Business activity and legal structure of a business in Armenia
Updated: Aug 24, 2022
The first and most important stage of starting a business is the choice of legal form. The most common ways of carrying out entrepreneurial activity are especially the individual entrepreneurs and the limited liability company (LLC). For new businesses, it's not always easy to tell the difference between a sole proprietorship and an LLC when choosing a legal structure. It is necessary to consider the company's financial needs, risks and ability to grow, as changing the legal structure after registration can be difficult.
Before choosing the type of legal entity, it is necessary to study the features of each type and choose the best option depending on the business idea. To get more detailed information, it is more appropriate to seek professional advice at the initial stage.
The scope of influence of the legal structure of a business in Armenia
The choice of organizational legal forms can be of key importance in terms of the origin of the future financial and legal obligations of the company. Depending on the legal type of the organization, the following frameworks of the organization change:
Taxes: Considering the choice of legal structure of the organization and the different tax rates of business and personal income, the choice of legal form can significantly affect the tax burden. There is a general and special system of taxation in RA. Within the general taxation system, organizations, individual entrepreneurs and notaries are taxed with VAT and profit tax. Within the framework of special taxation systems, organizations are taxed with taxes that replace VAT and/or profit tax.
Responsibility: The scope of responsibility is also determined by the legal type of the organization. For example, in the case of an LLC, the founder is liable for his company's assets. LLC structures can protect their personal assets in the event of a lawsuit. The name already suggests that the scope of responsibility is limited. And in case of registering as an individual entrepreneur, the founder is responsible for his personal property.
Documents: Each business, as a legal structure, depending on the type of activity falls under the appropriate taxation system defined by law, which in turn implies appropriate documentation and reporting. If you are setting up your company as a legal entity, you will need to regularly submit certain government reports.
Hierarchy: Some types of organization must have a board of shareholders. In some cases, this board must hold meetings annually. Corporate hierarchy also prevents the business from closing if an owner transfers shares or leaves the company.
Registration: The legal structure of the business is also a prerequisite for registering the business. You cannot apply for the necessary licenses and permits without the appropriate legal form. For example, you need to register as a legal entity to organize postal communication activities, winning games, lotteries.
Possible consequences of choosing the wrong legal structure: At the initial stage, the choice of the legal type of the company is important, although it may be subject to change later. However, changing business structure can lead to tax consequences and unplanned business liquidation.
If several persons intend to carry out joint business activities, then it is necessary to register a legal entity: LLC or joint-stock company (closed or open, depending on the number of founders).
The difference between a legal person and a physical person, the concept of a physical person
Both physical persons and organizations have the right to engage in entrepreneurial activity, being registered as a legal entity. One of the most frequently asked questions is whether an individual is a legal entity or not. In order to carry out entrepreneurial activity, it is necessary to register either as a legal entity or as an individual entrepreneur. Legal entities are organizations that can be profit-seeking (commercial) or non-profit-seeking (non-commercial).
The next frequently asked question is who is considered a physical person. Physical persons can act as an individual entrepreneur, carrying out business activities on their own behalf, at their own risk, bearing responsibility for obligations with their own property, except for the property that is not subject to confiscation by law.
The difference between a legal entity and a physical person as a private individual mainly lies in the difference in the scope of responsibility.
For-profit legal entities can be created in the form of companies, partnerships and cooperatives. The most common legal structures of commercial organizations in RA are LLCs, sole proprietorships, production cooperatives and CJSCs, and the common forms of non-commercial organizations are public organizations and foundations.
Main features of Private Limited Company and LLC
In terms of taxation systems, there is no difference whether the business activity is carried out through a sole proprietorship or an LLC, the main difference is the scope of responsibility, and in terms of accounting and documentation, it is easier to have a sole proprietorship, because it is not necessary to keep cash registers during cash transactions. LLC is a more profitable option if you need to establish a company with several founders. To better understand the differences between an individual entrepreneur and an LLC, let's discuss each one separately.
Individual entrepreneur. An individual entrepreneur is an able-bodied physical person (citizen of the Republic of Armenia, foreigner, stateless person) who has the right, without forming a legal entity, as an individual entrepreneur (from the moment of obtaining state registration in the prescribed manner) independently, on his own behalf and at his own risk, to carry out activities the main goal is to make a profit.
An individual entrepreneur is not considered a legal entity, but the rules applicable to legal entities considered as a commercial organization are applied to the entrepreneurial activity of an individual entrepreneur. An individual entrepreneur does not have a balance sheet, is not obliged to keep financial records and is responsible for his obligations with his own property, except for the property that is not subject to confiscation by law.
Registration of a private individual is carried out quickly and may be rejected if the person is already registered as an individual entrepreneur, the submitted documents are incomplete or he is legally deprived of the right to engage in entrepreneurial activity.
Limited liability company. A limited liability company is a company founded by one or more persons, the authorized capital of which is divided into shares of the size determined by the charter. In this kind of legal structure, shareholders bear the risk of losses related to the company's activities, depending on the limits of the invested deposit. On the basis of these deposits, the statutory capital of the company (the size of the participants' shares) is formed, for which no minimum amount is set, except for the cases specified by law.
In the case of an LLC, the number of company participants should not exceed 49. Otherwise, it is reorganized into an open joint-stock company within one year.
A participant of the company has the right to sell or assign its share or part of it to one or more of the other participants. The participants receive preference to purchase the alienable right in proportion to their shares, unless otherwise stipulated by the charter.
The process of registering an LLC is also simple and fast, it is possible to register even with a charter capital of 1000 RA drams. In case of LLC registration, in contrast to private individuals, there is no state duty, in the case of private individuals, it is set at the amount of AMD 3000. The participant of the LLC can withdraw from the company at any time, receiving his share. There are also privileges for those participants who own at least 10 percent of the company's shares. For example, they can demand the removal of another participant of the company from the company by court order, if the latter makes the normal operation of the company impossible by his actions.
Differences between a sole proprietorship and an LLC
Minimum documentary requirements and 3000 AMD head tax fee. Registration is done at the same time.
Mandatory document submission package and statute. Registration is done no later than two working days after submitting all necessary documents.
The need to report to the tax department and pay taxes incurred
The need to report to the tax department and pay taxes incurred
The right to hire workers in the state
The right to hire workers in the state
Has right of
An individual entrepreneur is registered at the place of residence, it is not necessary to have an activity address
Unlike a private individual, an LLC must have a business address
They bear responsibility for all the property they own, except for the property on which, in accordance with the law, confiscation does not apply.
The LLC founder is not responsible for the company's obligations
Right to free disposal of income
The founder can receive income only in the form of dividends, which can be distributed after making a profit. In addition, income tax must be withheld from dividends.
Statistics on legal structure types of company in RA
Statistics on common legal types in RA have the following image. According to the registrations of the MInistry of Justice of the RA from 01.01.2021 to 31.12.2021, individual entrepreneurs and LLCs are the most popular organizational legal structure forms. The next three most widespread are non-governmental organizations, individual enterprises and production cooperatives.
However, depending on the type of your activity, the organizational legal type can be changed to the most beneficial type for you, in this case it is necessary to consult with experienced specialists who will guide you to the correct choice.
According to the data published by the Ministry of Justice of the Republic of Armenia, the number of persons registered as individual entrepreneurs and LLC in the state unified register of legal entities during the last four years is as follows.
This is perhaps due to the fact that the fastest and least time-consuming of the organizational legal types is the registration of a sole proprietorship, but the obstacles to obtaining external financing in the future should be taken into account and the tax burden caused by the choice of each organizational legal form should be taken into account. Our experienced specialists can guide you in this matter.