Sole Proprietorship VS Limited Liability Company
You are facing a choice between a sole proprietorship (SP) and forming a limited liability company (LLC), and you are interested in which legal form would be more beneficial.
If you plan to engage in entrepreneurship alone, without partners, then SP is likely to be suitable for you. It will be cheaper, and you will appreciate the lower administrative burden, which will save you time and money.
However, if you have partners, it is recommended to consider creating an LLC. In this case, your liability will be limited to the company's assets, and you will not be personally liable.
SP represents a simple and cheaper way to start and conduct business with less administrative burden. It can also be tax advantageous, especially when there are fixed expenses or the payment of a fixed tax. Thus, SP can be more advantageous than LLC, even with a turnover of around 2 million Czech crowns.
On the other hand, SP carries the risk of full liability with your personal assets, especially when entering a business where you may be liable for potential losses or damages. In such cases, it is advisable to consider insurance.
If you have multiple partners, SP may not be the optimal option for conducting business. Problems may arise, especially regarding taxation and the risk associated with liability for all assets.
LLC has its advantages. According to the law, you are only liable with the company's assets. Additionally, if you have partners, you will have a simpler situation with invoicing and taxation. The main advantage is that you will be protected from the risk associated with possible mistakes or losses caused by your partners, and you will be liable only within the limits of the company's assets.
However, LLC also has its drawbacks. It’s registration and maintenance require more time and money. Usually, the process of registering an LLC takes 2 to 3 weeks. Managing an LLC is also more complex as it requires double-entry bookkeeping and stricter financial management rules. In contrast, an SP can be managed with the help of a paid accountant for a few thousand Czech crowns per year. Thus, the expenses for running an LLC will amount to tens of thousands of crowns per year.
Moreover, LLC may be less tax-efficient compared to SP until a certain level of income is reached. It depends on the expenses that can be accounted for in your business. SP has the advantage of fixed expenses (usually 60%), which can be more tax advantageous than the mandatory expense accounting in an LLC, even with an annual turnover of up to 2 million Czech crowns.
Which option is better: sole proprietorship (SP) or forming a limited liability company (LLC)?
If you are starting a business without a partner, it is recommended to choose sole proprietorship. This option will be more economically beneficial, and you will be able to avoid significant administrative burdens, saving you time and money. The option of registering an LLC can be considered later. However, if you have a partner, it is advisable to carefully consider the possibility of creating an LLC, as in this case, you will be liable only with your contribution to the LLC, not with your personal assets.
What are the costs of forming an LLC?
Creating an LLC requires the services of a notary. The cost of their services will depend on the complexity of your requirements. Typically, the costs of forming an LLC amount to several tens of thousands of crowns.
You have familiarized yourself with our comparison between sole proprietorship and limited liability company, but you have not yet decided which form of entrepreneurship to choose, or you simply don't have time to visit government offices? Take advantage of our services that will assist you with the registration of your business or the formation of a limited liability company. We will provide you with professional consultation and take care of all aspects of registration and the routine administrative tasks.