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eKapija |
Monday,
28.04.2025.|
11:50
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Copy linkLump-sum payment, book-keeping or LLC – Which form of business is best for you?
Do you feel like your business has outgrown the current framework of operations. You are increasingly getting bigger projects, your income is growing, but there are dilemmas too – whether to remain a lump-sum taxpayer, switch to book-keeping, or found an LLC?
These questions are on the minds of many local entrepreneurs, especially when they reach the thresholds proscribed by the laws on tax and VAT. And although each business model is legally defined, the true challenge is to find the one that pays off the most in a concrete case. In a conversation with eKapija, tax experts Djerdj Pap explains the key moments when entrepreneurs are at a crossroads and offers guidelines for making a smart decision.
– When, in a calendar year, the income exceeds RSD 6 million, the entrepreneur can no longer remain a lump-sum taxpayer in the next year, or even in the second half of that same year if the threshold was crossed in the first half – says Pap. They then have to choose – whether to switch to book-keeping as an entrepreneur or found a limited-liability company.
However, it is important to know that this transition is not without its limitations. To clarify, an entrepreneur that runs books has two ways of being taxed. One is through personal earnings, which is more favorable, and the other is the traditional system of taxation where the tax and contributions are paid in the amount of 44% of the profit, which, our interviewee says, is a huge charge.
– An entrepreneur that switches from lump-sum tax payment to book-keeping has no possibility, in the first year, to use the more favorable way of taxation through personal earnings. They are automatically subject to the traditional model, where the tax and contributions are paid in the amount of up to 44% of the profit – explains Pap. It is only from year two that they can choose the more favorable option.
There is also another threshold that many overlook, Pap advises, which is a threshold of RSD 8 million within the VAT turnover in the past 12 months. If that limit is also crossed, there is an immediate obligation of entering the VAT system.
– A mistake that can have serious material consequences, which I have seen myself frequently, is that entrepreneurs don’t pay attention to another situation, when an entrepreneur that pays a lump-sum tax has realized a VAT turnover of over 8 million in the past 12 months. When someone crosses the 8-million threshold in the past 12 months, they are obliged to become a VAT taxpayer and register with the VAT system the next day, which automatically means that they also have to run books. There is no choosing there whether to switch to an LLC or an entrepreneur. Instead, they have to start running books as soon as the next day – warns Pap.
The difference between taxation and responsibility: entrepreneur vs. LLC
When considering whether to remain an entrepreneur or switch to the form of a limited-liability company (LLC), it is important to understand the key differences between these two models – regarding both tax and everyday business operations.
– LLC and entrepreneurship have some similarities, especially in the cases when the owner of the company is, at the same time, its director. In both cases, it is possible to pay your own salary, with the obligation of paying the contributions, which are roughly at the same level. Still, there is a considerable difference when it comes to taxing the profit – an LLC pays an income tax in the amount of up to 15%, whereas an entrepreneur pays 10% – says Pap.
Also, there is a significant difference in the way money can be handled.
– While an entrepreneur can withdraw money from the business account whenever they want to, without any additional documentation (with a potential obligation of paying a tax of 10% on personal spending), things are far more formal when it comes to an LLC. Each cash withdrawal has to be documented – through an account, a calculation of per diem payments, or a similar legal basis – he says.
One of the most important differences, our interviewee notes, which has nothing to do with taxes, concerns responsibility. In an LLC, the obligations are limited to the company’s property, whereas an entrepreneur’s responsibility for the business obligations also involves their personal property. In practice, this means that, in the case of a court dispute or damage, an entrepreneur can also suffer personal consequences, whereas, with an LLC, the collection is done exclusively from the property of the legal person.
– An LLC’s responsibility involves the property of the LLC as a legal entity, and an entrepreneur’s involves both the entrepreneur’s and personal property. If an entrepreneur damages a client, the client sues, and the court rules that the damage has to be compensated, when you’re an entrepreneur, the damage can be collected from personal property too, and when you’re an LLC, it can only be collected from the property of the legal person – our interviewee concludes.
I. Zikic
These questions are on the minds of many local entrepreneurs, especially when they reach the thresholds proscribed by the laws on tax and VAT. And although each business model is legally defined, the true challenge is to find the one that pays off the most in a concrete case. In a conversation with eKapija, tax experts Djerdj Pap explains the key moments when entrepreneurs are at a crossroads and offers guidelines for making a smart decision.
– When, in a calendar year, the income exceeds RSD 6 million, the entrepreneur can no longer remain a lump-sum taxpayer in the next year, or even in the second half of that same year if the threshold was crossed in the first half – says Pap. They then have to choose – whether to switch to book-keeping as an entrepreneur or found a limited-liability company.
However, it is important to know that this transition is not without its limitations. To clarify, an entrepreneur that runs books has two ways of being taxed. One is through personal earnings, which is more favorable, and the other is the traditional system of taxation where the tax and contributions are paid in the amount of 44% of the profit, which, our interviewee says, is a huge charge.
– An entrepreneur that switches from lump-sum tax payment to book-keeping has no possibility, in the first year, to use the more favorable way of taxation through personal earnings. They are automatically subject to the traditional model, where the tax and contributions are paid in the amount of up to 44% of the profit – explains Pap. It is only from year two that they can choose the more favorable option.
There is also another threshold that many overlook, Pap advises, which is a threshold of RSD 8 million within the VAT turnover in the past 12 months. If that limit is also crossed, there is an immediate obligation of entering the VAT system.
– A mistake that can have serious material consequences, which I have seen myself frequently, is that entrepreneurs don’t pay attention to another situation, when an entrepreneur that pays a lump-sum tax has realized a VAT turnover of over 8 million in the past 12 months. When someone crosses the 8-million threshold in the past 12 months, they are obliged to become a VAT taxpayer and register with the VAT system the next day, which automatically means that they also have to run books. There is no choosing there whether to switch to an LLC or an entrepreneur. Instead, they have to start running books as soon as the next day – warns Pap.
The difference between taxation and responsibility: entrepreneur vs. LLC
When considering whether to remain an entrepreneur or switch to the form of a limited-liability company (LLC), it is important to understand the key differences between these two models – regarding both tax and everyday business operations.
– LLC and entrepreneurship have some similarities, especially in the cases when the owner of the company is, at the same time, its director. In both cases, it is possible to pay your own salary, with the obligation of paying the contributions, which are roughly at the same level. Still, there is a considerable difference when it comes to taxing the profit – an LLC pays an income tax in the amount of up to 15%, whereas an entrepreneur pays 10% – says Pap.
Also, there is a significant difference in the way money can be handled.
– While an entrepreneur can withdraw money from the business account whenever they want to, without any additional documentation (with a potential obligation of paying a tax of 10% on personal spending), things are far more formal when it comes to an LLC. Each cash withdrawal has to be documented – through an account, a calculation of per diem payments, or a similar legal basis – he says.
One of the most important differences, our interviewee notes, which has nothing to do with taxes, concerns responsibility. In an LLC, the obligations are limited to the company’s property, whereas an entrepreneur’s responsibility for the business obligations also involves their personal property. In practice, this means that, in the case of a court dispute or damage, an entrepreneur can also suffer personal consequences, whereas, with an LLC, the collection is done exclusively from the property of the legal person.
– An LLC’s responsibility involves the property of the LLC as a legal entity, and an entrepreneur’s involves both the entrepreneur’s and personal property. If an entrepreneur damages a client, the client sues, and the court rules that the damage has to be compensated, when you’re an entrepreneur, the damage can be collected from personal property too, and when you’re an LLC, it can only be collected from the property of the legal person – our interviewee concludes.
I. Zikic
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