1% IE vs. 5% LLC: Which Tax Strategy Is Best for Your Freelance, Startup, or Scaling Business?

Table of contents

TL;DR: 1% IE vs 5% LLC in Georgia

Introduction

The 1% Model: What an Individual Entrepreneur in Georgia Really Is

The 5% LLC Model: Understanding the Georgia Corporate Structure

When the 5% LLC Makes More Sense Than 1%

VAT Georgia: Where the Real Strategic Difference Appears

Banking: IE vs LLC in Practice

Cost Comparison: Setup and Ongoing Expenses

Georgia Tax Residency: Does It Change the Answer?

The Strategic Question

Scenario 1: The Solo Remote Freelancer (Early Stage)

Scenario 2: The Growing Service Agency (Mid Stage)

Scenario 3: The Tech Startup (Scaling & Investment Stage)

Scenario 4: High-Margin Consultant Scaling Beyond Threshold

Scenario 5: Cross-Border VAT Exposure

Scenario 6: Exit Planning and Asset Sale

Liability Comparison

Whether You’re a Freelancer or a Scaling Founder. Structure It Right.

Frequently Asked Questions (FAQs)

TL;DR: 1% IE vs 5% LLC in Georgia

If you qualify for Small Business Status Georgia, you can operate as an individual entrepreneur in Georgia and pay 1%  This works best for solo freelancers with low risk and predictable income.

A Georgia LLC operates under a distributed profit model. Corporate tax is generally 5% on distributed profits, offering limited liability, investor readiness, and stronger scalability.

1% IE is simple and lean.5% LLC is structured and scalable.

If you are building a long-term business, hiring, raising funds, or planning an exit, the LLC structure is usually the stronger strategic move.

The best structure depends on revenue size, liability exposure, VAT Georgia obligations, banking requirements, and future growth plans.

Planning beats restructuring.

Introduction

If you’ve been researching business registration in Georgia, you’ve probably seen two numbers everywhere:

1% tax.5% tax.

At first glance, the choice seems obvious. Why would anyone pay 5% if 1% exists?

But here’s the reality.

The 1% Individual Entrepreneur in Georgia and the 5% Georgia LLC are built for completely different types of businesses. One is designed for simplicity and solo operators. The other is designed for scale, structure, and long-term growth.

Choosing the wrong one does not just affect your Georgia tax amount this year. It affects:

• Your liability exposure

• Your ability to raise investment

• Your banking experience

• Your VAT Georgia obligations

• Your exit strategy

This guide breaks down both structures clearly, without marketing language. By the end, you’ll know exactly which model fits your business today and where it may take you tomorrow.

The 1% Model: What an Individual Entrepreneur in Georgia Really Is

Let’s start with the structure everyone talks about.

An individual entrepreneur in Georgia is a personal business registration. It is not a company. It is not a separate legal entity. It is you, operating commercially under your own name with a registered status.

When you register as a Georgia individual entrepreneur, you receive:

• A personal TIN Georgia

• Official tax registration with the Revenue Service

• The ability to invoice clients legally

• Access to apply for Small Business Status Georgia

And this is where the famous 1% tax comes in.

Under Small Business Status Georgia, qualifying individual entrepreneurs pay 1% tax on turnover, not profit.

That distinction matters.

If you invoice €100,000 in a year and qualify under the regime, your tax is €1,000.It does not matter whether your expenses were €10,000 or €60,000. The 1% applies to revenue.

That simplicity is why freelancers and consultants love it.

Why the 1% Tax in Georgia Is So Attractive

The 1% tax Georgia regime works extremely well in certain scenarios.

It is ideal when:

• You are a solo freelancer

• You provide services remotely

• Your costs are low

• You do not need investors

• You have limited liability exposure

• You want minimal administrative complexity

For many digital professionals, especially those relocating under a Georgia freelance visa, this model is clean and efficient.

Setup is straightforward.Ongoing reporting is light.Accounting requirements are manageable.Georgia company formation cost is lower compared to a full LLC.

If your revenue is under the Small Business Status threshold and your operations are simple, this structure can be highly efficient.

But efficiency is not the same as scalability.

