Which group of individual entrepreneurs to choose: a complete guide for entrepreneurs

Registering as an individual entrepreneur is not only starting a business, but also a responsible decision that affects the tax burden, reporting, permitted activities, and even profitability.

The question of which individual entrepreneur group to choose arises for everyone who plans to run their own business, from a freelancer to a manufacturer of goods.

This material is your detailed guide that will help you understand the differences between individual entrepreneur groups, evaluate the features of your own business, and choose the best option for running it.

What groups of sole proprietors exist in Ukraine?

Individual entrepreneurs can operate under a simplified or general taxation system.

The simplified system is divided into three groups (1, 2, and 3), and the fourth is a special regime for farmers.

1 group of individual entrepreneurs

An ideal option for a microbusiness that works independently and has a small income.

Briefly about the group:

  • Who can be: only individuals without employees.
  • Types of activities: household services to the population, small trade in the market.
  • Income limit: up to 1,118,900 UAH/year.
  • Taxes: fixed rate up to 10% of the subsistence minimum.
  • Reporting: once a year.
  • VAT: not paid.

Suitable for: market vendors, craftsmen, hairdressers, and private artisans.

2nd group of individual entrepreneurs

This group is suitable for small businesses that have regular customers and up to 10 employees.

Basic conditions:

  • Who can be: an individual entrepreneur with up to 10 employees.
  • Types of activities: retail trade, services to the population, cafes, bars, and workshops.
  • Income limit: up to 5,587,800 UAH/year.
  • Taxes: fixed rate up to 20% of the minimum wage.
  • Reporting: quarterly.
  • VAT: not required.

Example: the owner of a coffee shop with two employees or a beauty salon with several craftsmen.

3rd group of individual entrepreneurs

The most popular group among specialists working with business is IT, marketing, consulting, design, and logistics.

Short:

  • Who can be: an individual or a legal entity.
  • Types of activities: any, not prohibited by law.
  • Income limit: up to 7,818,900 UAH/year.
  • Tax rate: 5% of income or 3% + VAT.
  • Reporting: quarterly.
  • VAT: optional (you can be a payer or not).

Suitable for: IT professionals, freelancers, consultants, agencies working with legal entities or foreign companies.

4th group of individual entrepreneurs

This is a separate category – agricultural producers.

  • Who can be: farms.
  • Taxes: determined depending on the area of the land.
  • Income limit: none.
  • Reporting: annual.
  • VAT: paid according to general rules, depending on the activity.

Comparative table of individual entrepreneur groups

Indicator1 groupGroup 2Group 3Group 4
Who can beSelf-employed person without employeesSole proprietorship up to 10 employeesIndividual entrepreneur or legal entityAgricultural producer
Income limitup to 1.12 million UAHup to 5.59 million UAHup to 7.82 million UAHwithout limit
Tax rateup to 10% PMup to 20% of the minimum wage5% or 3%+VATdepends on the land
EmployeesNoup to 10without restrictionswithout restrictions
Reporting1 time per yearquarterlyquarterlyannual
VATNoNooptionallyby activity
Type of customersonly individualsindividuals, sole proprietorshipsnatural and legal entitieswholesale buyers
Calculation methodcashcash/non-cashanyany

What taxation systems exist and which one to choose?

The taxation system determines how much and how you pay taxes. In Ukraine, there is a simplified and general system.

Simplified taxation system

This is an option for small and medium-sized businesses. The entrepreneur pays a single tax at a fixed rate, without complex accounting reports.

Advantages:

  • simplicity of accounting;
  • possibility of cash payments;
  • a flat tax or a small percentage of income;
  • minimum reporting requirements.

Disadvantages:

  • limits on income and number of employees;
  • restrictions on types of activities;
  • If the limit is exceeded, you need to switch to the general system.

General taxation system

This option is chosen by entrepreneurs who have large expenses or work with large companies.

Main features:

  • taxes are paid on profits (income minus expenses);
  • tax rate: 18% + 1.5% military tax;
  • detailed accounting is maintained;
  • Supporting documents are required for all expenses.

Who is it suitable for: companies operating with high costs (logistics, trade, production).

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    How to choose a taxation system

    To understand which system to choose, consider the following factors:

    1. Income volume. If you plan to earn up to 7 million UAH/year, the simplified system will be more profitable.
    2. Expenses. If expenses are high, a general system can reduce the tax burden.
    3. Number of employees. There are restrictions for the simplified system.
    4. Client type: To work with large companies that require VAT, choose group 3.

    How to choose a group of sole proprietors?

    To choose the right group of sole proprietors, you need to evaluate several key parameters of your business.

    1. Types of activities

    • Services to the population – 1st or 2nd group.
    • Business services (B2B) – group 3.
    • High turnover trade – group 2 or 3.
    • Agriculture – 4th group.

    2. Expected income

    An entrepreneur should clearly understand their annual turnover. If you plan to grow, it is better to immediately choose a group with a higher limit to avoid a forced transition.

