Outgrowing the 1%: Moving from Individual Entrepreneur to LLC in Georgia

In the country of Georgia we know of no procedure that turns an individual entrepreneur into an LLC. Under the Law on Entrepreneurs an individual entrepreneur is a person doing business in their own name, not a legal entity, and the Law's rules on converting one legal form into another are written for companies. That is our reading of the Law, not a sentence in it. On that reading, moving means registering a new LLC, handing the business over to it piece by piece, and then closing the individual entrepreneur registration or keeping it. Planned ahead, it is paperwork on a date you choose; discovered in December, after the ceiling has been crossed, it costs more.

When an individual entrepreneur should move to an LLC

• Turnover: the forecast for this year or the next approaches GEL 500,000. The ceiling is measured on turnover, so costs do not help.
• Liability: a contract, a client or a product now carries a risk larger than you could absorb personally.
• Hiring: an individual entrepreneur can employ people, but the employer is then you, with everything you own.
• Owners: a co-founder or an investor. There is no share in an individual entrepreneur to give them.
• Clients: procurement teams and platforms that contract only with a company.
• Tax statuses: Virtual Zone and International Company status are granted to legal entities.
• Activity: the work is drifting towards consulting or another activity excluded from the 1% status.

The move does not save tax on the money you live on. Profit an LLC keeps is untaxed until it is distributed, but what you take out as salary or dividends costs roughly a fifth, against 1% of turnover today. The reason to move is the ceiling, the liability, the team or the client, not the rate. Our article on salary and dividends works through that arithmetic.

No one-step conversion from individual entrepreneur to LLC, as we read the Law

The practical result is that nothing passes to the new company by registration: the LLC is a different person from you. Your contracts, your bank account, your Small Business Status and every obligation you took on while trading in your own name stay yours. Each item is moved by its own document, or it does not move.

The hand-over from individual entrepreneur to LLC, in the order that works

1. 1

   Pick the switch date first, at a month end, and work backwards from it. The date decides the tax.

2. 2

   Register the LLC while the individual entrepreneur registration is still active, with yourself as partner and director, or with the co-founder the move was for.

3. 3

   Confirm access to the company's Revenue Service profile and open its bank account. The bank runs a new review in its own time, so start early.

4. 4

   If you are a foreign national without a permanent residence permit, settle your right-to-work authorisation before the switch. It names an activity or an employer, and a change of field needs a new one. Under the Government's rule at the time of writing, the director of a small, fourth-category company applies as a self-employed foreigner, with the company's registry extract and, once the company is over three months old, Revenue Service proof of the company's turnover of at least GEL 50,000 a year per foreign applicant. An individual entrepreneur is asked for the same proof, on the entrepreneur's own turnover.

5. 5

   Have each client sign a transfer of the contract, or a new contract with the LLC, effective on the switch date.

6. 6

   Assign to the company, in writing, what the business runs on: code, designs, the brand and its trademark, domains, equipment.

7. 7

   Issue the last invoices from the individual entrepreneur, file its last monthly declaration, and then close the registration or keep it on purpose.

How the switch date changes the tax

Three switch dates are worth comparing. Before the ceiling is crossed: the year ends under GEL 500,000, the 3% rate does not apply, and the count of years over the ceiling does not start. On 1 January: the cut is clean for the accounts, and a last year over the ceiling is one year over, not two. After the status has been lost: you are an individual entrepreneur under the ordinary rules, taxed at 20% on taxable income, with unlimited liability, the position the move was meant to avoid. The month matters too. As the Code is worded, 3% applies to all the income of the month in which the ceiling is exceeded and of every later month of that year, not only to the amount above GEL 500,000.

Whichever date you choose, keep the two taxpayers apart. The status is declared and paid monthly, so the last invoice of the individual entrepreneur belongs in one month and the first invoice of the company in the next. Money that arrives later for work the individual entrepreneur invoiced is still theirs; agree with your accountant in which month it is declared. Do not invoice your own company from the individual entrepreneur registration for the work you do in it: one payer that directs the work reads as employment, and salary income is outside the 1% regime. VAT runs on its own clock: registration becomes mandatory once a taxable person's taxable supplies pass GEL 100,000 in any twelve consecutive months. As that article of the Code is worded, each person counts its own supplies, so on our reading the company starts a new count and the individual entrepreneur's VAT registration does not pass to it. Confirm it with your accountant: the tax authority may requalify an arrangement whose form does not match its substance.

Closing the individual entrepreneur registration, or keeping it

• Closing: the registry cancels the registration on your own application. File the last monthly declaration and settle the tax first, and ask your accountant what the Revenue Service needs.
• Closing does not end liability. The Law treats you, the natural person, as the successor, so a claim from the years you traded in your own name is still a claim against you.
• If the individual entrepreneur is registered for VAT, look at the stock and equipment first: the Code treats the cancellation of a VAT registration as a supply of the goods still on hand, where input VAT was deducted on them.
• If a residence permit or a right-to-work authorisation rests on the registration, ask what happens to it before the registration goes.
• Keeping it is legitimate when you have a separate activity of your own that fits the status. The monthly declaration cycle then goes on, so ask your accountant how a month with no income is reported, and the ceiling stays personal to you.

What this article does not answer

It does not tell you how your home country will tax a Georgian company that you own and manage; take advice there before the company exists. It does not value the assets you transfer or settle how their transfer is taxed, which needs figures and an accountant. It cannot say whether a bank will open the account, or whether Virtual Zone status will be granted. We register the LLC, agree the switch date with you, prepare the transfer and assignment documents, and close or maintain the individual entrepreneur registration. We do not promise a bank's decision or a tax status, and we do not advise on another country's tax.