What Most People Don’t Consider About the 1% Model

Here’s where things get more serious.

An individual entrepreneur in Georgia does not create a separate legal entity. That means:

You are personally liable for business obligations. If your client sues, if you sign a contract, even if there is a dispute, your personal assets are exposed.

For freelancers earning moderate income, that risk may be acceptable. For growing startups handling large contracts, it becomes dangerous.

There are also growth limitations.

You cannot issue shares.You cannot bring in investors formally.You cannot easily sell the “business” because legally, it is just you.

Banking can also become more complex as turnover increases. When you attempt to open a bank account in Georgia, banks will evaluate your activity volume and structure. For higher revenue entrepreneurs, corporate structure often appears more credible.

If you plan to scale beyond solo consulting, the 1% model starts to feel tight.

The 5% LLC Model: Understanding the Georgia Corporate Structure

Now let’s move to the Georgia LLC.

A Georgia LLC is a separate legal entity. It exists independently from you.

When you register an LLC in Georgia, you receive:

• A corporate TIN Georgia

• A separate legal identity

• Limited liability protection

• Shareholder structure

• Clear ownership percentages

This immediately changes the risk profile of your business.

If the company signs a contract, the company is liable.If the company has debt, it is separated from your personal assets.

For many founders, that alone justifies the structure.

How the 5% Corporate Tax Actually Works

Here’s where confusion often happens.

Georgia operates under a distributed profit tax system.

Corporate income tax is generally triggered when profits are distributed, not when they are earned.

Under the standard model, when profits are distributed as dividends, a 5% corporate tax applies.

This means:

If your company earns €100,000 and reinvests the profits, taxation may not be triggered immediately.If you distribute €100,000 as dividends, 5% corporate tax may apply.

The Georgia tax amount calculation under the LLC model is therefore fundamentally different from the 1% turnover model.

It is profit-based. Not revenue-based.

That makes a huge difference for businesses with significant expenses.

When the 5% LLC Makes More Sense Than 1%

The LLC structure becomes more logical when:

• You are building a SaaS product

• You have co-founders

• You plan to hire employees

• You are raising capital

• You want to sell equity later

• You need stronger international credibility

Startups planning growth beyond solo operations rarely remain comfortable inside an individual entrepreneur structure for long.

The LLC also interacts more cleanly with international clients. Many foreign corporations prefer contracting with a limited liability company rather than an individual entrepreneur.

If your business looks like a company, it should legally be a company.

VAT Georgia: Where the Real Strategic Difference Appears

One of the most overlooked elements in this decision is VAT Georgia.

VAT operates separately from income tax.

If your turnover exceeds the VAT registration threshold, you must register for VAT regardless of whether you are an individual entrepreneur or LLC.

However, LLCs typically handle VAT compliance more smoothly because:

• They already maintain structured accounting

• They operate with corporate bookkeeping systems

• They separate domestic and foreign income more clearly

Under an individual entrepreneur model, VAT complexity can start feeling heavy if operations expand.

For cross-border service providers, reverse charge mechanisms may apply. But proper structuring matters.

Choosing a structure without evaluating VAT exposure often creates future compliance friction.

Banking: IE vs LLC in Practice

Let’s talk about something practical.

When you attempt to open a bank account in Georgia, banks evaluate structure, turnover, and clarity.

For lower revenue freelancers, individual entrepreneur banking is straightforward.

For higher revenue operations, banks often view a Georgia LLC as a more structured and scalable vehicle.

If you are searching for the best bank in Georgia for foreigners, understand that banks conduct detailed compliance checks. Having a clear LLC structure often reduces friction, especially when working with international clients or higher transaction volumes.

Banking is not just administrative. It affects daily operations.

Liability and Risk: The Silent Factor

This is where emotion meets logic.

If your annual turnover is €40,000 and you provide graphic design services, the risk exposure is low.

If your turnover is €400,000 and you provide technical development services to foreign corporations, liability risk increases.

An individual entrepreneur in Georgia does not separate business from personal exposure.

A Georgia LLC does.

That distinction alone often answers the question for scaling businesses.

