Microenterprises - an entrepreneurial vehicle with significant advantages for entering the business world

Publishing date: 15 February 2023

In this article you will learn more about how to step into business by setting up a small business. The article may also be useful even for entrepreneurs who already own a micro-enterprise but want to fix some details, in particular on the taxation of micro-enterprises, as well as the turnover thresholds from which the tax system for these entities changes.

Contents

1. Microenterprises - definition. What is a microenterprise and what does it mean in today's economic system?
2. Starting a micro-enterprise - the necessary steps, paperwork and procedures to enter the business world
3. Micro-enterprises and taxes - details on the conditions and thresholds to be met to qualify for the dedicated tax regime
4. Example of an accounting monograph for a sponsorship by a micro-enterprise

1. Microenterprises - definition. What is a microenterprise and what does it mean in today's economic system?

When the decision to enter the business world as an entrepreneur has been made, the first dilemma that arises is the mode or form of organisation that should be given to the future company.

The options at this stage are to set up an LLC or a D-LLC. Of course, many entrepreneurs starting out may choose to start a business in the form of a PFA (authorised natural person), but this form of organisation will prove insufficient as turnover develops and will not benefit from the advantages of classifying the newly established company as a micro-enterprise.

There are several advantages of classifying a newly established company as a micro-enterprise, including:

• Flexibility. Micro-enterprises have a simple and flexible organisational structure, allowing them to adapt quickly to changes in the market.
• Lower costs. Micro-enterprises have lower operating costs compared to other forms of organisation, such as limited companies, both in terms of setting up and staying in business.
• Limited liability. If a micro-enterprise runs into financial difficulties, the founders' liability is limited to the company's share capital.
• Less restrictive regulations. Micro-enterprises are subject to less restrictive rules and regulations than other forms of company organisation, such as joint stock companies, for example.
• Tax benefits. Micro-enterprises are eligible for special tax benefits, such as exemption from paying additional taxes or tax deductions, because the government usually has an interest in creating a certain effervescence in the private business sector, in which case it would have more to gain even if it collected lower taxes individually from each micro-enterprise.

It should be noted that this form of organisation may be more suitable for companies with small-scale activities or a small number of employees. If your company has plans for expansion or a larger volume of activity, it is advisable to consider other forms of organisation.

2. Starting a micro-enterprise - the necessary steps, paperwork and procedures to enter the business world

As regards the concrete way to set up a company that will be classified as a micro-enterprise, there are a number of steps that must be completed.

• The first step is to choose the name of the future company. The choice of the name is conditional on checking its availability in the Commercial Registry Office database, as the company name must be unique. Once the name preferred by the entrepreneur has been identified, it can be reserved at the same institution.
• The second step is to choose or designate a space to serve as the registered office. This space will also be the official address of the company to be found on the official incorporation documents. The premises may be the founder's (entrepreneur's) own premises or those rented or used on a commodatum basis.
• The third step is to prepare and draft the articles of association or memorandum of association of the future company. The articles of association are the document that forms the basis for setting up any company and contain provisions on the rights and obligations of the natural and legal persons, as appropriate, participating in the setting up of the company.

• The fourth step is to open a bank account and deposit the share capital, which in the case of an LLC or D-LLC is a modest amount set by company regulations.
• The final step is the actual registration at the Commercial Registry Office of the corresponding county town.

3. Micro-enterprises and taxes - details on the conditions and thresholds to be met to qualify for the dedicated tax regime

The reasons for choosing to open a new company and classify it as a micro-enterprise are based on certain benefits of the applicable tax regime. The tax rules applicable to micro-enterprises aim to encourage the development of entrepreneurship and increase the tax base by increasing the number of companies set up.

One of the most important advantages, and the one that most attracts entrepreneurs to fall into the micro-enterprise category, is the amount of taxation based on turnover. Currently, the tax rate for micro-enterprises with a turnover of up to €500,000 is:

• 1% of revenue in a financial year.

Of course, the tax rate is attractive for start-up businesses. However, in order to benefit from these fairly good tax conditions, the start-up company will have to meet and maintain a number of conditions cumulatively.

• Turnover or income from the sale of products and services does not exceed EUR 500,000 at the official exchange rate in lei on the closing date of the financial year corresponding to the realisation of this income.
• The existence of at least one full-time employee who must be legally employed within 30 days of setting up the company.
• The activities carried out must not be in the field of business or management consultancy for more than 20% of the total income obtained on the basis of tax documents. This condition does not, however, apply to tax consultancy, which may include financial auditing, as well as consultancy on VAT refunds or other tax matters.
• The share capital of a micro-enterprise cannot be owned by the State.
• Shareholders or associates of a company classified as a micro-enterprise must not hold more than 25% of the value of the shares or voting rights in more than three Romanian companies which are also classified as micro-enterprises.
• The company must not be in dissolution or liquidation proceedings.

