Is it necessary to become an individual entrepreneur and at what point to do this?

In 2011, having already worked as a freelancer for some time without the support of an employer, I decided to legalize my activities and register as an individual entrepreneur. There were several reasons for this.

Firstly, I wanted to have an official source of income in order to be transparent to the state and, most importantly, to the banks. For some reason, it seemed to me then that banks would be more willing to provide a loan to an individual entrepreneur than to an unemployed person. You will laugh, but later, when I really needed a loan, all the banks told me: “Currently we do not issue loans to individual entrepreneurs.” It probably just happened because of the timing, the current market situation and the decline in business activity. But it was both annoying and funny at the same time.

When I began to receive monthly money for designing interfaces as an individual, some acquaintances began to scare me with such a concept as “illegal business activity.”

Secondly, the average bill for my services was growing, and regularly selling design for more than 100,000 rubles as an individual was unprofitable. After all, the personal income tax (NDFL) was 13%. That is, for every 100,000 I had to give thirteen to the state. And it was only on my conscience. That is, when I did not pay personal income tax, no one followed me or came to me.

A rate of 6% of income when working as an individual entrepreneur on a simplified taxation system seemed more attractive to me. Moreover, this interest was first used to pay insurance and pension contributions, and only then the surplus was used to pay income taxes.

ThirdlyIn order to better understand the pain of my clients, it was important for me to get closer to their situation, to “get into their shoes.” Experience for yourself what it is like to work with contracts, invoices, acts, contractors. What are reports to Rosstat, insurance premiums, taxes... Of course, at the time of making the decision, I didn’t fully realize this, but my intuition suggested that it was a useful thing. As a result, this has had a really positive impact on my level of service when working with clients. I already understood much better where, in addition to directly providing my service, I could make them less stressed.

To register, you had to open a bank account, apply for registration as an individual entrepreneur, selecting the desired tax system (I chose the simplified one) and indicating the activity codes (OKVED; I found a set of codes from my former employer). Take some documents to the tax office, some documents to Rosstat and some documents to the Pension Fund.

In 2011, web services that helped register as an individual entrepreneur were just gaining momentum. So I had to figure out a lot of things myself. There was no electronic digital signature (electronic digital signatures), so the first report had to be submitted the old fashioned way: by printing it out and visiting the tax authority in person. There were no simple instructions for beginning entrepreneurs either.

At the time of writing this chapter, there have long been web services that literally take a novice entrepreneur by the hand and lead him through all authorities, reviewing every step and allowing him to send online electronically many things that I previously had to print out on paper and carry to special authorities myself.

Taxation systems have also changed a little, plus a concept such as “self-employed” has appeared, which passed me by, so I can’t tell you anything about this category.

Every month since 2011 I pay my bank for account maintenance. Over the years, the tariff has increased significantly. I can withdraw a limited monthly amount from my account without interest. Once it is exceeded, you must pay a commission. The amount of this amount has always been low and comparable to two or three average monthly salaries in my region.

Every quarter I pay insurance premiums and contributions to the Pension Fund in advance. Since 2011, this amount has grown every year. In 2011, it was about 16,000 rubles per year (that is, about 4,000 per quarter). In 2021 it amounted to about 32,000 rubles. Starting from 2018, if an entrepreneur earned more than 300,000 rubles a year, then everything he earned above this amount is subject to an additional tax of 1%. Therefore, for me, 32,000 naturally turned into an amount exceeding 50,000 rubles.

Also, according to the simplified taxation system, I pay 6% on all income. The tax amount can be reduced by the amount of insurance premiums and contributions to the Pension Fund. That is, if an entrepreneur works and earns money, then these contributions do not hit the pocket so hard. But if an entrepreneur does not earn anything at all in a year, he will still be forced to pay all mandatory payments (money for cash management services for a bank account plus contributions). In my case: if I didn’t earn anything in 2021, I would still pay a total of about 50,000 rubles. That is about 4,000 per month. So if you have already become an individual entrepreneur, then you better work! The status of an individual entrepreneur cannot be “suspended”, it can only be closed.

It turns out that at any moment you can figure out whether it’s time to open the status of an individual entrepreneur or not. To do this, I would take the average annual unofficial income, take 13% of it and compare whether this figure exceeds all future costs of maintaining an individual entrepreneur, including taxes. If it does not exceed, then you can wait.

Some more useful information. When opening an individual entrepreneur, entrepreneurs are not limited by the number of OKVED codes (this is a list of what the entrepreneur plans to do). It is important to indicate the main activity code, and then list at least all of them. However, I would not recommend doing this. Moreover, some codes require additional paperwork (such as a certificate of no criminal record).

If during the work of an individual entrepreneur something suspicious suddenly arises in terms of money, the bank may request documents confirming income. For example, if you received an average of one hundred thousand into your account every month, and then suddenly several million came to you, wait for a check. I myself have never received such requests, but I have repeatedly seen this happen to my entrepreneur friends.

As a result, an individual entrepreneur provides additional motivation for work, removes conditional restrictions on the price tags set, “whitens”, completely legalizes the activities of an entrepreneur in the eyes of others and introduces people who have escaped from employment to one of the sides of the world.