Are you planning to set up your business in the Czech Republic, but you are not sure what the major differences are between being a freelancer with a trade license and having a limited liability company s.r.o., and which option might be the most suitable for you? Check our article and share your feedback with us!
If you will get a trade license, you will be making business using your own name and surname. For the limited liability company, you can create a unique name and build a brand that will not be necessarily connected solely to your person.
If you are planning to operate in one specific field and to perform all the tasks yourself, without having to hire or employ other professionals or collaborators, this might be one of the factors in favour of the trade license.
If your ambition is to operate in different fields or take on new activities in the course of time, you think you will need to cooperate with other professionals or hire your own employees at some point, and you don’t want your business to be always solely dependent only on your own skills, the limited liability company might be a better option for you.
As a freelancer with a trade license, you will pay your social and health insurance contributions based on your income. Higher the income, higher the contributions. When it comes to income tax, you can apply your real expenses and thus decrease the base from which the tax is calculated, but with a Czech trade license you have also a second option – to choose to apply a fixed percentage for your expenses which means you will not have to keep track of all the expenses, resulting in less administrative tasks. If you don’t have high expenses it is better to choose this fixed percentage to lower your tax base, because with real expenses you would probably not be able to achieve the same amount as with this fixed percentage. As a freelancer you will pay 15% income tax from your tax base.
When you have a limited liability company (in Czech abbreviated to s.r.o.), you can act as executive director without having a salary, or you can get employed by your own company, so you will have a proper work agreement and receive a normal salary, with health and social insurance contributions and income taxes paid as a regular employee. These will be calculated based on the amount of the salary that you will receive, so they are not dependant on the company income, as opposed to the situation with the trade license.
The limited liability company per law needs to keep a double-entry accounting which usually means hiring an accountant which will keep your books on a regular basis. The accounting and overall administrative burden is slightly higher than for freelancers with a trade license. The s.r.o. cannot use the fixed percentage for expenses, thus only the real expenses must be used to lower the tax base. The income tax for companies is 19%. If you want your business to grow, expand into new fields or markets, you can use the company resources and invest them into future development.
Of course, when deciding between getting a trade license and opening a limited liability company it is not only about numbers, expenses and amount of paperwork. It is really up to you which business strategy you will choose. Whether you want to sell your services as a professional individual and you want your customers to collaborate with you personally because of your skills, thus your name is your brand, or you prefer to create a unique brand, a company which will grow in time, build a reputation, and it will be something that will last in time, also maybe when you will no longer be a partner of the company.
Last but not least it is very important to determine how you will be perceived by your business partners. Will they be willing to do business with you only when they will see you as a trustworthy company which does not stand and falls with one person, or they are interested in your skills as an independent professional?
The variables affecting the decision of whether to go for a Czech trade license or a limited liability company are numerous, and every single case is unique. Get in touch with us, we will discuss your ideas together and help you to make the right decision for your future successful business!
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