PRIVATE BUSINESS AND HOW TO APPROACH IT?

Private Business and How to Approach It?

Or in other words, what should we keep in mind when we decide to start our own private business and proceed to register a company?

The purpose of this article is not to make you experts in finance, accounting, or running a private business. The aim of this article is to highlight how and what elements you should not overlook when you decide to start a private business and to find the right specialist to answer your questions when you take the "startup" step.

When we decide to register a company as the first step in our private business

Before starting a private business and proceeding to register a company, we need to clarify many elements, facts, possibilities, and risks of the startup. The purpose of this article is also to make every young entrepreneur think deeply on the topic and not to make hasty actions that will later be a burden. When registering a company, everyone has an idea of a certain type of private business and the possible expenses, as well as the anticipated income from their activities, but in reality, very few people (judging from my practice) take into account the accompanying costs and complications that go hand in hand with registering a company.

First and foremost, every young entrepreneur (by young, I mean someone who has recently planned to engage in private business, not necessarily young in age) should ask themselves, after having ready ideas and preliminary exploration for their future realization, what is the most suitable legal form? I won't delve into details on this question. According to the current Bulgarian legislation, there are a specific number of legal forms for companies. They are OOD (Limited Liability Company), EOOD (Sole Limited Liability Company), AD (Joint-Stock Company), EAD (Sole Joint-Stock Company), SD (Partnership Company), KD (Limited Partnership), KDA (Partnership Limited by Shares). There are also possibilities for engaging in commercial activities by subjects that are not companies, such as ET (Sole Trader) or a person registered under the rules and conditions of the BULSTAT Register, exercising a free profession. I will not focus on facts like which is the most suitable legal form (in principle, OOD or EOOD, which many can explain why) and so forth, because the internet is full of this type of information. I will focus more on topics such as managing a private business, accounting obligations, administrative duties for filing information with official bodies and state institutions, and obligations for social and health insurance.

As the first step, consider whether you have the right to be a manager and what obstacles might prevent you from becoming a private businessman ?

Factors that might "hinder" you in your initiative called private business are diverse. You may be working under an employment contract or a management contract and at this stage, not planning to quit your current job. In this case, disciplinary dismissal certainly doesn't seem like a suitable alternative. Unfortunately, this alternative is possible if you do not do a little preliminary preparation before starting your private business. Open the documents you have signed with your current employer, read carefully your employment contract, as well as its annexes, possibly your job description and the company's rules where you are employed. Look for texts that prohibit you from performing parallel competitive activities or require you to inform your employer if you start some other side job parallel to your employment contract. Consult the HR department to see if your aspiration to embark on a private business adventure will become a problem for your current employer.

Insurance obligations are slightly different from the other side of the barricade, i.e., from the standpoint of the private business(man)

Often many entrepreneurs are surprised that they must pay insurance contributions after they have already started a private initiative. "Why is that? I'm working under an employment contract and my employer insures me?" - these are the two most common questions. The answer is that there is a maximum insurance threshold. For 2016 it is 2600 leva and it is expected to increase. If your gross salary is an amount less than the maximum insurance threshold, you will have to pay some insurance contributions. For the exact amount, it's good to consult an accountant or a payroll specialist. The numbers in the article are only indicative. To clarify the situation a little more, I'll give an example. You work under an employment contract and receive a relatively good salary - for example, 1500 leva. From it, your employer makes the necessary deductions so that you receive less. You decide not to give up the security of your salary and start a small online private business in your spare time. You register an EOOD and become its manager. You had an idea that you would have to pay some insurance contributions and you know that the minimum wage for the country is about 350 leva, you've heard that you can insure yourself at the minimum, and therefore, it seems that even if something needs to be paid, your insurance contributions probably won't exceed 40 leva per month and might not be a serious hindrance for your private business budget. Rest assured, you are making a gross mistake. Why is that?

There exists a classifier of professions and positions and, besides the maximum insurance threshold, there is also a minimum insurance threshold. However, the minimum insurance threshold is a bit more interesting than the maximum one because for each profession it is different and definitely not equal to the country's minimum wage, as you probably think. Here's the logic. Every commercial activity (of a company) has a unique code of economic activity. According to this code of economic activity (for example, 62 for Web Portals), job and position codes are determined by the National Classifier of Professions and Positions. They are divided into different directions, with the first four being the most interesting. The highest class encompasses managerial personnel - directors, managers, and similar positions. Next are second-class analytical specialists - for example, a chief accountant, in-house counsel, etc., followed by operational specialists - secretary, office assistant, etc., and lastly, fourth class - support staff. Usually, the minimum insurance threshold for positions described in the first class - managerial personnel, does not fall below 800-900 leva monthly in the best-case scenario. It is possible that for the professional direction of your online business, the minimum insurance threshold could be over 1000 leva per month.

