Difference between Self-Employed and Limited Liability Company

The basic questions that need to be answered before starting a business are, above all, the issues of liability and costs (in the form of taxes and fees) that are related to the business. When choosing the appropriate legal form, several aspects need to be considered, which may differ from form to form. The responsibility for consequences of business activity (for example for an unpaid invoice after due date) will vary between self-employed entrepreneur and a limited liability company. The profit will be paid off to the partner of a limited liability company differently than it is available for a self-employed. In this article we will focus on the comparison of the two main forms of business, self-employed and limited liability company (with abbreviation s.r.o.) in 2022.

Self-Employed in 2022 – definition and liability

Firstly, it is necessary to emphasize that not only a natural person, but also s.r.o. needs a trade license to carry out its activities. The difference is in the way this activity is performed and the associated consequences. The self-employed does business independently, personally and at his own risk.

According to Act no. 455/1991 Coll. on Trade Licensing, as amended, self-employed is a continuous activity operated independently, in its own name, on its own responsibility, for the purpose of making a profit or in order to achieve a measurable positive social impact, if it is an economic activity of a registered social enterprise under a special regulation, and under the conditions laid down in this Act. Simply put, a self-employed person is usually a person who, on his own behalf and under his own responsibility, carries out a certain activity and his aim is to make a profit for himself in this way.

It is possible to single out from the above definition the basic characteristic attributes of a trade, which will significantly differentiate it from the performance of limited liability company. As mentioned above, the self-employed person carries out the business personally, independently. However, the fact that he carries out a trade independently and in his own name cannot be confused with the fact that he could not carry out work together with other persons, for example in an employment or similar employment relationship, or with other self-employed persons on the basis of a cooperation agreement and the like.

It is important to mention, that self-employed should not be confused with employment. On the basis of the employment contract, the employee performs the work for the employer, on behalf of the employer and on the basis of the employer’s instructions. Concluding agreements with self-employed persons instead of employment contracts is defined in Act no. 82/2005 Coll. as illegal work, for which employers face significant fines.

The self-employed works in his own name and at his own risk. It means, that the self-employed will be liable for the debts incurred with all his property. Thus, if one of the spouses is a self-employed person, for example in the case of foreclosure due to business debt, it will also be possible to resort to property in the non-share co-ownership of the spouses, which means not only to assets acquired through business.

However, this can be avoided. The other spouse (non-entrepreneur) can apply to the court and ask him to cancel the non-share co-ownership. If both spouses were entrepreneurs, either of them can make such a proposal. By abolishing joint ownership, each of the spouses will acquire the property exclusively for themselves.

Limited Liability Company (s. r. o.) in 2022 – deposits and liabilities

As the name of this type of company suggests, the responsibility for the liabilities will be limited, by the unpaid shareholder’s deposit. What does it mean? The company may establish one or more, but a maximum of 50 partners. These shareholders are required to make a basic deposit of at least EUR 750. This will create a share capital of at least 5,000 euros. In the case of one partner, his deposit will amount to at least 5,000 euros.

The partner is obliged to repay his deposit no later than five years from the establishment of the company. However, at least 30% of each deposit, together with at least 50% of all monetary and non-monetary deposits, must be repaid when the company is registered in the Commercial Register. Until the partner pays his entire deposit, the difference he has to meet will be the amount to which he will be liable for the company’s debts. As partners generally have their deposits repaid in full when the company is set up, they are not personally responsible for the procedure of s.r.o. The company is thus liable for its own debts and is liable for the breach of its obligations with all its assets.

Example of responsibility for liabilities in s.r.o.

The two partners decided to set up s.r.o. As the founders, they wrote a partnership agreement and agreed that the amount of each deposit would be 2,500 euros, so that they would have equal shares in s. r.o. The first partner fulfilled his entire deposit at once before the company was registered in the Commercial Register. The second partner met only half, t. j. 1250 eur. While the first partner is no longer personally liable for the company’s debts, the second partner still remains liable up to 1250 euros, which means up to the amount of his unpaid deposit.

However, it cannot be overlooked that the managing director of the company, which is its statutory body, also bears some responsibility. Managing director of s.r.o. can also be an external person, which means it is not necessarily a partner of the company. Commercial Code in § 135 regulates that managing directors are obliged to perform their duties with professional care and in accordance with the interests of the company and partners. Should the managing directors (if there are more) violate these obligations, they would be jointly and severally liable for the damage they would cause to the company.

