Trade Licence or Limited Liability Company?
It is a very frequent question of our freelancers. We decided to prepare a brief and clear summary of the advantages and disadvantages of both types of business.
Establishing a Business
We can help you obtain a trade licence (Slovak: živnosť) or establish a limited liability company (Slovak: spoločnosť s ručením obmedzením – s.r.o.). We offer “turnkey” establishment of a business, which is favourable in terms of time and finance. A turnkey s.r.o. costs around EUR 250 and takes about 15 days to establish, which saves you several days. The costs of obtaining a trade licence online are much lower: EUR 25. If you want us to establish your future business for you, do not hesitate to contact us!
We can also help you with double-entry and single-entry accounting. The fee for double-entry accounting is individual, but the basic price is EUR 80 per year (€80/month). The annual fee for keeping single-entry accounting is around EUR 400 (€34/month).
These two types of business are completely different in liability. With a trade licence, your liability includes your entire (including personal) assets. With an s.r.o. (a LIMITED LIABILITY company), a partner’s or partners’ liability for all business risks is limited to a certain amount specified in the Memorandum of Association.
With a trade licence, this problem can be addressed by insurance. The principle of insurance is that an insurance company covers risks, accidents and damage that you cause and thus protects you from financial compensation that you could otherwise be forced to pay from your own funds. A big advantage is that this insurance can be included in costs in the tax return.
Any profit withdrawn (in any way) from an s.r.o. is taxed by 7%. It is not the case for a trade licence. It is also necessary to mention the income tax. Income of an s.r.o. is taxed at 21% while the tax base of a sole trader (natural person) is taxed progressively. The income tax is calculated as:
- 19% of the part of the tax base not exceeding 176.8 times the valid subsistence minimum (EUR 35 022.31);
- 25% of the part of the tax base exceeding 176.8 times the valid subsistence minimum.
This is something every new freelancer is interested in. A big advantage of a trade licence is that you pay no insurance payments in the first year of business (of course, except health insurance payments). However, after the first year the rule is: the more you earn, the higher insurance payments you pay. After the first year of business under a trade licence you will pay health and social insurance payments (the minimum insurance payments currently amount to EUR 202.26 per month). Subsequently, although a sole trader earns nothing, they must pay minimum insurance payments of EUR 161.71 per month, which adds up to EUR 1 940.52 per year. It is necessary to mention that you only pay health insurance payments with an s.r.o. (approx. EUR 60 per month) and you don’t have to worry about social insurance payments. When this huge advantage of an s.r.o. is combined with the advantage of a trade licence (i.e. no insurance payments in the first year), the result is clear. For freelancers, it is best to have a trade licence in the first year of business and then switch to an s.r.o.
An s.r.o. must keep double-entry accounting. The principle of double-entry accounting is that a business pays taxes regardless of whether it receives money. However, it also has advantages, such as more consistent time differentiation when planning the tax base.
If you do business under a trade licence, you can keep single-entry accounting, which you can handle yourself. If you decide to apply flat-rate expenses, you do not have to keep accounting and you have much less to worry about.
How long do these steps take? Establishing an s.r.o. takes about 20 days and obtaining a trade licence is much shorter and easier. It is possible to obtain a trade licence in a day if you are properly prepared. Read more in our article.
Termination of Business
The last difference in our summary is termination of business. When terminating an s.r.o., you don’t have to delete it from the Commercial Register (which is charged), but you can restore it after time or sell it for good profit. On the other hand, a trade licence is automatically deleted from the Commercial Register and cannot be sold.
Have you decided or do you need advice?
Do not hesitate to contact us. We will advise what’s best for you as a future freelancer and TITAN!
|Up to a certain amount||All assets, solution: insurance|
|7% tax on any withdrawn amount, 21% income tax||No tax on withdrawn profit, progressive income tax|
|No social insurance payments, just health insurance payments||No insurance payments in the first year of business, then the more you earn, the higher insurance payments|
|Double-entry accounting required||Single-entry accounting sufficient|
|15-20 days to establish||One day if all documents are ready|
|Termination of Business|
|Can be sold||Automatic deletion from the Commercial Register|