Two Business Models for Sole Proprietors: The Risky One Could Cost You Everything

Business Models for Individual Entrepreneurs

According to ХВИЛЯ: Lawyer Bohdan Yankiv has outlined two primary business approaches for individual entrepreneurs (sole proprietors, known as FOPs in Ukraine). The first is a high-risk model involving the purchase and sale of goods without proper documentation. The second is a transparent model that requires documented infrastructure and verified records for every transaction. The risky model typically includes sourcing products from platforms like AliExpress or through cargo services without original documents proving their origin. As Yankiv notes,

“a payment screenshot or even a shipping receipt is absolutely not proof of a product’s origin.”

Under the risky model, entrepreneurs often understate prices in invoices to reduce customs duties and split their business across multiple FOPs to stay below legal thresholds. This approach relies on a legislative loophole that could be closed with a single evening vote in the Verkhovna Rada, threatening the entire business structure. Yankiv warned,

“a loophole in the law can be removed in one evening by a vote in the Verkhovna Rada, and then the whole business collapses.”

The Transparent Business Model

In contrast, the transparent model requires documentation for every step of the business process. This includes:

• expense invoices
• official cashless payments
• fiscal receipts
• inventory tracking

A transparent business also involves infrastructure such as cashless purchasing, storage space, officially registered employees, and advertising or a website. This model provides entrepreneurs with better conditions for running their business, including the ability to sell it later.

The tax authorities actively analyze supply chains and the tax histories of counterparties, sending over 40,000 informational notices about potential violations. A risky business built on legislative gaps holds no real value, unlike a transparent one, which can be successfully sold on the market.

In today’s business environment, choosing between a risky and a transparent model can significantly impact a company’s stability and growth prospects. The transparent model not only helps avoid legal risks but also creates opportunities for development and expansion in a competitive market. This topic is especially relevant given the tax authorities’ active efforts to enforce compliance and identify potential violations among entrepreneurs.