How to choose the right legal form for your business

Choosing the right legal form for your business is a decision that will affect your taxes, social and health insurance contributions, liability and administration for years to come. There is no single ideal form for everyone – what matters is weighing up your own situation and goals. In this article, we compare the most common options and advise you on what to base your decision on.

The most common forms in Slovakia

New entrepreneurs most often choose between a trade licence and a limited liability company (s.r.o.). Other forms exist too, but for small businesses these two are the most common. Each has its advantages and disadvantages, which need to be compared. It is not just about taxes – the form also affects how you are liable for the business’s debts, how much time you spend on administration and how business partners perceive you. That is why it pays to give the decision the attention it deserves rather than blindly copying what someone you know chose.

The trade licence and its nature

A trade licence is simple both to set up and to run, and it suits lower incomes and the early days of a business. The entrepreneur, however, is liable with all of their assets, and at higher incomes it can be less advantageous in terms of taxes and contributions. It is a flexible form that lets you start quickly and test whether there will be interest in what you offer, without high start-up costs. The advantages of a trade licence:

• quick and inexpensive to set up,
• the option of claiming flat-rate expenses,
• simpler administration and accounting.

Limited liability company

An s.r.o. separates your personal assets from the company’s, so your liability is limited. It comes across as more trustworthy to larger partners and can be more advantageous at higher profits. On the other hand, it is more demanding in terms of administration, requires double-entry bookkeeping and you cannot simply take money out of the company. You will make the choice easier if you think through these points:

• you want to protect your personal assets from business risks,
• you plan to do business with larger companies and institutions,
• you expect higher and stable profits,
• you are considering taking on a shareholder or selling the company in the future.

What to base your decision on

1. Estimate the level and stability of your expected income.
2. Weigh up the level of risk and the need to protect your personal assets.
3. Take into account the kind of partners you will be doing business with.
4. Compare the costs of administration and accounting.
5. Think about future growth and a possible change of form later on.

Taxes and contributions in the decision

The tax and contribution burden is key to the choice. At low incomes, a trade licence with flat-rate expenses tends to be more advantageous; at higher ones, an s.r.o. may pay off. The exact rates, limits and thresholds change regularly, however, so always check the current figures and ideally run the calculation on your own numbers with an accountant.

The decision is not permanent

If you are not sure, you can start with something simpler and change the form later depending on how the business develops. Many entrepreneurs start with a trade licence and switch to an s.r.o. once they have grown. What matters is knowing how to choose the right legal form for your business for the stage it is currently at.

The right choice will save you money and worry. Since this is a decision with a long-term impact, it pays to discuss it with an expert before you start. An accountant or tax adviser can show you, using your specific figures, which form works out better and will point out implications that you might otherwise easily overlook.

Related articles: Invoicing for beginners: what an invoice must contain, Franchising: the advantages and risks of doing business under a brand, How to set prices for your services and products.

Frequently asked questions

Is a trade licence or an s.r.o. better?

It depends on your income, the level of risk and your partners. At lower incomes, a trade licence tends to be simpler and cheaper; at higher profits and where there is a need to protect your assets, an s.r.o. may be more advantageous. Ideally, run the calculation on your own numbers with an accountant.

Can the legal form of a business be changed later?

Yes. Many entrepreneurs start with a trade licence and switch to an s.r.o. once their income grows. The change is common, so there is no need to be afraid of starting with something simpler and adapting the form to how the business develops later.