The legislator has also provided for some areas and types of legal persons which cannot be included in the category of the tax regime specific to micro-enterprises, even if all the above conditions are met. These exceptions concern certain areas of activity such as:

• Banking;
• Insurance and reinsurance and intermediation of these types of services;
• Capital markets and capital market intermediation;
• Gambling;
• Exploration, development and exploitation of hydrocarbon deposits (oil, natural gas).

There is also a positive exception, if one can put it that way, whereby certain firms can opt for the micro-enterprise tax regime, even if they do not qualify for this category. This concerns firms operating in the HoReCa sector covered by several CAEN codes as follows:

• 5520 - Short-stay accommodation facilities;
• 5530 - Camping sites and campsites;
• 5510 - Hotels and accommodation facilities;
• 5590 - Other accommodation services;
• 5610 - Restaurants;
• 5621 - Food or catering activities for events;
• 5629 - Other food service activities n.e.c.;
• 5630 - Bars and beverage serving activities;

Companies operating in these areas therefore have the option of opting for the micro-enterprise tax system even if they do not tick any of the above conditions. Moreover, the whole micro-enterprise tax system is optional and not an obligation for companies.

When one or more of the conditions listed are no longer met, the company exits the specific tax system. Entrepreneurs or managers of such companies are obliged to notify the tax authorities if they find themselves in this situation by 31 March of the year following the year in which the conditions are no longer met. Once out of the micro-enterprise tax system, companies are subject to the normal corporate tax regime.

4. Example of an accounting monograph for sponsorship by a micro-enterprise

The accounting of micro-enterprises is identical and subject to the same accounting rules as the rest of the companies not included in this special tax class. Even if the 1% tax is levied on turnover or on all income earned, there is a difference in tax treatment, for example in the case of sponsorship of non-profit or religious entities.

Sponsorships may be granted under the terms of Law 32 of 1994 provided that the entities to which they are addressed are entered in the Register of entities/units of worship. Amounts paid to these entities are deducted from the tax that the micro-enterprise would have to pay. However, there is also a limit up to which such transactions can be made, namely a maximum of 20% of the income tax that the micro-enterprise owes for the quarter in which the sponsorship payment was recorded in the accounts.

According to Article 56 of the Tax Code, amounts not deducted from the income tax due are carried forward. The carry-over period is 28 consecutive quarters, i.e. 7 years.

For a more comprehensive understanding of this possibility of deduction, a brief accounting monograph on a sponsorship carried out by a micro-enterprise in accordance with the law can be illustrated by way of an example.

Thus, assuming that a micro-enterprise makes a sponsorship to one of the above-mentioned entities registered in the Register of religious entities/units, the sponsorship or payment made for this purpose is entered in the accounts in account 6584 - Expenditure on amounts or goods granted as sponsorship. Thus, if we take into account the amount of 1000 lei granted, we will have:

6584 = 5311 or 5121 - 1000 lei,

Where 5311 represents the House in lei and 5121 bank accounts - depending on how the transfer of 1000 lei was made, in cash or by bank transfer.

If we assume that the sponsorship took place in November of the tax year, and at the end of December, the micro-enterprise has to pay a tax of 5000 lei (i.e. 1% of the turnover, or of the total income made in the reference year), a certain amount can be deducted from this tax, which is calculated according to the Tax Code within the limit of 20% of the tax payable.

Thus, the amount that can be deducted from the tax due is:

20% of 5000 lei = 1000 lei - i.e. exactly the amount sponsored.

After deduction of the sponsorship, the calculation of the microenterprise income tax is as follows:

5000 lei - 1000 lei = 4000 lei.

The next step is, of course, to record this tax in the accounts:

698 = 4418 4000 lei, where

698 is the income tax expense account and 4418 is the income tax account.

In conclusion, entering the world of entrepreneurship by taking advantage of the somewhat more favourable tax regime for micro-enterprises is a step that should be considered by any entrepreneur, be he experienced in business or even a beginner at the beginning. Favourable taxation of 1% of revenue is still acceptable for many small companies with a turnover of no more than EUR 500 000 per year and is a slightly more advantageous system than corporate taxation, sparing entrepreneurs the inherent problems of recording eligible expenses in this case.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.