Self-employed or Ltd. Find out which is better for you
Do you want to start a business, but don't know whether it is better to set up a trade or a company? We have prepared a comparison of the most common forms of business in the Czech Republic! Take a look at the differences, read the advantages and disadvantages and specific practical examples. We hope that at the end of the article you will be clear which way to go.
COMPLETE COMPARISON: COMPANY VERSUS TRADE
|Type of entity||legal person||physical person|
|Number of persons doing business||1 to 50 partners||1|
|Minimum share capital||CZK 1||not determined|
|Liability for debts||low (after the repayment of the share capital the owner of the s.r.o. does not guarantee personal assets)||high (self-employed persons are liable with all their personal assets)|
|Name of entity||optional (not interchangeable with another company)||Your name and surname|
|Position in business relations||operate professionally as an institution||can appear more credible by guaranteeing its own assets|
|Accounting||administratively more demanding (must always keep accounts + publish financial statements)||less administratively demanding (only when the turnover exceeds 25 million, otherwise tax records, flat tax or flat expenses, when it is enough to record income)|
|Taxes and levies||19% tax on profits, 15% withholding tax on shareholders' share of profits||15% income tax, social security and health insurance payments from the start of the business|
|Sale or transfer||is possible||difficult|
|Time-consuming establishment||with a consulting company within a week, it is possible to do it expressly within 24 hours, with your own help within days or weeks (depending on your knowledge and contacts)||usually immediately (free, craft and tied trades), for licensed trades you wait for the issue of a permit|
|Price of foundation||usually 6-10 000 CZK (depending on whether you use the services of specialists or set up your own)||from CZK 1,000 (administrative fee at the office - the only expense in case you arrange the trade yourself)|
|Legal regulation||Act on Business Corporations||Trade Law|
ADVANTAGES AND DISADVANTAGES OF LLC AND SOLE PROPRIETORSHIP
Now you have an idea of how a self-employed person and a company differ. Let's take a closer look at the most important areas.
LIABILITY FOR LIABILITIES
The most significant difference between a sole trader and a business owner is the type of liability. As a self-employed person, you are liable for your business obligations with all of your personal assets. It can easily happen that you run into existential problems because of your business. The only way to limit the risk is to take out commercial professional indemnity insurance, but this is quite expensive at a high turnover.
As an owner (shareholder) of a limited liability company, you are liable for the company's obligations only up to the amount of the unpaid share capital. If you pay the capital in full at the outset, you are not liable for the company's debts and your personal assets are protected.
The LLC also has a managing director who manages and makes decisions in the company, but is not its owner. If the managing director performs his function with due care, he is not liable for the company's liabilities with his personal assets.
PRESTIGE, CREDIBILITY AND BRAND
Although even a sole trader can achieve a great reputation in the market, an LLC business looks professional at first sight. This is especially crucial in supplier-customer relationships or in tendering procedures or tenders. A sole proprietorship, on the other hand, is slightly more trustworthy in business relations because it guarantees its own assets, which guarantees better enforceability of obligations to the counterparty.
A sole trader's business is based on his name, so it is linked to a specific person. A company, on the other hand, has a name that you choose (called a trading name). If worst came to worst and you were not doing well in business, you can change the name of the Ltd, but it is difficult to change your name and the bad reputation associated with it.
ACCOUNTING, TAXES AND LEVIES
The overall level of taxation is the result of a combination of business type and industry, tax optimisation and business decisions. It is therefore impossible to say in general terms whether a company or a trade is more advantageous - both legal forms have their pros and cons:
- The advantages of flat-rate payments play in favour of self-employed persons, which reduces taxation and administration.
- However, with higher profits above CZK 2,000,000 it is usually better to optimize the profit of the LLC - especially if you reinvest the proceeds back into the company, which will reduce the profit and thus also the income tax.
Both limited liability companies and self-employed persons become VAT payers if their turnover exceeds CZK 1 million for 12 consecutive months. The same conditions apply to the employment of people. The general obligations of both forms of business are as follows:
ACCOUNTING AND TAX AT THE COMPANY
As far as administration is concerned, in the case of an LLC it is clear - you have to keep the books (everything is governed by the Accounting Act and related legislation). This means that you keep records of all income, expenses, receivables and payables, etc. in the company. From the resulting profit, which you adjust to the tax base according to the Income Tax Act, you pay 19% in corporate income tax.
The shareholders receive money from the company in the form of a profit share, on which they also pay a withholding tax of 15% (if they are individuals). In a company, you only pay social security and health insurance on the employees' wages and claim them as an expense. The company can usually do without an accountant.
