Planning and development of a model of work in the Ukrainian market
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Starting a new business requires careful planning. Entrepreneurs typically consider factors like revenue and expenses, personnel needs, and necessary resources like equipment and workspace.
However, it's easy to overlook the importance of legal planning and structuring in setting up a business, which is crucial for ensuring growth, development, and compliance with the law.
Legal planning and structuring involves several key components:
1. Building the structure of the company's work and relationships between partners or investors.
2. Tax planning and optimization of the tax process.
3. Obtaining the necessary permits and licenses.
4. Obtaining the necessary legal opinions and consultations on business activities to avoid penalties from regulatory authorities.
5. Managing personnel, equipment, and resources.
Other questions may arise during the process, but the above aspects are basic.
A client came to us who, together with a partner, wanted to launch an IT business in Ukraine. The client and partner had worked as freelancers on Western European markets for quite some time. Now they had the idea of creating a business and attracting employees. However, at the start, the client does not always understand the legal aspects and details of the business.
Our lawyers successfully registered an LLC with the appropriate NACE codes. However, prior to the registration process, we proposed a comprehensive business planning and structuring approach for our client.
We conducted a thorough tax planning analysis and assisted with the selection of the appropriate tax system, helped negotiate contracts with customers, and established a framework for the company's operations. We also regulated the legal relationship between partners and investors.
How to establish seamless cooperation between business stakeholders, investors, and partners?
To ensure the success and growth of your business, we recommend establishing efficient collaboration and interaction among partners, management, and company investors.
Partners can regulate their relationships by "gentlemen's agreements" in verbal form, which is mostly ineffective. It is necessary to approach this issue more constructively.
In such cases, lawyers can offer you:
- Partnership agreement
- Distribution of a part of the legal entity to influence decision-making
- Corporate agreement
- Combination of the above options
Investors can be attracted through debt capital - providing loans or credits, or through equity capital. That is, they can invest funds in your legal entity and receive a share in the authorized capital and voting rights. In any case, relationships with investors must be properly formalized.
If an investor is providing funds for the business, it is necessary to ensure the conclusion of a corresponding loan agreement or credit agreement with favorable terms for the business. If the investor acquires a share in the authorized capital of the legal entity, it is necessary to understand what decisions the investor will influence and how.
In our practice, there was a situation when two partners wanted to start a business. One partner had a trademark, brand, and resources, while the other partner dealt with organizational matters, searched for personnel and equipment, and was supposed to manage the business.
The parties refused to create a legal entity (used individual entrepreneurs) and planned to fix the agreements verbally. However, we managed to persuade them to conclude at least a partnership agreement, which helped divide the property and revenues after a year when the parties decided to terminate the project.
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The tax system and accounting for businesses in Ukraine: What's the preliminary planning?
When starting a business, it's crucial to analyze not only the income and expenses but also the taxes and fees that need to be paid. The Ukrainian tax system allows for simplified and general tax systems.
The simplified tax system is not applicable to all types of activities since the Tax Code prohibits its application to certain types of activities (such as gaming, financial intermediation, fuel trading, etc.). Legal entities can only be in the 3rd or 4th group of the unified tax (the 4th group of the unified tax is applicable to the agricultural business).
The simplified tax system for a legal entity in the 3rd group provides the opportunity to pay 5% of the income or 3% of the income and VAT, and in conditions of martial law - 2% of the income.
The income limit for the simplified tax system of the 3rd group is 7,818,900 UAH per year for both individual entrepreneurs and LLCs.
Individual entrepreneurs in the 2nd group pay a fixed single tax of 20% of the minimum wage (1,340 UAH) and a social security contribution of 1,474 UAH. The limit for individual entrepreneurs in the 2nd group in 2023 is 5,587,800 UAH per year.
The General Taxation System provides for a profit tax of 18%, determined based on the financial results of the legal entity.
Please note! A legal entity under the General Taxation System must become a VAT payer if the total amount of transactions within 12 calendar months exceeds 1 million hryvnias.
If you have a charitable organization or a public association, you can obtain a non-profit status.
Another option is taxation for residents of Diia City, which we have already discussed here.
In our practice, we have dealt with various projects and tasks. For example, for a client who wanted to popularize one of the forms of art, we created a public organization. For a client engaged in the supply and sale of goods from abroad, given that the revenue will exceed 10 million per year, it is better to choose the General Taxation System.
Tax planning for such clients looks like this:
- We gather and analyze information about the sphere of activity, planned income and expenses, presence of import-export operations, and other information.
- We analyze the information and propose the best option for the client.
- We help to implement the option and obtain all necessary registrations, permits, and licenses.
- We provide additional consultations if the client needs them.
Tax planning depends on the intended type of activity, nature of operations, number of participants, and other factors. In any case, our company's lawyers find the best options to help businesses optimize their tax burden.
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When should you hire employees or individual entrepreneurs when starting a business?
Business owners often struggle with how to best organize their workforce and relationships with external parties.
It's important to remember that not all workers need to be registered as individual entrepreneurs (IE). After all, an IE is an independent legal entity that runs its own business and is responsible for its results.
It makes sense to engage an IE to perform certain tasks or services when there are no indications of an employment relationship (systematic payment for work rather than results, provision of a workplace and equipment, performance of work that corresponds to the profession classifier, etc.).
For example, if you need to hire a cashier, it's better to enter into an employment contract rather than creating an IE for this purpose.
The law allows for the conclusion of civil law contracts with "employees." In most cases, this will be a contract for the provision of services or a contract for the performance of work, which determines periodic, seasonal, or project-based work.
Regardless of the approach taken, it's crucial to define your personnel and structure the work legally, conclude employment contracts with employees, engage IEs and other individuals necessary for the business at the start of your business.
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How does business operate in Ukraine?
Scaling and creating optimal models require businesses to follow the rules and comply with legal requirements. Failure to comply with regulations in their area of activity puts businesses at risk of spending large sums on fines and legal representation in court.
For example, if you import and sell household appliances in Ukraine, you must ensure that the appliances have the necessary quality certificates and comply with the legislation requirements for such appliances to sell to distributors and customers. Otherwise, you may face inspections by the State Consumer Protection Authority and possible fines, corrective measures, or even product seizures. Your reputation as a supplier will also be affected negatively. Therefore, businesses must analyze the requirements they need to meet beforehand.
In one of our cases, a buyer wanted to start selling jewelry. Before investing in jewelry production and sales, they consulted us to learn about the legal requirements for manufacturing and trading jewelry.
After the consultation, the client realized that it would be better for him not to invest in production, but to focus his resources on selling jewelry. If the client had not understood the requirements for jewelry production, he could have invested in it and possibly suffered losses.
In summary, when starting a business or engaging in other activities in Ukraine, we always offer our clients several options.
- If the client is 100% sure about the type of business he wants to have and how he plans to run it, we take care of all the technical work. This includes registering the business, opening accounts, obtaining licenses, preparing documents for foreign directors or employees, and so on.
- If you want to be sure that opening a business in Ukraine will be profitable, if you have an idea in mind but want to find the most optimal and secure way to implement it, or if we, based on our experience, understand that your scheme is complex, we suggest conducting Business Planning and Structuring before registration.
You can decide which path is right for you at the initial consultation. Please contact our specialists for more information.