Can an individual entrepreneur be the founder of an LLC: nuances and taxes

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Individual entrepreneur and limited liability company are the most common forms of business ownership in Russia. But can an individual entrepreneur be the founder of an LLC? Is it legal? What are the implications of this for the entrepreneur? And can there be any claims from regulators? It is worth addressing these questions before taking the steps to design a new organizational form.

Is it legally possible?

The seventh article of the Federal Law No. 14 on LLC states that a citizen or legal entity can become the founder of such. What about individual entrepreneurs? Do they have such a right? The law states that a deputy, a military man of any rank, an employee of a state institution, a company with one member, and a local government and state authority cannot be a resident of an organization. Therefore, the answer to the question of the procedure, can an individual entrepreneur be the founder of an LLC - yes, he can, but he will act inas FL. A person, at will, can retain both legal forms, while conducting, as it were, a “double business”, that is, activities from an entrepreneur and from a member of the company will have clear boundaries.

In the documents of an LLC, for example, in an extract from the Unified State Register of Legal Entities, information about entrepreneurship will not be contained, only the data of a person as an individual will be reflected there.

Why might this be needed?

Is it possible for an individual entrepreneur to be the founder of an LLC, of course. But why might this be needed? The reasons are varied. The most common is that a person started a business as an entrepreneur, later the enterprise expanded, “appetites increased” and it was necessary to attract investments, impressive amounts of loans from banks. Everyone knows that it is easier for a legal entity to do this.

The prestige of a limited liability company carries more weight compared to individual businessmen. It is easier for organizations to find a partner, participate in tenders and government orders, and besides, entrepreneurs are not allowed to engage in certain types of activities (alcohol production, insurance, and others), conduct joint business, or simply appoint a director. If you want to conclude a financially large deal, one person loses to the organization in the issue of approval of such a potential partner in the contract.

True, in these cases, when the business is expanding, but the scope of activity does not change, it is better to close the IP. Firstly, it will be easier to manage cases and documentation, Secondly, there will be fewer questions from regulatory bodies.

Will it release me from duty?

There is no doubt about the advantages of opening a legal entity when expanding a business. But will it free the entrepreneur from the costs? A member of the company is responsible only for his part of the authorized capital, while an individual entrepreneur is fully responsible for all his property (of course, excluding the only living space). Since the cases will be conducted separately, in no case will he release him. These will be two completely different businesses, and a citizen will conduct business and meet obligations in different ways. Therefore, can an individual entrepreneur be the founder of an LLC - yes, will the entrepreneur also be responsible with his personal savings - yes.

The founder decided to open an IP

What about whether the founder of an LLC can open an IP? Legal forms can be opened in any order, they are not mutually exclusive. In this case, the person will have the same rights and obligations as when registering in the reverse order, that is, these will be two different areas of activity. Only the bottom should be added: if a participant in a legal entity has registered an entrepreneurship in order to withdraw money from the organization’s current account indefinitely, nothing will work. IP and its capabilities have nothing to do with LLC. These are two different businesses. That is, the payment of dividends will be made in the standard manner: no more than once a quarter (or better once a year), and only when the company has a profit and it does not suffer losses.

What are the risks?

Problems in the interaction of two legal norms are possible, the tax authorities in such situations use the concept of "interdependent persons". In cases where transactions are made between individual entrepreneurs and LLCs, the prices of which are much lower than market prices, there will be fines. For example, an organization is supplied with products from an entrepreneur and its price is clearly underestimated. However, when there are no economic relations, then there are no problems.

Can an individual entrepreneur be a founder of an LLC and a director?

The question is relevant and worries many entrepreneurs. Can an individual entrepreneur become the founder of an LLC - yes, but is there any chance of appointing him a director? An entrepreneur can be the head of an organization, but there are a number of nuances from such interactions. Registration is possible in two ways: through an employment contract (as an employee) or through an agreement with an individual entrepreneur who provides a management service.

From the point of view of the tax authorities, the first way is the only possible one. This logic is easy to understand - the tax burden is greater. The organization will need to withhold the standard thirteen percent of personal income tax from the salary and pay thirty percent of the insurance contribution to the pension fund itself. Of course, the tax obligations of an entrepreneur working under a contract for the provision of services will be many times less, but an on-site audit from the Federal Tax Service is inevitable.

Conclusion: it is better not to try to transfer the management of the company to an individual entrepreneur, especially to entrust accounting to him, this will definitely be perceived as a tax scheme.

It is necessary to clarify, the very fact that a person in the status of an individual entrepreneur manages an organization is possible. The option of such registration is excluded if he is also the founder. That is, if this is really a third-party businessman hired, there will be no proceedings, and his remuneration will fall into the “expenses” accounting item. There is no need to pay personal income tax and insurance premiums, and the entrepreneur will pay his own taxes.

This option is only possible under the following circumstances:

• This will not be a person who was previously registered with the firm under an employment contract.
• The registration of the individual entrepreneur was completed much earlier than the transaction.
• In the OKVED codes for a businessman, the main type of activity is management.
• The content of the contract for paid services is different from the provisions of the employment contract, it is not tied to hourly wages, the organization does not create working conditions and a workplace for the manager, and there is no work schedule.

Taxes

Tax liabilities are strictly separated from the organization and the entrepreneur. This means that taxes on activities carried out by individual entrepreneurs will remain on the same system as they were before the opening of the company. Similarly, payments to the budget from the LLC will be fully reproduced according to the chosen taxation system, with all insurance premiums paid for individuals in its composition. There is no way to reduce the tax, and there can be no exceptions here.

Documentation Features

It is clear whether an individual entrepreneur can be the founder of an LLC, for this he will need to fill out and submit form P11001, which, by the way, does not contain an item where one could indicate his status as a businessman, he is filled in on behalf of a citizen. In the public register, as mentioned earlier, the person will also act as an individual.

Is it possible to open an IP for the founder of an LLC - yes, for this you will need to fill out the form P21001, in which again there is nowhere to indicate the fact of founding in a business entity.

In the future, it is desirable to ensure that activities carried out under two different legal forms do not come into contact with each other in any way, in particular, there are no transactions between them, so that regulators do not have suspicions of interdependence.

Can an individual entrepreneur be the founder of an LLC and the general director in one person - only as an individual. That is, a citizen must be accepted for this position under a standard employment contract, he will receive a salary that meets the labor market standards, and the organization must deduct personal income taxes from it, and pay insurance premiums. Only in this case it will be possible to safely combine two activities.

Tax reports and contributions will be submitted twice - from an individual entrepreneur and from a limited liability company, according to the chosen form of taxation, and in each of the declarations information will becompletely different, with no mention of a second business.

Conclusion

The legislation does not have any prohibitions on whether an individual entrepreneur can be the founder of an LLC. The main question is why a person needed to combine two forms of ownership. In the event that a citizen simply does business as an entrepreneur, while receiving dividends from another business, there will be no problems. But if he tries to reduce the tax burden in this way or engage in any financial schemes, questions from the regulatory authorities cannot be avoided.