Taxation in network marketing. Features of organizing an MLM company

Network marketing has become an integral part of society's business life. The legality of MLM is indisputable, and earnings from network business, like income from any other commercial activity, are subject to state taxation.

Basics of multi-level marketing taxation

Many doubt whether it is worth getting into network business, assuming that they will need a license to conduct such activities. Considering the realities of doing business in our countries, distribution does not involve such nuances.

Choosing ownership form in network marketing

When starting a business, the question arises of which form of business organization to choose. Individual Entrepreneur (IE) and Limited Liability Company (LLC) are the most common types of ownership, which have quite a few differences between them.

Sole Proprietorship (SP) is an individual who is registered as an entrepreneur. An SP does not have separate property, so in case of bankruptcy, personal belongings will be at risk. 

Limited Liability Company (LLC) is a separate legal entity with its own rights, obligations, and property. In case of bankruptcy, LLC founders risk the statutory capital (minimum 10,000 rubles) and subsidiary liability (they will have to pay off the debts as owners of the organization). Personal property can be preserved with evidence of acting in the organization's best interests.

Regardless of the form of ownership of the company, there is a list of assets that cannot be taken from the founders, namely:

- the only residence;

- clothing, footwear, and household items;

- food and money totaling no less than the established amount of the subsistence minimum.

If you are planning to do business alone, an individual entrepreneur (IP) is suitable for you. An entrepreneur can work without employees and be responsible for everything independently.

To start your own business with partners, you need to register a Limited Liability Company (LLC), where up to 50 people can be taken into the share. An LLC must have at least one employee who coordinates the activities - the director. It can be one of the owners or a hired employee.

Even if you are the sole founder and manage the company's activities independently, you need to conclude an employment contract with yourself and pay yourself a salary. In the contract, on the one hand, you will act as a representative of the LLC, and on the other hand, as an employee.

Accounting

Individual entrepreneurs do not maintain accounting. And for individual entrepreneurs under special tax regimes, it's simpler: one tax replaces several, and only one simple report needs to be submitted.

In contrast to individual entrepreneurs, all LLCs are required to keep accounting records - make entries to reflect each operation on the company's accounts and submit financial statements at the end of the year. Large companies hire in-house accountants for this, while small ones hire contractors or use specialized services.

Revenue Disposal

An individual entrepreneur can dispose of earned money as they please and at any time take revenue for personal needs. 

The founder of an LLC can receive money (apart from salary) in the form of dividends, which are paid no more frequently than once a quarter and only in the presence of net profit according to accounting data. It's worth mentioning that tax is levied on dividends. 

Suspension of Activities

Individual entrepreneurs are required to pay fixed insurance contributions for themselves. If a person decides to temporarily suspend activities, the contribution must be paid even in the absence of income.

In 2019, in Russia, the amount of insurance contributions for all individual entrepreneurs is 36,238 rubles, but if the annual income from the business exceeds 300,000 rubles, then in addition to the fixed part of the contributions, an additional 1% of the income exceeding 300,000 rubles will have to be paid.

Limited Liability Companies (LLCs) only pay insurance contributions on the salaries of their employees. In the event of suspending activities, the rule "no salaries - no contributions" will apply.

When choosing between an individual entrepreneur (IE) and a limited liability company (LLC), you need to consider the specifics of your future business, its development, and the extraction of profits from its activities. If you want to develop a large network company, scale it, attract investors - it is better to register an LLC right away. An IE will be suitable for a starting network company studying the market situation.

Registration of MLM Enterprise

At this stage, a question may arise whether regional registration is beneficial or if the company should be moved to an offshore jurisdiction.

An offshore is a method of international tax planning, a business tool that allows reducing tax expenses.

Regional Registration

If it is planned that the main part of the transactions will be carried out within the country and the reputation of a national manufacturer of goods is important for the MLM company founder, there is no point in bothering with foreign registration.

Companies registered in Russia may have tax benefits and preferences on-site. In July 2018, a certain "anti-sanctions field" was created for local entrepreneurs - a package of laws was adopted that introduced the so-called special administrative regions (SAR), Russian offshore zones on the islands of Russky (Primorsky Krai) and Oktyabrsky (Kaliningrad Oblast).

For companies that wish to register and operate in SAR, tax and currency benefits are provided. The government has also eased the conditions for hiring migrants to work for them. However, future SAR participants must undertake to invest at least 50 million rubles in the Russian economy within six months.

Special economic zones play a significant role in the business offshore strategy. This way, companies are protected from any sanctions by transferring assets to a local jurisdiction, and capital returns to the country's economy from abroad, attracting foreign investments.

Foreign offshore registration

International offshore companies significantly expand opportunities in global markets and provide access to services not available in Russia's domestic markets. Offshore accounts and companies are often created for confidential fund storage and transfer, organizing product supplies, as well as for investment, including purchasing real estate abroad.

Advantages of registration in offshore territories

- Preferential taxation or complete absence of taxes.

- Confidentiality of asset ownership and management.

- In classic offshore zones, there are no requirements for financial and accounting reporting.

- Foreign company image.

- Absence of requirements for the payment of the authorized capital.

- Ability to open accounts worldwide.

Due to the increased scrutiny of offshore jurisdictions in recent years, registration in offshore territories will require consultations with experienced international tax specialists. Otherwise, offshore business is justified, provided that the registration zone is chosen correctly.

For example, an offshore company in Monaco is contraindicated for those seeking affordable conditions for establishing a business. For foreigners, the procedure of opening a company in this country involves huge costs of time and money resources. But registration in Monaco attracts those who are looking for a place to store large sums of money, keep silent, and simply enjoy comfort and a high standard of living.

To Be or Not to Be

When it comes to the appropriateness of registering a business, legality and transparency are indeed worth it. When creating an MLM company, remember about responsibility, as the reputation of even one network organization affects the prestige of the entire MLM industry.

If the business is conducted "in the black market," regulatory authorities can show up for inspection at any time.

Let's imagine that a buyer was dissatisfied with the quality of the purchased goods and filed a complaint to the company with Rospotrebnadzor. In this case, a business without registration faces various fines for tax evasion, conducting illegal activities, etc.

Bringing a business into the "white zone" is worth it not only to avoid legal responsibility. Having official registration as an individual entrepreneur or LLC makes it much easier to enter into transactions and cooperate with contractors. In addition, legal companies increase the loyalty of both potential and existing partners, which affects their decision to cooperate with you. Considering all of the above, a registered business has more chances to scale easily and quickly.

To optimize the taxation conditions of a business, it is important to know the smallest nuances and peculiarities of local laws, analyze development trends in the industry worldwide.

Do you have questions about organizing a network business? Perhaps you are considering launching your own MLM company? Do you want to assess the prospects of network business for your industry? Specialists from flawlessmlm.comAlways ready to help and provide you with a free consultation.