When a Sole Proprietor Should Pick the General Tax System

In previous posts I covered when a sole proprietor should pick the monotributo system. It is a system I highly recommend for people just starting out with a small business in Argentina. However, there are some cases when monotributo is either not allowed or recommended for sole proprietors.

Exceeding the Monotributo Limits
If you exceed or expect to exceed the monthly monotributo limits, you can't enroll in this system. The limits are currently $72,000 pesos annually for service activities and $144,000 pesos annually for other activities. On an annual basis, the business cannot consume more than 10,000 KW of electricity for service businesses and no more than 20,000 KW for other businesses. Additionally, the business cannot occupy more than 85 m2 for service businesses or more than 200 m2 for other businesses.

Large Capital Investments
If you're starting a business that is going to require a large capital investment with purchases of equipment and materials, it probably is not a good idea to start as a monotributista and then switch to the general system. The reason being is that if you start in the monotributo system, all the VAT that you pay to purchase the equipment and materials is going to be lost. Keep in mind also, that since monotributistas are not subject to income tax, you won't be able to take the depreciation on your capital equipment or be able to deduct your materials.

Businesses that require large upfront investments may not pay any VAT taxes for a year or two due to all the VAT credit they have from their initial investments. Additionally, income taxes could be minimal after depreciating the equipment, materiales, and other expenses.

Importing
Monotributistas cannot import, period. If you have a business that is going to import, you will have to be in the general system.

Expats without a DNI
Finally, if you don't have a DNI, you can't enroll in monotributo. You'll need to form a company and operate within the general system.

Practical Advice
I would like to finish this article just by saying that if you have a small business and provide some small product or service and want to operate legally in Argentina without much difficulty, monotributo is a good option. Anyone looking to run a serious business with growth prospects needs to look to the general system.

Frank, from Sugar & Spice, commented on a post I made the other day about the monotributo system and some disadvantages. To use a cookie analogy, if you're an expat looking to bake cookies in your house and sell them to a few restaurants or shops, monotributo is fine. If you're going to be opening big stores (like Frank has done in Palermo), investing in expensive commercial ovens, selling your products to Jumbo or other supermarkets, monotributo is not going to work.

When a Sole Proprietor Should Pick the General Tax System

Sole Proprietorships

How does one do business in Argentina? If you read any of the 200 guides out there written by lawyers, they’ll begin to explain the difference between the different types of legal entities in Argentina -- SRL or SA -- but since all the guides are designed for Fortune 500 companies, there’s a key option missing -- a sole proprietorship.

In the US, when you are going to start doing business as a consultant or sole proprietor, you don’t need to do anything special, you just get started. At the most you’ll get a business license from your municipality and register for sales taxes. But the IRS doesn’t require anything from you. At the end of the year you just attach an extra schedule to your 1040 and you’re off and running.

In Argentina, as you’ll see with many things, the system is different. Anyone in Argentina who is engaged in a trade or business needs to register with AFIP (the Argentina tax agency) and the province where the business is based.

Sole Proprietorship Are For Residents Only
It is important to note at this point that if you are not a legal resident in Argentina (i.e. you don't have a DNI), you may not do business as a sole proprietorship, since you have no authorization to work within Argentina’s territory. You will need to form a corporation in order to do business.

Unlimited Liability
Just like in the United States and elsewhere, if you are operating your business as a sole proprietor, you have unlimited liability and no personal protection against creditors. You will need to determine whether the limited liability offered by a corporation is worth the added expense and hassle (and believe me it is much more expensive and a lot more hassle) of maintaining a company.

As a practical matter, an expatriate who has recently arrived to Argentina and maintains their assets abroad is pretty much judgement proof. Lawsuits in Argentina take forever, there is no debtors prison, and the worst that happens to debtors here is that they have their reputation ruined with their suppliers and they are put into the Veraz (the local credit bureau).

On the other hand, if you have properties in your name, significant assets, or you expect to be running a large company with many employees, you should be looking at forming a company.

Federal Registration: Two Different Regimes
If you decide to go forward as a sole proprietor, there are two basic options to choose from when it comes to your taxes. You can either choose to enroll in VAT, or if you are a small business with limited revenues, you can choose to enroll in a parallel regime called “monotributo” (or single tax). It’s actually a misnomer because you’ll pay more than one tax as an entrepreneur, but the tax is certainly simpler and easier to calculate.

I highly recommend the monotributo regime for entrepreneurs who are just starting out and have limited sales. I especially recommend it for entrepreneurs from the United States who do not have experience with VAT. Not only will it allow you to get your feet wet and see whether your business idea works, you’ll be subject to less administrative headaches as you try to get your business off the ground.

If you don’t qualify for monotributo, you will need to register for income taxes, self employment taxes, and VAT.

Provincial Registration
Until now, we’ve been talking about federal taxes. However, provincial taxes also apply for most non-manufacturing activities. If your business is located in the City of Buenos Aires, you’ll need to register with Rentas. If you’re in one of Argentina’s provinces, you will need to register with the province’s tax authority.

Printing Invoices
This article is not meant to discuss taxes, but all the previous steps are required to obtain the different inscription papers which will allow you to finally go to an official print shop and have your invoices printed up. Once you have your invoices (“facturas” as they are known in Spanish) you can finally begin to sell legally. Selling without a factura or official ticket emitted from a Controlador Fiscal (a special receipt printer) is illegal.

There are more steps to be followed if you are going to sell to the general public rather than businesses (such as the need to emit tickets via the Controlador Fiscal) and that is beyond the scope of this particular article. However, every entrepreneur should be aware that running a business as a sole proprietorship is a viable possibility in Argentina and I recommend it for new businesses.

As always, please feel free to contact me should you require assistance with your particular situation or need more information. I’m happy to assist when possible.

Sole Proprietorships