How to Move from an Individual Entrepreneur to an LLC: Procedure, Assets and Taxes

Step 1. Set up the LLC

A company is founded by decision of its founders; if there is a single founder, that person decides alone (Article 11 of the LLC Law). With one founder, the charter approved by that person is the constituent document; when there are two or more participants, they sign a founders' agreement (Article 12).

The former IE usually becomes the sole participant and director of the new LLC. Charter capital consists of the nominal value of the participants' shares; a minimum amount may be set by licensing requirements (Article 15). Each participant must pay in its contribution in full within the period set by the constituent documents, which may not exceed one year from state registration.

Step 2. Transfer the assets

Contributions to charter capital may be money, securities, other things, property rights or other rights with a monetary value (Article 16 of the LLC Law). A former IE has three main ways to transfer equipment, goods and vehicles.

• Contribution to charter capital. The monetary value of a non-cash contribution is approved unanimously by the participants. Non-cash contributions worth more than 10,000 BCV are valued by an appraiser, and their value may not exceed the appraised value (Article 15).
• Sale of the assets from the IE to the LLC under a sale contract — at market price, with payment and documents.
• Lease — the IE keeps the assets and leases them to the company. Convenient for a transition period, but it creates separate rental income for the IE.
• For the LLC, funds received as a contribution to charter capital are not treated as income (Article 304 of the Tax Code).

VAT on the transfer of assets

If the IE is a VAT payer — its sales income for the tax period exceeds UZS 1 billion or it has opted into VAT voluntarily (Article 237 of the Tax Code) — transferring goods as a contribution to a legal entity's charter capital is a taxable supply (Article 239). Tax is charged as on a sale.

The recipient LLC may then offset the tax paid by the participant on the transfer of property to charter capital (Article 266). For the offset to go smoothly, the transfer is documented with a handover act and an invoice. If the IE is on turnover tax, check how the transfer is taxed before the deal.

Step 3. Contracts with customers and suppliers

Contracts signed by the IE do not pass to the LLC automatically. There are two routes: re-sign the contracts in the LLC's name, or document a change of party to the obligation. A debt may be transferred to another person only with the creditor's consent (Article 322 of the Civil Code), so the IE's obligations cannot be moved to the LLC without the counterparty.

In practice a schedule is drawn up: contracts with major customers and suppliers are re-signed in the first month, new deals are concluded by the LLC from day one, and the IE completes settlements under old contracts. Remember to update details with the bank, acquirer and marketplaces — otherwise revenue will keep arriving at the IE.

Step 4. Employees

The employer of an IE's staff is the entrepreneur personally, so the employment contracts with the IE are terminated and new ones are signed with the LLC. An employee may terminate a contract with an IE on their own initiative with seven calendar days' written notice, and the period may be shortened by agreement (Article 511 of the Labour Code). The simplest option is termination by mutual agreement and hiring by the LLC on the same day.

The employer records hiring and termination in the employment record book and in the interagency software and hardware system Unified National Labour System (Article 125 of the Labour Code). Notice periods, severance and compensation on termination of a contract with an IE are set by the employment contract — check them in advance.

Taxes after the move

• An LLC with total income for the tax period of up to UZS 1 billion may apply turnover tax (Article 461 of the Tax Code); above the threshold it pays VAT and profit tax. For certain activities turnover tax does not apply at all.
• The owner receives the LLC's profit as dividends, taxed at 5% for a resident individual (Article 381 of the Tax Code). The director's salary is subject to 12% PIT and social tax.
• An IE with outstanding obligations keeps filing returns until it ceases activity. IEs that pay taxes in the manner provided for legal entities are subject, on ceasing activity, to the compulsory liquidation requirements set for legal entities (Regulation approved by Cabinet of Ministers Resolution No. 66).
• The LLC keeps its books under NAS from day one, including opening entries for the charter capital contribution.