S.r.o. is a legal person, a certain entity, under which the business activity is carried out, and for which it has been granted a permit. The partners do not do business under their own name, but under the name of s.r.o. company. S.r.o. may carry out one or more sole traders. They have their bodies and, unlike the self-employment, the partners are entitled to a profit depending on how high their share in the company is. This share is determined by the deposit mentioned above.

Self-Employment  liable with all his property

  does not need to repay the deposit, does not create share capital
Limited liability company – s. r. o.  the company is liable for all its assets, the partners only up to the amount of unpaid deposits

  the partners make a deposit of min. in the amount of 750 euros

  s. r. o. has a registered capital of at least EUR 5,000

Establishment of Self-employment and s. r. o. in 2022

In terms of administrative burden, establishing a self-employment is a simple process that can be implemented electronically. It is not time-consuming or financially demanding, and is therefore available to everyone, depending on the type of trade that a certain natural or legal person wants to set up. The Trade Licensing Act distinguishes between three types of self-employments, namely:

  • free trades – it is sufficient that a person is of legal age, of good repute and has the capacity to perform legal acts,
  • tied trades – in addition to the general conditions, a certain professional competence is required (for example, an instructor’s license is required for the trade of a driving school instructor, etc.),
  • craft trades – in addition to the general conditions, professional competence acquired through apprenticeships in the field is required.

Obtaining a trade certificate is carried out through a trade registration. At present, registration can be made electronically via an electronic service on the central public administration portal. In the case of free trades, citizens of the Slovak Republic usually attach to the form only a document proving the right to use the real estate, even if the address of the place of business will be different from the address of residence.

The advantage of electronic trade registration is the reduction of the administrative fee, which even in the case of a free trade is not at all and in the case of a craft or tied only 7.50 euros per trade. The relevant trade licensing department will issue the certificate within three working days of receiving the complete notification. Obtaining a trade license is thus relatively time-efficient.

Creating and registering s.r.o. to the Commercial Register represents a relatively longer and more demanding sequence of steps. Not only will it be necessary to secure a trade license, but it will also be necessary to register s.r.o. also to the Commercial Register. Detailed information on setting up s.r.o. can be found here

In short, however, the following steps can be emphasized:

  • • Prepare a deed of incorporation (if the company is founded by one person) or a partnership agreement, which will also identify the name of the company, registered office, types of activities to be performed, the specifics of individual bodies of the company, the amount of shareholders’ contributions, etc.
  • • Report trades for s. r. o., while together with the notification it is possible to submit a proposal for registration of the company in the Commercial Register. The proposal for entry in the Commercial Register is implemented only electronically.

A limited liability company cannot be established by a person (natural or legal) who is on the list of tax debtors or has registered arrears on social insurance premiums. The court that will register the company in the Commercial Register examines the potential existence of arrears itself. If a person had such arrears and still wanted to set up with. r. o., would have to obtain the consent of the tax administrator (tax or customs office) and attach this consent to the application for registration s.r.o. to the Commercial Register.

S. r. o. is established in the relevant charter or social contract. Subsequently, similarly to a self-employed person, who is natural person, also s.r.o. declares a sole trader that will be the subject of its business activity. As a rule, he submits a document proving that it has been established or established (for example, a partnership agreement), a power of attorney and, if he also submits a proposal for entry in the Commercial Register, also other documents related to this entry.

Founded s.r.o. arises only by registration in the Commercial Register. The relevant registration court is to make the registration within 2 working days from the delivery of the application for registration, while the delivery of such a proposal is considered to be the day when the fee of 150 euros was paid. If the deadline of at least three days is observed when obtaining a trade license certificate, the entry in the Commercial Register may take significantly longer. For example, at the District Court Bratislava I you can wait about 2 weeks – 2 months.

Taxes and levies for self-employed and s. r. o. in 2022

The economic aspect of business is also transformed into the amount of taxes and levies paid. Therefore, when deciding on the form of business activity, it is appropriate to consider the tax burden and other tax obligations.

The entrepreneur is exempted from paying social security contributions for a certain period after the establishment of self-employment. At present, it will save at least 187.78 euros per month. The self-employed person receives the assessment of contributions from the Social Insurance Agency automatically. However, from the first day of business, he must have health insurance as a SZČO (if he does not have another premium payer), while at present the amount of the minimum monthly advance payment for health insurance is EUR 79.31. You can read more about the amount of contributions in the article SZČO contributions to the Social Insurance Agency and the Health Insurance Company in 2022.