Cost Comparison: Setup and Ongoing Expenses

Yes, the individual entrepreneur model has lower initial Georgia company formation cost.

Yes, accounting is simpler.

But the difference in cost should be evaluated against:

• Growth trajectory

• Liability exposure

• Investor potential

• Future restructuring costs

Many founders register as individual entrepreneurs to “save money” and then restructure into an LLC one year later.

Restructuring costs more than choosing correctly from the beginning.

Georgia Tax Residency: Does It Change the Answer?

Some founders believe becoming a tax resident automatically makes the 1% model superior.

Not necessarily.

Georgia tax residency determines personal tax obligations. It does not replace corporate structure decisions.

You can be a tax resident and operate an LLC.You can be a tax resident and operate as an individual entrepreneur.

The choice depends on business structure, not residency alone.

The Strategic Question

• So which is better?

• The wrong question is:

• Which tax rate is lower?

The correct question is:

Which structure matches my business model, risk exposure, and growth plan?

If you are:

• A freelancer earning under threshold

• Working alone

• Low risk

• Not raising capital

The 1% Small Business Status Georgia regime is extremely efficient.

If you are:

• Building a startup

• Hiring

• Scaling

• Seeking investment

• Handling larger contracts

The 5% Georgia LLC structure is usually the more stable long-term foundation.

Tax is important. Structure is decisive.

And choosing correctly at the beginning avoids expensive corrections later.

Scenario 1: The Solo Remote Freelancer (Early Stage)

Profile

• One person

• Service-based income

• Foreign clients

• Low operational expenses

• No employees

• Revenue under Small Business Status threshold

Think: developer, designer, copywriter, performance marketer, consultant.

What Happens Under 1% IE?

If you register as a Georgia individual entrepreneur and qualify for Small Business Status Georgia, you pay:

1% on turnover

If you invoice €80,000 per year → tax = €800.

Accounting is simple. No complex corporate governance. No shareholder structure. Low Georgia company formation cost.

For this stage, the 1% IE model is extremely efficient.

What Happens Under 5% LLC?

Under a Georgia LLC:

Corporate tax is triggered when profits are distributed.Dividend distribution generally triggers 5%.

If profit after expenses is €70,000 and you distribute it, you may face 5% corporate tax on distributed profit.

In this scenario, the LLC adds complexity without adding value.

Verdict for Stage 1

For a solo operator with predictable income and low risk:

1% IE wins.

Scenario 2: The Growing Service Agency (Mid Stage)

Profile

• Revenue €150k–€400k

• Multiple contractors or employees

• Larger international clients

• Long-term contracts

• Growing liability exposure

This is where things start shifting.

Under 1% Individual Entrepreneur

Yes, the 1% tax still applies (within threshold). But risk exposure increases.

1. You are signing larger contracts.

2. You may have service-level agreements.

3. You may be liable for delivery failures.

As an individual entrepreneur in Georgia:

You are personally responsible.

If a dispute arises, your personal assets are exposed.

Banking also becomes more scrutinized when you attempt to open a bank account in Georgia with increasing turnover.

And here’s something most people ignore: Large international companies often prefer contracting with a limited liability company, not an individual.

Under 5% Georgia LLC

Now the LLC becomes more attractive:

• Limited liability protection

• Corporate credibility

• Clear shareholder structure

• Easier expansion

• Stronger banking position

The Georgia tax amount calculation changes from turnover-based to profit-based.

If you have real expenses, the LLC may become equally or more efficient.

Example:

Revenue: €300,000Expenses: €180,000Profit: €120,000

Under IE at 1% → €3,000 tax on turnoverUnder LLC → 5% tax on distributed profit (if distributed)

But the key difference here is not tax, it’s risk and scalability.

Verdict for Stage 2

When revenue grows and contracts become heavier, LLC starts making strategic sense, even if the tax difference looks small.

Scenario 3: The Tech Startup (Scaling & Investment Stage)

Profile

• Founders

• Investors involved or planned

• Equity structure

• Product-based (SaaS, platform, app)

• Future exit potential

Here the answer becomes clear.

