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Nowadays, people who are about to start their entrepreneurial adventure or who are on their way to doing so, usually face the dilemma between operating as a natural person or as a legal entity, always wondering which is the best option or at what time they should take which step.
In order to answer these questions, entrepreneurs resort to various means and among them it is worth mentioning the support provided by various institutions in the city of Medellin, both public and private, including Ruta N, Creame, ANDI, the Chamber of Commerce and many others.
Based on the foregoing, we would like to offer our opinion on the topic, with the sincere intention of enriching the debate on the subject and thus supporting businessmen and entrepreneurs in making the most appropriate and propitious decision for each particular case.
First of all, it should be pointed out that both possibilities are totally valid in terms of commercial and tax legislation, but both offer completely different advantages and disadvantages, as follows:

  • Starting activities as a natural person is more flexible, from every point of view, in particular, this can be clearly seen in the fact that it is not mandatory to sign any contract (although it is advisable) to start activities, even if there are “partners” in the project.
  • On the other hand, legal entities are created in any case by means of a partnership contract, which may have several natures (S.A., LTDA, S.A.S. among others).
  • As a general rule, businesses carried out by individuals are part of the simplified VAT tax regime, which means that they are not obliged to invoice in the same way as legal entities, which are part of the common VAT regime without any excuse, likewise the way of accounting is different in both scenarios.
  • Now, acting in commerce as a natural person has an advantage for income tax purposes, since the income tax rate is different for natural persons than for legal entities, the former being gradual, starting at 0% of the net income up to 34%, depending on the volume of income; while for the latter it is a fixed rate and its amount is 25% of the net taxable income (ART 26 E.T), to which other taxes are added.
  • In addition, individuals are not generally required to pay the CREE (tax for equity), unless they have more than one (1) employee, in which case they will have to pay the full rate of 9% on sales, for legal entities this tax operates with or without employees.
  • The lack of formality makes it unlikely that large and long-established companies will engage commercially with natural persons in search of services; they prefer to contract with legal entities.
  • The lack of separation of the assets of the natural person and the business makes the commercial activity notoriously more risky for the participants of the business, since with each contract the trader is putting his personal assets at risk; the opposite happens with legal entities, whose objective is precisely to separate the assets of the participants and the business.

As can be seen, both situations are clearly different and in each of them both pros and cons can be observed, therefore, it is essential that these decisions are supported by professional experts in the field and that each case is taken with the utmost care.
With the above we consider that the topic was addressed with the precise level of depth to support entrepreneurs in making decisions in this regard from a general perspective, however, this does not meet the specific day-to-day needs of each of them, as each case is completely different.
BY: SANTIAGO PINZON SOSA CORPORATE ATTORNEY

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