A sole proprietorship - is it worth setting up?

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The largest number of small economic entities is in Poland. They are extremely important for the Polish economy. Most of the Polish GDP is generated in small businesses. The majority of them are sole proprietorships. They are a very simple form of running a business. In addition, we do not have partners then, so we make all decisions ourselves. Read what a sole proprietorship is!

Definition of economic activity

The definition of economic activity can be found in Art. 3 of the Act of March 6, 2018 - Entrepreneurs Law.

In the light of this definition, an economic activity is an organized gainful activity performed in its own name and on a continuous basis.

Recall that the above provisions do not apply to:

  • production activities in agriculture in the field of agricultural crops and animal husbandry and breeding, horticulture, vegetable growing, forestry and inland fishing;

  • renting rooms by farmers, selling household meals and providing other services on farms related to the stay of tourists;

  • the manufacture of wine by producers who are farmers who produce less than 100 hectoliters of wine during the marketing year referred to in Article 17 sec. 3 of the Act on the production and bottling of wine products, trade in these products and organization of the wine market;

  • the activities of farmers in the field of sales referred to in article 1. 20 paragraph 1c of the PIT Act;

  • activities carried out by rural housewives associations pursuant to the act on rural housewives circles, meeting the conditions referred to in Art. 24 sec. 1 of this act.

In the following, we will find the definition of an entrepreneur. It is a natural person, legal person or an organizational unit that is not a legal person, the legal capacity of which is granted by a separate act, carrying out economic activity. Entrepreneurs are also partners of a civil law partnership in the scope of their business activity.

Definition of activity in the light of the Income Tax Act

In the light of the PIT Act, economic activity should be understood as gainful production, construction, trade, service activities as well as prospecting, exploring and extracting minerals from deposits, as well as activities involving the use of intangible and legal assets and assets - conducted on one's own behalf, regardless of its the result, in an organized and continuous manner.

An economic activity must therefore have the following characteristics:

  • profit-making - the pursuit of economic activity is aimed at making profits (non-profit-making activity is not economic activity). The result of the activity is not important here, but its goal;

  • the subject of activity is a very wide catalog, which means that practically most of the activities are included in it;

  • conducted on its own behalf. Thus, the provision of services by subsidiaries (e.g. employees, contractors) is not an economic activity;

  • it must be organized, which means that economic activity requires an establishment;

  • it must be continuous, which means that the performance of economic activity is not a one-off event; it requires the performance of a series of activities, very often repetitive and stretched over time;

  • cannot be counted among other sources of income

A sole proprietorship

A sole proprietorship is, as we have already written, the simplest form of running a business. It is usually characterized by the lack of employment of workers. In order to be able to conduct such activity, the taxpayer must register with CEIDG.

Importantly, taxpayers who decide to set up such an activity must note that the company's assets are their own assets. Therefore, in the event of failure, they are liable with all their assets for the debts of the enterprise.

We must remember that this responsibility also applies to the spouse. Of course, the taxpayer may limit it by establishing property separation.

In the case of sole proprietorship, these matters are dealt with by the entrepreneur. Thus, he is responsible for them. Importantly, the taxpayer may hire employees or cooperate with the family. The above means that some of the sole proprietorships are sometimes large companies.

In practice, some matters are transferred on the basis of a power of attorney, e.g. accounting and HR matters.

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Features of a sole proprietorship

First of all, such activity is easy to open (an entry in CEIDG is enough). Taxpayers may also suspend or liquidate it. They can be taxpayers. One-man activity is also characterized by the simplicity of decision-making. In such a company it is done by one owner.

The taxpayer has a very large selection of taxation forms for this activity:

  • flat tax,

  • progressive tax,

  • checked lump sum,

  • tax card.

The taxpayer can change the method of taxation.

Example 1.

The taxpayer registers the economic activity. Its subject is renovation of apartments. It will not incur significant operating costs. He wonders what form of taxation to choose.

In this case, the registered lump sum seems to be the most optimal. The lump sum rate is 5.5%. The taxpayer will not incur significant costs, which means that other forms of taxation will not be beneficial for him.

Example 2.

The taxpayer registered a business activity in the field of legal services. He agreed that he would have a permanent contract for legal services for a large entrepreneur. The taxpayer expects his income to be very high. It will bear the costs, especially in the beginning of operations. What form of taxation should he choose?

Here the flat tax seems to be the most advantageous. The taxpayer provides for high income and the choice of a different form of taxation, e.g. progressive tax, would mean higher taxes.

The biggest disadvantage of such activity is liability to third parties. In this case, it is the responsibility of both the entrepreneur and his spouse.

VAT and sole proprietorship

When running a business, a taxpayer must choose whether he wants to be a VAT payer. In many cases, we do not have such a choice, the above applies to the sale of goods and the provision of services listed in art. 113 paragraph. 13 of the VAT Act.

The choice of taxing an activity with VAT is associated with numerous obligations. VAT taxpayers must keep records and settle this tax for monthly and quarterly periods.

In addition, they must add VAT to the sale of their services or goods (in practice, this may mean that the services and goods have a higher price).

The advantage for VAT taxpayers is the possibility to deduct input tax related to purchases. Thus, if the taxpayer's activity involves large investment outlays, he should opt for VAT taxation.

Example 3.

The taxpayer starts a business. It consists in the hotel business. In the first two years, he will be building a guesthouse in the mountains. Thus, it will incur large investment expenditures. Should he choose VAT in this case?

Yes, the taxpayer should choose to tax the activity with VAT, even though he will not make any sales in the first two years. Despite the lack of sale, it will have the right to deduct input tax.

In this case, the taxpayer will therefore reduce the cost of the investment by the deducted VAT.

In conclusion, if we want to run a business, one of the best forms is a sole proprietorship. It is also the most frequently conducted activity in Poland. However, when choosing this form of activity, the taxpayer must take into account the necessity to choose its taxation. It should be well thought out.