An individual entrepreneur in Georgia cannot:

• Issue shares

• Allocate equity

• Bring investors formally

• Structure stock options

• Sell the company as a corporate entity

There is no separation between business and person.

Investors do not invest in individuals.They invest in companies.

Under a Georgia LLC

You get:

• Share capital

• Ownership percentages

• Investor entry capability

• Exit planning flexibility

• Clear dividend structure

The 5% corporate tax model becomes aligned with growth.

The LLC also integrates better with:

• International contracts

• VAT Georgia compliance

• Structured payroll

• Cross-border operations

Verdict for Stage 3

For startups planning scale:

LLC is not optional. It is necessary.

Scenario 4: High-Margin Consultant Scaling Beyond Threshold

A consultant grows fast and hits the turnover threshold under Small Business Status Georgia.

Now what?

If you exceed the threshold, you lose 1% eligibility: Your taxation changes. Compliance becomes heavier. Restructuring may be required.

Many founders come to us at this exact moment. The clean solution would have been structuring as a Georgia LLC earlier. Planning beats reactive restructuring.

Scenario 5: Cross-Border VAT Exposure

Under VAT Georgia, once turnover exceeds the registration threshold, VAT registration may be mandatory.

Export services may benefit from reverse charge mechanisms, but compliance still applies.

LLCs typically manage VAT reporting more efficiently because:

• They already operate corporate accounting

• They separate revenue streams clearly

• They maintain structured bookkeeping

Individual entrepreneurs can manage VAT, but scaling makes it heavier.

If your business involves EU clients, B2B services, or international invoicing, the LLC structure often reduces friction.

Scenario 6: Exit Planning and Asset Sale

1. You build a product.

2. Revenue grows.

3. A buyer approaches.

If you operate as an individual entrepreneur:

There is no company to sell.

You must restructure before acquisition. That costs time and money.

Under a Georgia LLC:

• The company can be sold.

• Shares can be transferred.

• Valuation is clean.

If long-term exit is part of your thinking, start with the correct structure.

Liability Comparison

Let’s break this clearly:

Scaling Model: How Founders Usually Evolve

We see this pattern constantly:

Stage 1 → Individual entrepreneurStage 2 → Revenue growsStage 3 → Liability increasesStage 4 → Investors or employeesStage 5 → Restructure into LLC

That restructuring step is avoidable if the founder anticipates growth early.

Choosing a structure based on current income only is short-term thinking, but choosing structure based on projected scale is strategic thinking.

Whether You’re a Freelancer or a Scaling Founder. Structure It Right.

At Gegidze, we don’t just register structures.

We analyze:

• Your projected revenue• Your risk exposure• Your Georgia tax residency status• Your VAT Georgia exposure• Your banking needs• Your scaling roadmap

Then we build the right foundation.

Before you choose 1% or 5%, speak to our team.One 15-minute consultation can save you years of restructuring.

Book your free consultation with Gegidze and structure your business correctly from day one.

Frequently Asked Questions (FAQs)

Is the 1% Individual Entrepreneur in Georgia always better than a 5% LLC?

Not always. The 1% regime under Small Business Status Georgia is ideal for freelancers with lower turnover and limited risk exposure. But if your business is scaling, hiring, or planning investor involvement, a Georgia LLC with 5% distributed profit tax may be more sustainable long term.

Can I switch from 1% IE to a Georgia LLC later?

Yes. Many founders start as an individual entrepreneur and later register an LLC. However, restructuring during growth can be more complex than setting up the right structure from the beginning.

Does Georgia tax residency affect whether I choose IE or LLC?

Georgia tax residency impacts your personal tax position. Corporate structure, whether IE or LLC, is a separate decision. However, both must align for optimal tax efficiency and compliance.

Do both structures require VAT registration in Georgia?

Yes, if turnover exceeds VAT Georgia thresholds or taxable transactions apply. VAT obligations are independent from whether you operate as an individual entrepreneur or an LLC.

Is it easier to open a bank account in Georgia as an IE or LLC?

Banks in Georgia apply compliance checks in both cases. For higher turnover or international operations, a structured Georgia LLC often aligns better with banking expectations and KYC procedures.