Assessment of the Efficiency of Operating as a Sole Proprietor under Tax Optimisation and Risk Minimisation Conditions

Анотація

Introduction. In the current geopolitical situation caused by martial law in Ukraine, domestic small businesses operate under pervasive risks, limited financial resources and increasing tax burdens, which challenge their security, resilience and survival. The choice of an optimal legal form of business and tax regime directly affects the profitability of entrepreneurial activity. Sole proprietors under Group 2 of the simplified taxation system are approaching the upper income thresholds, which raises the question of choosing between transitioning to Group 3 of the single tax or registering a limited liability company (LLC). Tax planning becomes increasingly complex due to the lack of comprehensive studies that account for the specifics of different types of activities, cost structures and administrative burdens. Purpose. The aim of the study is to conduct a comparative analysis of the efficiency of operating as a Group 2 sole proprietor, Group 3 sole proprietor and an LLC, taking into account the full scope of tax liabilities, mandatory payments and administrative costs; to identify critical transition points between legal forms for two typical business models – service provision and retail trade; and to develop practical recommendations for optimising tax burdens under the legislation effective in 2025. Methodology. The research is based on comparative analysis of tax regimes using financial modelling under various activity-level scenarios. A calculation and analytical method is applied to determine income thresholds at which a change in legal form becomes economically justified. A structural cost analysis is used to define the total tax burden, including the single tax, military levy, unified social contribution, value-added tax and administrative expenses. Results. A detailed assessment of tax liabilities for a Group 2 sole proprietor, Group 3 sole proprietor (with and without VAT) and an LLC under the general taxation system was performed for two business models. For service activities with a low share of material costs, it was established that a Group 3 sole proprietor without VAT remains the optimal option up to an annual income of UAH 6.5 million, providing savings of up to UAH 150,000 compared to an LLC. For retail trade with a high share of goods procurement, a critical transition point to a Group 3 sole proprietor with VAT occurs at an annual turnover starting from UAH 5 million, where VAT credit recovery reduces the effective tax burden to 8.2–9.1%. A decision matrix was developed to support the selection of an optimal business form depending on income volume, cost structure and the need to work with VAT payers. A methodology for calculating the economic feasibility of transitions between business forms, considering transitional costs and tax audit risks, is proposed.

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