LEVIES AND TAXES FOR TRADESA self-employed person has more options:
- Flat tax. You pay one amount per month, which includes social security, health insurance and income tax. You don't have to file a tax return. You can only use the flat-rate tax if you meet the conditions, for example, your income must not exceed CZK 1 million per year.
- Lump sum expenses. You only track business income and pay monthly social security and health insurance contributions. You calculate expenses on your tax return as a percentage of income - for most trades you can claim expenses at 60% of income, for crafts it's as high as 80%. However, the amount of expenses has maximum limits, for example for a 60% flat rate it is capped at 1.2 million. CZK. Expenditure lump sums are mainly worthwhile for entrepreneurs with income up to CZK 2 million. Expense expenses are limited to those with a minimum annual income of CZK 2,000.
- Tax records. It is a simplified form of accounting. Again, you pay minimal insurance contributions and apply real business-related expenses to your income, which you track using tax records.
- Accounting. As a self-employed person, you can only keep traditional accounting records if your annual income from business exceeds CZK 25 million. You can also choose to keep accounting voluntarily, but it is more time-consuming and costly than the previous options, so there is usually no reason to do so.
As a self-employed person, you pay insurance premiums on a monthly basis and pay 15% personal income tax on your tax base once a year. The administration associated with recording income and expenses and taxes varies - you may be able to deal with the flat-rate tax yourself, but for the other options you are more likely to use the services of an accountant or tax advisor.
VALUE, SALES, EXPANSION AND SUBSTITUTABILITY
- The value of the Ltd. is gradually increasing. The older the company you own, the more valuable it is.
- The company has a more permanent character - you can sell the LLC and transfer it to a new owner without your customers knowing it, or you can pass your business share to your family, so the company will "survive" for several generations.
- With a company, it is easier to expand abroad by setting up a branch or spin-off plant.
- Another partner, such as an investor or managing director, may join the company to represent you in the management.
- The trade depends solely on you as an individual.
DIFFICULTY OF ESTABLISHMENT
You only start a business a few times in your lifetime at most, so the difficulty and cost of setting up should not be a major decision point. Plus, so many people have done it before you! While we could imagine even smoother office procedures, LLCs are slowly approaching sole proprietorships in ease of formation.
We will briefly introduce both processes:
PROCEDURE AND PRICE OF SETTING UP A TRADE
One visit to the Trade Licensing Office and filling in the form is enough to process the trade. If you choose a trade as a trade or craft, you must also provide proof of professional competence (proof of experience or education in the field). You pay an administrative fee of CZK 1,000 and you are done. Expect delays in the case of a licensed trade, where you need to obtain a business permit or concession.
PROCEDURE AND PRICE OF SETTING UP A LIMITED LIABILITY COMPANY
Setting up a company takes a little more time than setting up a business. With a consulting firm you can usually do it within a week, we can set up a company expressly within 24 hours.Setting up a company on your own can take days, weeks or months - depending on your knowledge, experience and contacts.
- You choose the name, the registered office of the company, determine the share capital and the managing director, or the shares of the shareholders.
- You draw up a deed of incorporation (you set up the company yourself) or a memorandum of association (multiple partners).
- You will arrange trade licenses for the company.
- You will deposit the share capital and have your Ltd. registered in the Commercial Register.
We will help you set up your company for a price starting from CZK 5,993 and you can concentrate on starting your business. When you set up on your own, you are sacrificing your time. Other costs are individual, but usually you can fit in 10 000 CZK.
TIP: Wondering if you can handle it or would you rather turn to the experts? Read our comparison and find out more about whether to set up a business yourself or with the help of specialists. .
PRACTICAL EXAMPLES: HOW TO DECIDE?
So when to start a company? It will be a better choice if any of the following points apply to you:
- You plan to grow your business quickly, hire employees or eventually expand abroad.
- You don't want to guarantee your own assets.
- You will be doing business together with other people.
- Your business is risky.
- Your business partners will mostly be corporations and you need to appear professional when dealing with them.
- The money you earn will mainly be invested back into the business.
- The business will bring you a high turnover in the order of millions or more. It is important for you to be able to sell your business share or pass the business on to your family over time.
- You want to build a brand rather than going by your name.
A trade licence may be sufficient in the following cases:
- You work as a freelance professional.
- Business is based on your personal knowledge and skills.
- You want to present your name.
- You can handle everything on your own and without other people to represent you.
- You need to start your business as cheaply and quickly as possible.
WHETHER A TRADE OR A COMPANY - YOU DON'T HAVE TO BE ALONE WITH THE PAPERWORK
Have you read our comparison of sole proprietorships and LLCs and still don't know which form of business to choose, or just don't have time to go around the authorities? Take advantage of our services for setting up a trade or LLC. We will advise you and take care of the cumbersome administration. Do you have any questions? Do not hesitate to contact us.