 of the Government of Georgia dated 29th December, 2010)
- Person with micro business status is obliged to submit simplified annual income tax return prior April 1st of the year following the report year to tax authority
- A person with micro business status is released from an obligation to use cash register
- Persons with micro business status do not pay current tax payments.
- Person with micro business status does not have an obligation to record incomes and expenses
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A case Study
Jack is a teacher of English Language and He has got some students. He has hired one assistant who is helping him out with practical work and as well as is accounting clerk. His Annual Gross Income is 29000 GEL. He pays net 7200 GEL as a salary to his assistant. He also has got some other expenses – Rent Fee 4800 GEL per year and utilities 800 GEL.
Jack Claimed Status of Micro Business and Registered as ENP - (Entrepreneur Natural Person )
Jack Claimed Status of Small Business and Registered as ENP
Jack is Registered as LLC and he can not claim any type of Special Taxation Regime
Jack was rejected for this application. He can not claim status of Micro Business since he has hired a person. Micro Business Status Holder Shall not have hired any employee.
Jack was eligible for the status of small business. He saved all his bills and confirmation of rent and salary payments, so he could provev 60% of his expenses. This is way at the end of the year he just payed 1% of taxes on his gross income, which was 290 GEL per annum. He did not withheld Personal Income Tax for his assistant either, since the salary payed was less than 25% of his gross income. So, as a result, he has just payed 290 GEL tax and his net profit of the year was 15910 GEL.
Jack was withholding Personal Income Tax for his assistant each month, which increased his expenses with 1800 GEL. ( 20% is the rate of PIT in Georgia. 9000-20% of 9000 = 7200) Similarly, He was also paying PIT for his rent which amounted 1200 GEL. At the year end, Jack decided to distribute his profit and use it for his Personal Requirements. Profit Tax Base for him was His Gross revenue deducted his expenses – 13200 GEL. Upon Distribution he payed 15+5% of Profit and Divident tax which was – 2640 GEL. ( In case he decides not to distribute his profit, he will not be obligated to pay this amount) As a result his net profit amounted – 10560
Sum Up Comparison LLC vs Individual Entrepreneur :
Intended Conclusion: think twice before you register your legal form and establishment for your business in Georgia. In case you are confused and feel that you need a help, always feel free to claim your free consultation 🙂
Best of Luck