Another interesting point is the ratio of insurance contributions for private business worker-employer, which you probably haven't thought about until today. Up until now, your employer has been deducting insurance contributions for the worker's account and PIT from your salary and budgets the insurance contributions at the employer's expense, paying them together to the state budget. Now that you are an entrepreneur and business owner, there is no one to do it for you instead. You have to do it yourself or hire a specialist to do it on your behalf and at your expense. Usually, these are your accountants.

Which moment here can surprise you as an emerging private business(man)? Most likely, you have been appointed in your own EOOD under a management and control contract (there are other options, but we will not discuss them here). I.e., you are the worker, and the employer is your EOOD. It is clear that your EOOD cannot obtain funds from anywhere except from generated income from the activity or if it hasn't yet realized revenue - from your budget. You understand that the contributions are paid every month, right? 

Here's what happens. You receive a salary under an employment contract of 1500 leva from your current employer. The maximum insurance threshold for 2016 is 2600 leva. 2600-1500=1100 leva. You appoint yourself in your EOOD approximately at a salary of 1000 leva under a management and control contract (or a close amount, because these are the minimum insurance thresholds for managerial personnel). The remainder of your possible income until reaching the maximum threshold is 1100 leva, i.e., you fall within the remainder to reach the threshold, and therefore you have to pay in full each month:

• Insurance contributions at the worker's expense,
• Insurance contributions at the employer's expense,
• PIT.

The approximate value of the listed 3 types of expenses each month is somewhere around 380 leva.

Partners of a private business(man).

• Accountant or accounting firm.

I have already mentioned that many things related to your business will probably need to be done by specialists. Keep in mind that like any other job, theirs is also paid. You might be able to reduce costs by hiring someone on a civil contract to process your information from home for significantly less money or by hiring an accounting firm/office. To receive quality accounting service (which is really important), it is good to carefully evaluate your partner. Do a detailed market, price, and capacity study before registering your company.

If you turn to an accounting firm, they may offer subscription services. There are different possibilities here - for instance, they may offer you a package with included services and consultations or only a service package, with everything outside the package including every separate consultation being chargeable. My personal recommendation is to choose a firm where they freely answer your questions without charging extra for each call, even if the monthly subscription is slightly more expensive, because this would encourage you to stop asking questions. If you stop asking questions, you risk making substantial mistakes in organizing and managing your business. Keep in mind that all your financial information is with your accountants, and they are the people who should support you in making your management decisions in these directions:

• How to optimize the taxes of your private business
• What are the risks if you commit administrative violations or
• Disregard some of your documents
• How to optimize your costs
• When and in what situations to seek assistance from a financier, lawyer, or another consultant.

It is good for the firm you turn to to have software solutions so you can track your expenses by item, and if you find a hole in your business budget, take your management decision to optimize this expense (e.g., telephony or a certain type of stationery or something else).

What are the risks if you turn to an "expert" who processes your documents in their spare time at home?

• They are likely not to have the necessary software,
• They are likely not to have enough time to thoroughly investigate each of your inquiries or cases;
• They might not respond to your inquiries at all because they are at work, and their phone may often be switched off or continuously busy;
• They might not have backups of the information provided to you, and if their computer breaks, they might not be able to recover it. This risk should not be underestimated. Every company has an administrative obligation to keep its commercial documentation for 5 years, and the documentation related to personnel – for 50 years.
• As the complexity of your activities increases, they might not properly cover all the cases related to your business and may not give you the best possible directions, and they might even make mistakes. In such a case, you practically have no possibility of holding them accountable and take on this business risk entirely. If an accounting firm serves you, you can always refer to the signed contract with them, request a discount from the price, compensation for the harm caused, or a penalty even if you don’t have such a clause in your contract.

My personal advice is when choosing a firm to partner with your private business, look for one where people are really working, not one that looks fancy. You will recognize it by the fact that the reception will always be full of people (probably other clients), the shelves will be full of documents, and the people will definitely appear busy with what they do. You won't see them browsing social networks and talking in the corridor over coffee during working hours.

Finally, but not least on the topic of accountants, I'll share from my personal experience that the negative outcomes of poorly managed accounting often become evident only after the first audit, which is when business owners bitterly regret not carefully and judiciously choosing their partner-accountant. If your accountant was good, then your audit should conclude with a clean act. If your audit ends with a tax assessment, there are different scenarios:

• You have had information from your accountant about the risks you are taking, but you ignored them by underestimating the risk, dismissing their warnings as an impossible hypothesis, or relying on the thought "Who will catch me." In this case, your accountant is not responsible for your results.
• Your accountant does not pay you the necessary attention, assuming that as a business owner, you should specifically ask, assess the risk, and make your calculations. This approach I know well and is far from wrong. After all, it is fair for each person to be responsible for their actions. Consultations are a paid service, and the client should request it before receiving it.
• You have asked plenty of questions, but your accountant is not competent enough to assess and respond.

