Do you want to start a business but don’t know whether to choose a sole proprietorship or a limited liability company? Both options have their advantages and disadvantages. We provide clear arguments and counter-arguments to help you decide which is better for you.
You may want to start modestly, working alone without help and using only your own resources, at least initially. Even so, you should have some vision for the future of where you want your business to go under ideal conditions. You undoubtedly have a business plan in place. Your vision and, among other things, your awareness of the following topics should be clear from this plan:
All of this could give you a clue as to which direction to take. Let’s look at each topic a little more closely.
We will safely guide you through the entire process of setting up an LLC and provide all related services. We will handle everything quickly and professionally so that you can enjoy your own company as soon as possible. For a pre-determined price and throughout the country. You can pay only after the service is provided.
An important question you should ask yourself as a budding entrepreneur is how quickly and at what cost you are willing and able to enter the business. This is because both are different for a sole trader and an LLC.
You can literally set up a trade in a matter of days. You just need to choose the fields in which you are going to do business, fill in the Uniform Registration Form for the Trade Licensing Office, and after paying the administrative fee of CZK 1,000 you can start your business right away. This process applies if you are not considering setting up a licensed trade, for which the rules are stricter.
Tip: We have covered the five steps to easily set up a business in our separate article
In contrast, setting up a limited company will usually take you a couple of weeks. In addition to obtaining a trade licence, you need to draw up a memorandum of association or articles of association in the form of a notarial deed, register the company with the relevant authorities and the commercial register and set up a bank account. In contrast to sole proprietorship, an LLC needs a share capital upon incorporation, although currently it may be only one crown.
Tip: Obtaining a trade licence is not a necessary legal requirement for setting up an LLC. However, for most activities you will still need it in practice.
Similar to administration, the input costs are similar. If this is a priority for you and you don’t want to add more to your input costs than is strictly necessary, running your business as a self-employed person is also a better option.
It is worth pointing out that choosing one form does not mean you cannot switch to the other in the future. However, if you do change form in the future, it is infinitely easier to start a business as a sole trader, as setting up a business is significantly easier, quicker and less demanding. Conversely, the eventual dissolution and liquidation of a limited company is a relatively complex and costly process.
Hint: Read also how corporate criminal liability works and how corporate punishment works.
An important aspect of your decision is the extent to which you are willing to be personally liable for any debts associated with the business. If you set up an LLC, you will only be legally liable for the company’s debts to a limited extent and not for everything you have. Under the law, the members are jointly and severally liable for the debts of the limited company to the extent that they have failed to meet their contribution obligation as recorded in the commercial register at the time they were called upon by the creditor to perform. Thus, if the contributions of all the partners are paid, they are not liable for the company’s debts and their personal assets are protected (on the contrary, the failure to pay the contribution of only one of the partners means that they are all liable). Since you can set up a limited liability company today with an initial investment of a few thousand, you can significantly reduce the property risk of your business.
If you are self-employed, you will owe for debts related to the business completely unlimitedly, with all of your assets.
Tip: Business is also associated with the mandatory establishment of a data box. Read our article on tips for using a data box.
Setting up a legal entity is seen by some banks, but also by investors and business partners, as a more stable form of business and therefore you will have better access to the external funding you may need to start or grow your business.
In the case of a limited company, you can transfer part of your business to a third party relatively easily, giving your business a new boost or finance. If you build up the goodwill of the limited company over the course of its existence, you have a chance of selling it at a bargain price in the future. Nothing like this awaits you as a sole trader.
Tip: Have you become a sole trader and are wondering what information about you will be publicly available in the trade register? Do you need to apply for registration and how can you change some incorrect or outdated information? We have looked at all this in our article on what the Trade Register is and what it is for.
The limited liability company is also unrivalled in this area. That is, unless your business is based on your personal services and qualities (such as a book translator, graphic designer or accountant). In that case, it is better if you also present yourself as an individual. This way you can build your reputation, personal brand and personal approach to the customer.
Setting up a limited company, on the other hand, allows you to share management and acting on behalf of the company with more people. And that’s an advantage that sole traders don’t have. Having a separate legal personality for your company also allows you to create a separate brand from your person, which can be much more beneficial and interesting from a marketing perspective. And if you want to have a reputation in business circles as an entrepreneur, then it is the LLC that will allow you to do just that.
Tip: Considering whether to choose a trade or business? Try both! What are the advantages of such a combination, and what can get in the way of doing business, we will tell you in our article.
Self-employed persons are legally liable for health and social insurance and cannot count it as a tax deductible expense.
If you set up a limited company, employ yourself and only pay yourself the minimum wage, you can only pay health insurance under the minimum scheme and be exempt from paying National Insurance. This is because there is no basis on which to assess it. Whether this is such a great advantage or not, however, you will probably reassess in retirement, the amount of which will be substantially affected by this move.
Tip: Are you considering setting up a company and don’t know what form to choose? Apart from the financial and administrative complexity, the liability of the individual partners or the company in general can be an important aspect of the decision. Therefore, read on to find out how an LLC and its partners are liable for debts.
At first glance, the situation might seem more favourable for the self-employed, as he is only subject to income tax at 15%. In addition, he or she can take advantage of expenditure lump sums and does not have to monitor and report actual expenditure. However, in the case of higher earnings, he may be subject to solidarity tax and then the situation is not so clear-cut.
On the other hand, an LLC allows for better tax optimization, which can offset the handicap of the 19% corporate income tax rate (and if you split the profit shares with your partners, you pay 15% withholding tax on it).
Clearly, there is no clear winner in this contest. So every aspiring entrepreneur should consider the current and future shape of their business, their expected profits and the way their business operates and create a model that is tailored to them. It pays not to be alone in such crucial steps. It pays to consult with an experienced attorney about the legal aspects of each step.
Tip: Unfortunately, not every business is successful or promising. If yours isn’t bringing you the joy, money or anything else you originally expected, you may be considering quitting. We’ve discussed how to wind up a business legally, time-wise and financially in our article.
We will safely guide you through the entire process of setting up an LLC and provide all related services. We will handle everything quickly and professionally so that you can enjoy your own company as soon as possible. For a pre-determined price and throughout the country. You can pay only after the service is provided.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
In person and online. Just choose the appropriate service or opt for an independent consultation when you are unsure.
