Trade license or LLC?

Trade License or LLC?

You are the proud owner of a great business idea, a business plan, some startup capital and you are ready to launch your new venture? Next important step is establishing yourself as an entity and hence choosing a legal form for your business activities. Simply put, there are two forms to choose from. Either you become a natural person-entrepreneur (sole proprietor or sole trader) or you become a legal person (fictitious person, that is in reality a company or other organization). There are several types of legal form, however the most common one is considered LLC (czech: s.r.o.).  In this article we will show you the key differences between LLC (limited liability company) and Trade license (sole proprietorship). 

LLC: 

Costs of incurring an LLC are relatively low. For a long time a entrepreneurs had to put in a minimum of 200 thousand crowns of capital to establish a company. Nowadays you need as little as 1 crown. However the administration around establishment is more complicated than the with trade license. In this you might benefit from a professional company helping you in the process. 

Trade license:

Compared to LLC, establishment of a trade license is faster. At any trade licensing office you can fill in a uniform registration form. This form allows you to make all necessary declarations and registrations (trade license, income tax registration, notification to the health insurance company and social security administration) at the same time. As a sole proprietor you can choose as many as 80 “free trades” that don’t require extra documentation. In case you would like to establish a trade license in the fields that require extra licensing (gastronomy, craft trades, agriculture etc.) you also have to prove the required professional competence with education or practice in the field. 

LLC:

LLC is more difficult to maintain than a sole proprietorship. Financial authorities require you to do double-entry bookkeeping and even though there are many accounting softwares available online, most of them are not user-friendly and we do not recommend you to manage your LLC accounting yourself. Leaving this to a professional will save you time and nerves. That is why it is good to know the criteria which your accountant should meet. 

Trade license:

As a self-employed person you benefit from a less complicated administrative processes than LLC. You do not need to maintain double-entry bookkeeping and, in case you decide to apply lump sum expenses you don’t have an urgent need for an accountant. Those expenses represent fictitiously legal expenses that the Czech law allows the trader to claim. Read more about lump sum expenses. An entrepreneur can therefore reduce his income for as much as 80% (depending on the type of business activity) even if he did not have such expenses in a given year. In case you decide to record your expenses in real terms (actual costs), you can keep a simplified accounting. Again however, accounting software is not very user-friendly. Moreover, it is necessary to keep track of applicable legislation and know what you can and can not apply into accounting. Accounting for trade license is always cheaper than for LLC. 

LLC:

The tax obligation is calculated from the actual profit of the company. In case you are the only company executive and you do not set any remuneration or wage for this role you do not have to pay social security or health insurance.

Trade license:

Sole proprietors can claim several tax benefits, sums that are not going to be taxed:

1. Taxpayer discount of CZK 24,840 (the amount is determined by law and is increased from time to time).
2. Flat rate expenses up to 80%. 
3. Other tax benefits (for a spouse, children, etc.)
4. Deductible items (life insurance savings, pension savings, gifts, interest on loans, etc.)

While self-employed you have to pay advances for health and social insurance in the minimal amount from the beginning of your business, even if you have no income. Minimal amount for health insurance for year 2020 is 2352 CZK and social is 2544 CZK. Subsequently, if your profits increase, the amount of advance you ought to pay goes up. This means that the more you earn in a given year, the more you will pay in advance the following year.

LLC:

The biggest advantage of LLC in comparison to trade license is limited liability. This means that the liability of the company is only guaranteed by the executive up to the amount of registered capital, so only up to the amount of unpaid part of their deposits. You do not guarantee the deposit by private property at all, the company guarantees by its property.

Trade license:

The trader guarantees his obligations by all his assets (personal, family property). In case of non-fulfillment of obligations, the bailiff can touch everything, for example even a family house.