Many beginning entrepreneurs ask themselves whether it is more advantageous to run a business as a personal entity — as a businessman (or woman)— or to establish their own firm, such as a limited liability company.
Let’s take a look at the advantages and disadvantages of both types of entrepreneurship. From the point of view of administrative demands, it is easier to obtain a trade or license, also called a business license or a commercial license. This is quite a simple task: just fill in the appropriate form from the appropriate Trade Licensing Office. The issuance of a trade license should be very fast after the paperwork is submitted.
When establishing a limited liability company, known as an s.r.o. (společnost s ručením omezeným) in the Czech Republic, it is necessary to count on additional costs and a larger amount of paperwork. Costs that are connected with establishing a limited liability company are about Kč 10,000, and if you use the services of a professional lawyer, the costs can be higher. Many companies and law firms offer ‘ready-made companies’ wherein anyone can be named a company executive.
It is also necessary to set aside a minimum Kč 200,000 in basic capital. At the beginning of running a business, it is highly recommended to set up basic capital only in a minimal amount; later the basic capital can be increased. But remember that the basic capital is only a number and is not readily accessible for business purposes — the money cannot physically be in a company account.
Many companies or law firms offer “ready-made companies,” where anybody can be immediately appointed a company executive. In this case, establishing a limited liability company is a question of hours.
Of course, along with running a business comes the statutory duty to pay taxes. With a limited liability company, taxes are paid on profit under the legal entity income tax regime, and then the trade shares of the company associates are taxed under personal entity income tax.
Entrepreneurs must also pay, aside from taxes, health insurance and social insurance when he or she is running business based on a business or trade license.
There is also another aspect, the size of the business. When a businessman has higher business ambitions and expects that the business will grow, it is better to establish a limited liability company. Moreover, many companies prefer to deal with other established companies rather than with people working as tradesmen on a business license.
From the perspective of administration and accounting, a limited liability company is a greater burden on entrepreneurs. There is also, in some cases, an obligation to hold a general meeting once a year.
Let’s look at the issue of liability for both types of businesses. In the case of a business operated under a trade license, businessmen are liable with all their business assets. If there is a business failure, this may be fatal. By establishing a firm such as a limited liability company, the company’s associates are liable jointly and severally for the obligations of the company up to the entirety of the outstanding parts of all the associates’ investments that are entered into the Commercial Register.
As stated, both ways of running a business have their advantages and disadvantages. If a businessman is not sure of the size of his business at the beginning, it is better to at first start running the business under a commercial license. Later, when the business gets bigger or goes international, you can establish a limited liability company.
Jakub Smutný is an in-house lawyer at SPAR Česká obchodní společnost s.r.o.