Sole Trader or Limited Liability Company?

In the beginning of his or her career path, a future entrepreneur faces a common dilemma: whether to set up a company or to pursue a career as a self-employed person. There are several weighing factors that should be considered when making such decisions.
Sole Trader or Limited Liability Company

Sole Trader or Limited Liability Company

Deciding on the type of incorporation can be of key importance for a young company. Formalistic aspects and established legal provisions provide a framework, which is additionally defined by different provisions on taxes. At the outset, we will address the legal framework for these two forms of company incorporation.

Sole Trader or Limited Liability Company?

Corporations are established through registration, which demands a founding charter, a minimum founding equity and additional type-specific formalities.

Sole Trader (s.p.), commonly also known as self-employed person, is physical person who conducts a certain profitable activity without forming a separate legal business entity.

Limited Liability Company (LLC or Ltd) is one of many corporate types of private legal entities with their own legal identity, which separates the liability of the company from its employees and shareholders. Companies working under this type of incorporation append an abbreviation d.o.o. to the company name.

The presented types are the generally preferred types of incorporation in Slovenia. Primarily due to relatively low costs and simple bookkeeping in comparison to that of other corporations. Neither of the forms can issue stocks, nor trade shares on the open market.

Comparison between a Sole Trader and a Limited Liability Company (LLC):

Sole Trader Limited Liability Company
Corporation Type Physical person Legal entity
Founding Equity / Capital none 7,500 EUR
Liability Full personal liability Liability is limited to the assets of a company; no personal liability for shareholders
Salary All revenue after taxes and social contributions Determined in the contract of employment. A salary can consist of a fixed and variable part. The latter might depend on the annual profits
Asset Management Large margin of discretion and leeway when making general business decisions and operating transactions Strict legal framework for business transactions to prevent money laundering, tax evasion and/or other unfair business practices
Borrowing Powers Very low, because there is no minimum founding equity requirement, a generally low debt to equity ratio Higher borrowing powers, especially with banks. Moreover, the type of incorporation facilitates application to public tender licitations
Tax on Profit Progressive tax on income (16%, 27%, 34%, 39%, 47%) or normalised expenses (effective tax rate is 4% of all revenue = 20% tax rate on 20% tax base) 19% flat tax rate,
25% flat tax on dividends (can be lower – after 5 years 15%, after 10 years 10%, after 15 years 5%, after 20 years 0%)
Social Contributions Special scheme for self-employed persons or a flat payment for sole traders who are already fully insured at their place of employment Social contributions can be deducted from monthly salaries. If the shareholder who is also the director is not employed he or she is paying social contributions him/herself. Payment contributions are conducted irrespective of annual profits
Accounting One-/Two-fold Bookkeeping (is not necessary if tax base is calculated using Normalised Expenses (80% of annual income)) Two-fold Bookkeeping or professional accounting or Normalised Expenses (80% of annual income)

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