    3. Employees

    It is important to know if you plan to hire people. – Group 1 does not allow hired employees, and Group 2 allows a maximum of 10. If the business is growing, Group 3 provides complete freedom.

    4. Type of customers

    • Working with the population (B2C) – group 1–2.
    • Working with legal entities, IT or external partners – group 3.
    • Agricultural business – group 4.

    5. Choice examples

    Field of activityOptimal groupExplanation
    IT, marketing, designGroup 3Works with companies, often from abroad
    Trading in the storeGroup 2There is a cash register, employees, and a stable income.
    Manicure masterGroup 1 or 2Services to the population, small turnover
    Furniture productionGroup 3Ability to work with legal entities
    FarmingGroup 4Land plots, taxation by area

    Professional Solutions specialists will help you assess your income, expenses, and risks to choose the optimal tax model.

    Is it possible to change the group of an individual entrepreneur and how to do it?

    Yes, it is possible to change the group, and this is a fairly common practice.

    When to change group

    • The amount of income has increased.
    • New types of activities have appeared (for example, you started working with legal entities).
    • VAT is required for cooperation with large companies.
    • Are you planning to scale your business or hire employees?

    Transition algorithm

    1. Submit an application to the tax office at your place of registration.
    2. Specify the group you are transferring to and the transfer date.
    3. Confirm the KVEDs.
    4. Wait for confirmation from the tax office (usually 10 business days).
    5. The transition is effective from the first day of the following quarter.

    Example: if you apply in November, the new group will be effective from January 1.

    Liability for the incorrect choice of the individual entrepreneur group

    A mistake in choosing a group can be costly.

    1. Financial penalties

    If an entrepreneur has exceeded the income limit or engaged in prohibited activities, the tax office will assess additional taxes, fines, and penalties.

    2. Additional tax assessment

    An entrepreneur can be transferred to the general system retroactively, then they will have to pay 18% income tax and 1.5% military duty.

    3. Loss of single taxpayer status

    If the conditions of the simplified system are systematically violated, the status of an individual entrepreneur is canceled.

    Conclusions

    Choosing a sole proprietorship group is a strategic decision that determines the tax burden, level of accounting, reporting requirements, and flexibility of your business.

    Before registering, it is worth assessing the type of business, income, number of employees, and type of clients.

    And if you want to avoid mistakes, use the help of professionals – the Professional Solutions company will help you choose a group of individual entrepreneurs, set up a tax system, prepare reports, and support you in all financial matters.

    FAQ

    Which group of individual entrepreneurs should a freelancer choose?

    For most freelancers (IT specialists, marketers, designers, copywriters, consultants), the most optimal is the 3rd group of individual entrepreneurs.

    It allows:

    • work with legal entities and individuals, including foreign clients;
    • receive payment to the account of an individual entrepreneur in hryvnia or foreign currency;
    • pay tax only on income (5% or 3% + VAT);
    • do not keep complicated accounting records.

    What are the income limits for different groups of sole proprietors in 2025?

    In 2025, the following income limits apply for groups of sole proprietors:

    Group of sole proprietorsAnnual income limitFeatures
    1 groupup to 1,118,900 UAHwithout employees, only individuals
    Group 2up to 5,587,800 UAHup to 10 employees, individuals and sole proprietors
    Group 3up to 7,818,900 UAHwithout restrictions on employees, any clients
    Group 4without limitonly for agricultural producers

    Exceeding the limit automatically entails a transition to another group or general taxation system.

    Which group of sole proprietorships is the most profitable in 2025?

    The most profitable group for most entrepreneurs remains group 3 of the single tax (TP).

    Reasons:

    • convenient rate – 5% of income (or 3% + VAT);
    • you can work with both individuals and legal entities;
    • there are no restrictions on the number of employees;
    • minimal reporting and simple accounting.

    However, for a microbusiness with a small turnover (up to 1 million UAH/year), group 1 or 2 may be beneficial due to the fixed tax.

    What happens if you exceed the individual entrepreneur income limit?

    If an individual entrepreneur has exceeded the allowed income limit, the tax office may:

    • automatically transfer it to a higher group or to the general taxation system;
    • calculate additional taxes according to general rules (18% + 1.5% military duty);
    • impose fines and penalties for violating the conditions of the simplified system;
    • to deprive of the status of a single taxpayer.

    Therefore, it is important to monitor your income quarterly and, if necessary, submit an application for a change in the individual entrepreneur group in a timely manner.

    How to apply for a change in the group of an individual entrepreneur?

    To change the group of an individual entrepreneur, you need to submit an application to the tax office at the place of registration.
    The procedure is as follows:

    1. Log in to your taxpayer’s electronic account.
    2. In the “Applications, requests, messages” section, create an application using form 308.
    3. Specify the new group of individual entrepreneurs, the transition date and the KVEDs.
    4. Sign the application with a qualified electronic signature (QES).
    5. Get confirmation from the tax office.

    Important: the transition is effective from the first day of the next quarter. That is, if you submitted your application in May, the new group will take effect from July 1.

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