Are you deciding whether to start a business as a natural person – entrepreneur (sole trader) or do you prefer to set up a limited liability company (s.r.o.)? Both options have their advantages and disadvantages. In this article we give you a brief comparison to help you make the right decision.
Trade (Natural person entrepreneur)
Advantages:
- Easy and fast business start-up, low start-up costs.
- Easy bookkeeping – especially for flat-rate expenses.
- Lower administrative burden.
- Freer disposal of income – it is immediately available for personal use.
Disadvantages:
- Unlimited liability – the entrepreneur is liable for liabilities with all his personal assets.
- Limited possibilities to optimise the tax burden at higher incomes.
- Lower prestige, which can be a barrier in some areas of business.
Limited liability company (s.r.o.)
Advantages:
- Limited liability – a shareholder is liable only up to the amount of his outstanding contribution.
- Higher credibility and better prestige with business partners and clients.
- Greater opportunities to optimise the tax burden at higher incomes.
- Easier transfer of ownership and entry of investors.
Disadvantages:
- Slightly more complex start-up process and initial costs (share capital, fees).
- More demanding bookkeeping (double-entry bookkeeping compulsory).
- Higher administrative obligations.
- The company’s money is not directly the shareholder’s money – you need to pay yourself a salary or dividends.
Which is more suitable for you?
If you are planning to run a small business, or if you are just starting out and want to test your business without a lot of upfront costs and administration, a sole trader may be a better option for you.
Conversely, if you expect to grow your business quickly, are planning larger investments, or want to reduce your risk and optimise your taxes, a limited company is probably more suitable.
Each situation is individual, so it is important to consider all the circumstances. We hope this article has helped you better understand the differences between the two forms of business.
