The Individual entrepreneurs are drowning: are the massive liquidations still to come?

According to the tax authorities, despite the promises of the state and introduced sets of the support measures, the individual entrepreneurs in Russia are massively leaving the market.  Only in March, almost 65,000 individual entrepreneurs completely terminated their activities.  At the same time, the number of those who have a desire to register their business is relatively small.  Many experts are wondering - will the Russian market be completely free from the individual entrepreneurs in the nearest future?

Sad statistics are supplemented by the fact that the economic crisis, caused by the restrictive measures and the volatility of stock quotes, affected the termination of the most IEs activities.  But it is worth noting that the negative dynamics became evident in the first months of 2020, when the entrepreneurs had not yet gone into isolation, and the markets had been successfully functioning.

The representatives of the International Legal Company agreed with this position, recalling that a significant reduction in the number of entrepreneurs has been observed since 2014 - this may be due to the tax burden on entrepreneurs and the difficult economic situation.  Now, when IEs are faced with the measures, taken because of the coronavirus, many had to suspend their work.

“Further activities are at risk, as not all of the entrepreneurs have enough free funds; almost everything is in circulation. The state support is insufficient, while many individual entrepreneurs, despite the downtime, continue to pay rent, salaries and operating expenses,” states the ILC.

The company's experts told “Rusbankrot” that only the “strongest” will be able to get out of the crisis, and in the nearest future, a wave of IE liquidations might be expected.  At the same time, many will become self-employed and some will go into the shadows. However, we should not expect the complete disappearance of the IEs.

The lawyer and the head of the bankruptcy practice of the “Borodin & Partners” legal company Oleg Sklyadnev agrees that the phenomenon of IE will not disappear.  He notes that after the stabilization of the epidemiological and economic situation, it will be possible to observe the registration of the new entrepreneurs.  However, not all of them will return.

“The small businesses that require hiring the staff and the presence of at least some significant working capital may be in a situation in which the restoration of work will be impossible,” Oleg Sklyadnev noted.

Such entrepreneurs do not have significant financial reserves as a rule, which is critical in the conditions of falling real incomes of the citizens and obtaining loans for virtually non-working businesses.

The fact that in March 2020, 77% more businessmen stopped their activities in comparison with the same period of 2019 has become a reality.  The surveys and research data show that the entrepreneurs are often forced to close their businesses not by administrative coercion, but by their own free will.

The lack of the “financial cushion” and the competition with large enterprises are forcing the smaller organizations to wind down.  A change in purchasing power has also been noted - people are less and less willing to buy unique products in small stores, they prefer shopping centers.  It takes longer to get to the shopping center, but there you can save money.  Due to this tendency, the small shops and associated IEs are gradually leaving.

Artem Denisov, the managing partner of the “Genesis” legal company, said that the number of entrepreneurs can be reduced due to the measures, taken by the Government to support citizens and pay them a minimum salaries in case of a job loss.

“Many employers used full-time employees with IE status to optimize the payroll taxes. Now the employers ”say goodbye” to these employees, and it is easy to do, due to the lack of the need to comply with the Labor Code of the Russian Federation, and the IEs begin to massively terminate their activities, ”says Artem Denisov.

At the same time, the expert noted that currently the IEs have the possibility to use the state support measures which the SMEs have no right for.  For example, the credit vacation, extended to the individuals regardless of whether their activities are in the list of the areas, affected by the pandemic or not. 

It should be noted that representatives of legal companies record an increase in the number of requests for advice on the business liquidation.  Thus, the entrepreneurs want to stop the possible future claims of the creditors, partners, suppliers, customers or representatives of the tax authorities.  In this case, a number of persons who have been previously registered as an individual entrepreneur prefer to file for bankruptcy in a civilized way of regulating of such problems.

The lawyers of the Liquidation and Bankruptcy Bar Association noted that if an entrepreneur does not have a “safety cushion”, there is a real threat of termination of activity. In addition, we should not forget that a large layer of IE activities is associated with an interaction with the restaurant business,the  forecasts for which, unfortunately, are far from the optimistic.

In general, the representatives of the Association noted that in the current situation, the activities of entrepreneurs have become economically inexpedient, disadvantageous and risky.

So far, the statistics show 3.9 million people, registered in the Russian Federation as the individual entrepreneurs.  This is slightly more than the number of those who are registered at the labor exchange as unemployed.  However, the negative economic trends suggest that soon the situation can change dramatically.

The departure of many entrepreneurs from the market also means the dismissal of the employees. The entrepreneurs, as a result, are faced with a choice - to pay all necessary taxes and close the company, or to file a lawsuit and declare bankruptcy.

The partner of “MGP Lawyers” Stanislav Golotvin noted that the situation with entrepreneurs is critical for the development of the Russian economy, as the individual entrepreneurs are mainly the representatives of micro and small businesses.  It is small business that is experiencing the greatest financial problems, due to the restrictions, associated with coronavirus.

“Many entrepreneurs and self-employed in the current situation prefer to abandon the status of individual entrepreneurs in order to save on taxes, insurance and pension contributions.  But after the improvement of the situation, not everyone will return to the entrepreneurial activity,” said Stanislav Golotvin.

The expert believes that many former entrepreneurs will prefer to be employed in the future to reduce the risks. Stanislav Golotvin also recalled that in Russian realities, some of the IEs are not really entrepreneurs - they use this status to optimize the taxes, protect assets and for more efficient management.

Evgeni Matsak, a lawyer and partner of the “Globallaw International Center for the Protection of Rights”, adheres to a rather optimistic position, emphasizing that the concept of “IE” cannot evaporate, since it is a convenient legal form for the small businesses.

“The individual entrepreneurs, applying the simplified taxation regime, are exempted from the accounting.  In addition, there is no double taxation for the IEs: the money, received in the account, can be freely withdrawn from an ATM,” said Yevgeny Matsak.

For comparison, in LLC money cannot be withdrawn freely, you need to pay it to the founders in the form of dividends or transfer it to the employees as a salary, which requires payment of taxes on dividends, personal income tax and contributions to the budget.  The expert also emphasized that the control of the tax authorities over IEs operations is less stringent than over the legal entities.  For these reasons, we should not underestimate the demand for IEs registration in the future.

It is worth noting that many entrepreneurs, in spite of everything, still rely on their tangible and intangible assets, continuing to function and at the same time, suffering from the significant losses.  Will the state's proposed tax and contribution deferrals, privileges in refinancing loan obligations, and a prohibition of the tax inspections of individual entrepreneurs help to save the small businesses?  The question is rather a rhetorical one, since the final result is yet to come.