Excluding the first instance where private businessmen are to blame for the results themselves, in the second and third cases, I recommend changing the specialist. If you somehow associate your business partner with the behavior described in the second and third hypotheses, consider whether to continue the partnership. It is good for everyone to be responsible for their actions, but ultimately, to ask a question, you need to be aware of what to ask about. Often young entrepreneurs don't know what questions to ask, and their partners need to give them more information and in advance. 

Audits are standard tax procedures, and each company is usually audited at least once every 3 to 5 years. The accounting of each company should be conducted so that no accounting errors are found during the audit, and the documents accompanying your invoices (as additional evidence) should be complete and accounted for in a way that is satisfactory. Besides the Accounting Act, your accountant should be familiar with at least the VAT Act, the Corporate Income Tax Act, the Income Tax on Individuals Act, the Tax and Social Security Procedure Code, the Excise Duties and Tax Warehouses Act, and properly apply national and international accounting standards, know the practices and procedures of the NRA, as well as their internal instructions.

• Lawyer, in-house counsel or law firm

This specialist is also important for your private business. It is good to have someone close who reviews your documents, explains what commitments you undertake and what risks you carry. Whether it's a contract, a power of attorney, or another document, always when you sign something it is good to be aware of what will follow for you and your business from your signature.

When selecting a specialist, keep in mind that lawyers are specialized like doctors. The colleague who helps you get rid of your fine before the traffic police or register your company may not be particularly effective if you want to finance your business with a bank loan.

Look for lawyers or law firms whose narrow specialty is commercial relations, corporate law, banks, taxes, and always seek a second opinion. The appropriate partner for your private business development is one who offers you different solutions, clarifies the pros and cons of each option, and gives you the opportunity to choose what is best for you and your business without imposing their opinion.

You may decide to turn to a financial consultant if you haven't already.

Other business-related commitments. Submitting documents here and there.

• National Revenue Agency (NRA)

Firstly, the financial year starts on January 1 and ends on December 31. You must align your documentation with this requirement - invoices, reports from cash registers, POS terminals, etc.

From January 1 to March 31 of the current year, your company's annual tax returns for the previous financial year must be prepared and sent to the NRA.

• NSI. During the same period, reports are submitted to the National Statistical Institute.
• Publication of annual financial statements in the Commercial Register.

From March 31 to June 30, your annual financial statements should be prepared and published in the commercial register at the registry agency. The reports must be signed by an accountant. A state fee is paid for their publication.

Your tax returns are a different document from your financial statements. In the tax return, you yourself indicate the information, how many taxes, what types and amounts your EOOD owes.

Your annual financial statements contain documents that provide a numerical expression of the economic activity of your EOOD throughout the year. They include: Balance Sheet, Income Statement, Cash Flow, accounting policy, Reference for the employed personnel.

This can also be done electronically.

The reports and tax returns are submitted by you or your accountant absolutely every year, regardless of whether your EOOD has had activity or not. It doesn't matter if your business has not been particularly successful, and you've decided to stop. This does not relieve you of the obligation to notify the tax administration about the financial, tax, and economic status of your company.

Liquidation

When a business starts, owners often overlook the topic of liquidation, but it should not be ignored at all. If the registration of a company is, so to speak, the "birth" of a business, then liquidation is its end. Like any procedure, liquidation is associated with additional costs.

As for the duration, unlike the registration of a company, which administratively lasts a few days, liquidation lasts about a year. The procedure is conducted simultaneously before the district court and the Commercial Register. Usually, the execution of the procedure is associated with the assistance of a lawyer. What most often happens during liquidation?

• Your accountants prepare liquidation balances and reports at a certain moment in time, for which you should allocate a budget.
• You turn to a lawyer who conducts the procedure before the court and the commercial register. The judge, where your file has ended up, determines a minimum 6-month period (wait time) during which any creditor (if you have any) who remembers that your company owes them something can bring their claims against it. The amount is paid from the liquidation share.
• Your company's activity is officially terminated, but it continues to exist until you hand over the salary records to the National Social Security Institute (NSSI) for storage, for which there is a special administrative order, and liquidate its assets (the liquidator usually liquidates the company's assets). Usually, your accountants can assist with the procedure before the NSSI. Generally, the NSSI conducts a review of your documents, which from the moment of appointment to its completion and finalization may take between 3 months and 1 year.
• After handing over the records to the NSSI, if you don’t have creditors and the assets are liquidated, your company is deleted from the commercial register.

It is important to know that during the liquidation procedure, which can easily exceed a year, the liquidator has the right to a salary every month. Besides their salary, the required contributions are paid to the budget. If you act as the liquidator for your own company (which is legally not prohibited), you should know that you are obliged to pay your contributions to the budget - at the worker's and employer's expense, just like at the beginning.

Instead of a conclusion to this article, I want to wish great success to all aspiring businessmen and finish with a saying I know from my grandmother, which I find especially appropriate in this case: "Measure three times, cut once."