Differences between individual entrepreneurship and legal entity activity

General information

Entrepreneurial activity is an endeavor carried out independently by an individual, with the primary aim of generating profit or income from the use of property, provision of goods, performance of work, or delivery of services. Entrepreneurial activity can be conducted both as a natural person and by establishing a legal entity.

Individual entrepreneurship refers to the entrepreneurial activity of a natural person aimed at generating profit without establishing a legal entity. A legal entity is an organization that has been registered with the state, possesses separate property, and is liable for its obligations with its assets. It has the right to acquire and exercise property and personal non-property rights, bear responsibilities, and act as a plaintiff or defendant in court.

If the main purpose of a legal entity's activity is to generate profit, that entity is classified as a commercial legal entity, if its primary purpose is not profit generation and it does not distribute the profits among its participants, it is considered a non-commercial legal entity., additionally, if it engages in activities of national and/or public significance, it is regarded as a public legal entity.

The most commonly encountered organizational-legal form of a commercial legal entity in the market is limited liability companies (hereinafter referred to as "LLC"), and therefore, we find it necessary to highlight the similarities and differences between this legal entity and individual entrepreneurs for the readers.

Registration of a business entity

It should be noted that a legal entity possesses civil rights and bears civil obligations from the moment it is registered with the state (for tax purposes). An individual also obtains the right to engage in entrepreneurial activity and assumes obligations from the moment they are registered for tax purposes.

The procedures for the tax registration of individuals and legal entities differ from one another. Specifically, the documents required for their tax registration and the acquisition of the electronic taxpayer identification number (hereinafter referred to as “TIN”) are various. Once those documents are prepared and gathered, they must be submitted to the State Tax Service.

Liability

It should be noted that the scope of liability for an individual entrepreneur and an LLC differs. The participants of a legal entity are not liable for its obligations, and they assume risk only to the extent of the value of the contributions they have made regarding the company's activities.

The entity is also not responsible for the obligations of its participants towards third parties. A participant’s personal debts may only be redirected against their share in the company’s assets if it is insufficient to cover their other personal debts.

In contrast to an LLC, an individual entrepreneur is liable for obligations related to their activities with all of their assets.

Taxes

Tax obligations of individual entrepreneurs

The tax obligations of individual entrepreneurs and LLCs have some similarities and differences. An individual entrepreneur can choose to be a simplified tax payer or an income tax payer.

The following individuals have the right to be simplified tax payers:

(i) Individuals who are not registered for Value Added Tax (hereinafter referred to as "VAT") and whose taxable operations in any month of a consecutive 12-month period do not exceed 200,000 manats;

(ii) Individuals engaged in trade and/or public catering activities whose taxable operations exceed 200,000 manats in any month of a consecutive 12-month period;

The following individuals are considered simplified tax payers:

(iii) Individuals engaged in passenger transportation within the territory of the Republic of Azerbaijan;

(iv) Operators and sellers of sports betting games, as well as organizers of lotteries and sellers of lottery tickets;

(v) Individuals providing residential and non-residential premises, as well as land plots;

(vi) Individuals engaged in tailoring, shoemaking, and other similar activities.

The simplified tax rate is generally calculated based on the total revenue obtained, as well as off-sale income (excluding income subject to withholding tax).

Among the aforementioned tax payers, those classified under (i) are taxed at a rate of 2%, those under (ii) at a rate of 8%, and individuals under (iii)-(vi) are subject to a fixed amount of tax.

As for the income tax of individual entrepreneurs, the rate is 20%.

If an individual entrepreneur is not a simplified tax payer and their taxable operations exceed 200,000 manats in any month of a consecutive 12-month period, their income is subject to VAT. The VAT rate is 18%.

Tax obligations of legal entities

A legal entity may choose to be a simplified taxpayer or a profit tax payer. The following legal entities have the right to be simplified taxpayers:

(i) Legal entities that are not registered for VAT purposes and whose taxable operations in any month of a consecutive 12-month period do not exceed 200,000 manats;

(ii) Legal entities engaged in trade and/or public catering activities whose taxable operations exceed 200,000 manats in any month of a consecutive 12-month period;

The following legal entities are considered simplified taxpayers:

(iii) Legal entities engaged in passenger transportation within the territory of the Republic of Azerbaijan;

(iv) Legal entities that operate and sell sports betting games, as well as lottery organizers and sellers of lottery tickets.

The entities classified under (i) are taxed at a rate of 2%, those under (ii) at a rate of 8%, and those under (iii)-(iv) are subject to a fixed amount of tax.

The profit tax rate for legal entities is 20%. If a legal entity is not a simplified taxpayer and its taxable operations exceed 200,000 manats in any month of a consecutive 12-month period, its income is also subject to VAT. The VAT rate for legal entities is 18%.

Difference in taxation

In addition to what has been described, it should be noted that the payment related to the distribution of net profit of a legal entity in favor of its founders is called a dividend. A 5% tax is withheld at the source from the dividends paid by a resident enterprise.

The income of individual entrepreneurs is subject only to income tax and VAT, and is not subject to any other taxes.

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Note: The information contained in this article should not be interpreted as legal advice or legal opinion. Our Company provides all professional legal services related to the registration of business entities, their management, and cost optimization. Our Company is ready to assist you in this area with pleasure.

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