Switching from a trade licence to an s.r.o.: when it makes sense

Switching from a trade licence to a limited liability company (s.r.o.) is a step that many successful entrepreneurs consider sooner or later. However, it is not automatically advantageous for everyone. What decides it is the numbers, the risk and your plans for the future. So when does it make sense?

Why people change their legal form

A trade licence is ideal for getting started – simple and cheap. As your income grows, however, the tax and contributions arithmetic changes, and unlimited liability with your assets comes fully into play. That is exactly when people begin to weigh up whether it is time for an s.r.o. Another trigger is often the wish to come across as a serious business when bidding for larger contracts, or the need to separate business finances from personal ones. There may be several reasons at once, but the decision should always rest on concrete numbers, not on impressions.

The main reasons for an s.r.o.

• limited liability and protection of your personal assets,
• a possible tax and contributions advantage at higher profits,
• a more credible image with larger partners,
• easier to bring in a shareholder or sell the company.

When the switch pays off

Put simply, an s.r.o. starts to make sense when your income is consistently higher and your risk is growing. If you work in a field where damage may occur or you trade with larger companies, asset protection and a more professional image may tip the balance. The specific thresholds from which the change pays off depend on current rates and limits, which need to be checked and worked out using your own numbers.

What the switch involves

The change is not just a formality. An s.r.o. requires double-entry bookkeeping and stricter administration, and you cannot take money out of the company as freely as with a trade licence. You also need to consider how you will transfer your existing business – assets, contracts and liabilities. The switch also means new costs for keeping the accounts and running the company, which you need to factor into your decision. It is therefore not wise to change your legal form hastily, just because someone around you has done so.

Taking money out of the company

One of the biggest differences compared with a trade licence is how you get hold of your earnings. The profit of an s.r.o. belongs to the company, not directly to you, and there are specific ways of paying it out, each with its own tax rules. Before you switch to an s.r.o., therefore, be clear about how, and how much, money you want to draw from the company. It is often this area that decides whether the change really is worthwhile for you.

How to go about the switch

1. Work out the tax and contributions impact under both forms.
2. Consider the level of risk and the need to protect your assets.
3. Set up the s.r.o. and put double-entry bookkeeping in place.
4. Arrange the transfer of assets, contracts and liabilities from the trade licence.
5. Decide whether to terminate or suspend the trade licence.

Do not forget the wider picture

When switching, think about your clients, suppliers and bank – a change of legal form means new invoicing and payment details. The right timing is also important, ideally at the turn of the accounting period. Because of its complexity, it is almost always worth consulting an accountant about switching from a trade licence to an s.r.o.

If both the numbers and the risks clearly favour an s.r.o., the change can bring the company both stability and savings. The key is a thorough calculation and proper preparation, so that the switch goes smoothly. Conversely, if the benefits are not clear-cut, feel free to stay with your trade licence – simplicity has its value too, and there is no point in complicating your business without a real benefit.

Related articles: Protecting your trademark and intellectual property, Running a business while receiving unemployment benefit, E-shop: obligations and accounting for online sales.

Frequently asked questions

When does switching from a trade licence to an s.r.o. make sense?

Most often when your income is consistently higher and your risk is growing, and the need to protect your personal assets and the possible tax and contributions advantage start to carry the most weight. It is advisable to work out the specific threshold using your own numbers with an accountant.

Do I have to keep double-entry bookkeeping after switching to an s.r.o.?

Yes, an s.r.o. requires double-entry bookkeeping and stricter administration than a trade licence. You also cannot take money out of the company as freely. That is exactly why it pays to entrust both the switch and the subsequent bookkeeping to an expert.