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What to choose for business: trade or Ltd.?

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.

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7 minutes of reading

Chapters of the article

Step out of your business plan

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:

  • external sources of financing (do you plan to take out loans or seek partners?),
  • employees and collaborators (is it necessary for your business model to employ several (dozens) of people? Will you typically work with self-employed people? Do you need to address fungibility?),
  • future business growth – (is it conceivable for you to transfer part of your business to someone else to gain new strength or finance?)

All of this could give you a clue as to which direction to take. Let’s look at each topic a little more closely.

Establishment of the company s.r.o.

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.

Consider your financial capabilities and the complexity of starting a business

An important question you should ask yourself as a budding entrepreneur is how quickly and at what cost you want and can 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.

We have covered thefive 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 condition 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 increase the input costs more than is strictly necessary, it is also a better choice to run your business as a self-employed person.

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 forms 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.

What responsibility are you willing to take on?

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. Therefore, 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.

Access to capital and disposal of shares

Setting up as 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.

Business management and fungibility

Again, this is an area where a limited company is unrivalled. That is, unless your business is based on your personal services and qualities (such as being 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 separate 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.

Insurance

Self-employed people 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 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.

Paying taxes

At first glance, the situation might appear to be more favourable for the self-employed, who are only subject to income tax at 15%. In addition, he can use 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. Every aspiring entrepreneur should therefore 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.

Are you solving a similar problem?

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Establishment of the company s.r.o.

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.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

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.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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