Do you have a wide range of services to offer but you don’t know how to turn them into profit? In the Czech Republic, you could choose between establishing a limited liability company (s.r.o) or obtaining a trade license (Živnostenské oprávnění) to offer your services to the public. But what are the differences between these two options and the advantages/disadvantages?
Establishing a company (s.r.o / LLC) in the Czech Republic
Limited-Liability Company (Společnost s ručením omezeným / s.r.o.) is one of the most preferred types of companies in the Czech Republic. Minimum required capital for establishing this type of company is 1 CZK. It can be established by a natural or a legal person. A minimum of one authorized manager should be appointed. Both the owner and managing director of the company may be foreign nationals. An s.r.o is commonly used for small and medium-sized businesses.
The advantages of limited-liability companies are the simple registration, Only minimum share capital requirement, the simple structure of the company, and minor personal liability of members for the limited-liability company’s obligations.
The principles of the free movement of labour in Europe apply to all EU, European Economic Area (EEA) and Swiss citizens alongside their family members working in the Czech Republic. Employees from these countries can work without a work permit if they have a travel document or ID card. However, all non-EU and non-EEA citizens must have a valid long-term visa/residence permit in order to open a limited-liability company.
Every limited liability company in the Czech Republic needs to open a bank account by providing the firm’s necessary documents. The account is necessary for minimum share capital deposit and future financial operations of the company. In the last few years, opening a bank account for new companies became a very difficult process. Banks require various documents in order to activate your account. Therefore you would need professional consultancy to be successful in activating your bank account.
Once you receive a notarial deed proving the establishment of a limited liability company, you will have to apply for a trade license. The process of obtaining a trade license for a business is the same as for a natural person except that you also provide a notarial deed to set up a new legal entity. After the approval, the company needs to be notated at the Commercial register.
The main taxes applied to companies in the Czech Republic are corporate tax, withholding tax, value-added tax (VAT), social security contributions, road tax and property tax.
|Corporation income tax||Corporation income tax rate: 19%.|
|Personal income tax||Personal income tax rate: 15 %|
|The standard VAT||The standard VAT rate of 21 % – Applies to most products and services.
The standard VAT 15 % – basic foodstuffs, some pharmaceutical products, newspapers, some medical supplies, heating, social housing.
Reduced standard VAT 10 % – basic baby foods, some medicines, books, mill products and other products suitable for a gluten-free diet.
|Property Acquisition Tax
|On receipt of a new property, the buyer pays a fixed 4%.
The location of the property varies according to its type and purpose.
Social and Health Insurance
Insurance paid based on the wages of the employees.
|Insurance premiums||Employer (%)||Employee (%)|
|Social Security Administration||21.5||6.5|
|Disease and other benefits||2.1||0.0|
If you establish an s.r.o, you are not obliged to register for a VAT number, have an office address (can be virtual as well) and start bookkeeping.
Becoming a Freelancer in the Czech Republic
Being a freelancer /self-employed is not only beneficial from a financial point of view, but also it offers you a great amount of flexibility. As self-employed, you can manage your working days/hours on your own. In order to become a freelancer in the Czech Republic, you need to obtain a trade license. The reasons for self-employment are changing from person to person.
The main reasons for self-employment are to be able to manage your own time and not and do not report to your boss. You become an independent contractor or service provider, and you make all decisions based on your needs and priorities.
you and provider make all decisions based on your needs and priorities.
For people from non-EU countries, it is very important that they already hold a long-term visa or residence permit. It is a simple process if you hold a residence permit already and you would like to obtain a business license too. After collecting the required documents, you need to register at the Trade License Office. If everything is okay with the documents, you will get the free trade licence (OSVČ) in 5-7 business days, which will be valid for as long as your visa is valid.
If you do not have any valid visa, you better get prepared for the long process. You have to add all documents such as accommodation confirmation, seat location consent, bank report, proof of future projects and others. You have to apply in your country of origin or another country than the Czech Republic and get well prepared for an interview. You may get your free trade licence (OSVČ) even if you do not hold any visa but it won’t be active. In order to activate the license and start freelancing legally, you will need a residence permit.
The trade licence holders need to have to pay for the health and social insurance (approx.5.000CZK / 180 Euro) every month and %15 income tax. The amount of total income tax will be counted from the annual closing.
Trade license owners are not required to keep accounts, only tax records.
|Administration Process||It takes a few weeks to finalise the process of establishing a limited liability company.||For residence permit holders in Czechia, it takes 5-7 business days to obtain a trade license.|
|Capital||The necessary capital required is minimal.||The necessary capital required is minimal.|
|Tax Requirements||S.r.o. owners are subject to corporate income tax (19%), personal income tax (15%), and VAT (more taxes).||Trade license owners only need to pay personal income tax (15%) (Fewer taxes in general).|
|Social Security and Health Insurance||S.r.o. owners need to pay for social and health insurance based on the wages of employees.||Trade license owners only need to pay the social and health insurance every month (about 4000 czk)|
|Accounting Requirements||An s.r.o. is obliged to start bookkeeping and publish a financial statement every year.||A self-employed person doesn’t need to hold accounts, just tax records.|
|Corresponding Address||An s.r.o company needs to have a corresponding official address.||A self-employed person doesn’t need an office address.|
|Advantages||If you want to have a business partner and start a brand, establish an s.r.o.||If your business is based solely on your personal skills, obtain a trade license.|
The scope of your business
If you run a freelance business and your business is based solely on your personal skills, then it would not be beneficial for you to start a limited liability company. On the contrary, in a situation where you want to do business with a business partner, and you are interested in “starting a brand”, then establishing a limited liability company is a clear choice for you.
Although, today establishing a company in the Czech Republic doesn’t require a lot of capital in the big picture it is more costly than obtaining a trade licence. The fees for establishing a company are higher than obtaining just a trade license. Moreover, a company is subject to mandatory bookkeeping which creates extra costs in the long term.
What about taxation?
The big disadvantage of self-employed people is that, in addition to 15% of income tax, they have to pay social and health insurance for everything they earn. At the same time, social and health care cannot be deducted from taxes but paid by the freelancer. Although a legal entity pays 19% income tax, they have to pay social and health insurance only on wages paid to employees. If you are the sole owner of a limited liability company, without employees and as an executive, you work for your company for free, you do not pay social and health insurance. You have the opportunity to pay money out of the company as a profit from the company. This amount is further taxed namely 15% withholding tax. To sum up, as a self-employed person, you pay fewer taxes in general but establishing an s.r.o gives you a chance to optimize this process.
Doing business through a limited liability company can be recommended especially if you are interested in creating value and building a brand in the long term that will not depend on the skills of a single person and if you want to retain the opportunity to transfer business to your children or business partner in the future. If you want to sell your company in the future, you would definitely need an ‘LTD’.
If you are doing business as a freelancer with a smaller budget such as being a designer, programmer, translator…etc it is probably for the best to obtain a trade license. YeYe Agency can advise and support you in every stage of decision making and implementing. With the help of an expert, you can decide what is the best option for you and ease the process.