S.r.o. partner usually in smaller s.r.o. does not receive  any income for the function, but is entitled to a share of the profits according to the amount of its share in the company. Thus, two situations can occur. If no profit is paid to the partner, he does not pay any tax or levies. In the case of a profit payment, he pays 7% dividend tax, but even in this case he will no longer pay contributions from the said income (or health insurance must be covered differently). Although such a scenario may seem advantageous, it should be noted that the persons who are partners in s.r.o. they do not have e.g. entitlement to unemployment benefits, even if they have just terminated their employment. Without contributions to the Social Insurance Agency, there will be no entitlement to sickness, maternity, etc.

The managing director of the company will be in a similar situation if he does not receive any income for the given function (with the exception of the advance payment for health insurance, which must be resolved in each case). However, it is common practice that managers have with the company closed e.g. a mandate agreement with a regular monthly remuneration, from which they then pay social and health insurance contributions, which are comparable in terms of employment.

It is not excluded that an employment contract will be concluded between the manager or partner and the company. In this case, the manager or partner will receive the same social security as any other employee, but will have to pay the same contributions.

An interesting information is that in 2022 self-employed people as well as s.r.o. in the case of taxable income up to EUR 49,790, for the tax period, they may apply a reduced income tax rate of 15%. Otherwise, the corporate income tax rate is 21%, for natural persons it is two rates 19% and 25%.

Termination of business (self-employment and s.r.o.) in 2022

As with the establishment, the cancellation of the trade is accompanied by obvious administrative simplicity. If the entrepreneur decides to end the trade himself, it is enough, for example. electronically send or physically send to the relevant district office a notice of termination of business using a simple form, in which it states in particular the date of termination of business. His trade license will expire on the day specified in this notice. It is also possible to interrupt the trade.

However, if s.r.o. decided to terminate the business, it will be a more complicated procedure associated with the deletion of the company from the Commercial Register. On cancellation s.r.o. it shall be decided by its general meeting by at least a two-thirds majority. The liquidation of the company will usually follow, as a procedure aimed at satisfying the claims of creditors of s.r.o. or other persons. During the liquidation period, s. r. o. bear the name with the words “in liquidation”. To cancel s.r.o. it will occur only by deletion from the Commercial Register, the proposal of which is submitted by the liquidator of the company.

What other criteria to consider and summary

When deciding in what form to conduct a business, it will be necessary to take into account a number of factors, from administrative burdens to financial issues, such as the fact that s.r.o. are required to publish financial statements, while information on the self-employed person’s economic status remains only part of his tax return. Although the question of liability or the levy may seem authoritative, the very nature of the business cannot be disregarded in its decision-making and thus take into account the form which final customers ultimately prefer. It is reasonable to assume that large companies will prefer cooperation with a trading company, while e.g. consumers often look for smaller, family businesses and do not evaluate cooperation in terms of whether they are self-employed or s.r.o.

Establishment of a self-employment or s.r.o. however, it does not have to be the final decision of the entrepreneur, so if e.g. the self-employed later decided to set up a trading company, our legislation allows him to do so. Getting out of s.r.o. is not easy. Not only does the Commercial Code not allow withdrawal as such, the cancellation of participation in s.r.o. the court would decide in such a case, but the transfer of a shareholding to another person may also be excluded by the articles of association.

Self-Employment Limited Liability Company (s.r.o.)
Administrative burden associated with setting upA relatively simple process associated with registering a self-employment electronically or in paper formThe establishment of a company requires a deed of incorporation / partnership agreement, registration of a trade and registration of the company in the Commercial Register, which is carried out exclusively electronically
Establishment feeIn the case of electronic filing in the case of a free trade, there is no fee, in the case of a tied and craft EUR 7.50 per tradeTrade registration fee + fee for registration in the Commercial Register in the amount of 150 euros
LiabilityThe self-employed person is liable with all his property, e.g. in the case of execution, property in the non-share co-ownership of the spouses can also be reachedThe partner is only liable up to the amount of the unpaid deposit
Levy burdenContributions to the Social Insurance Agency after a certain time from the beginning of the business

Contributions to the health insurance company min. in the amount of 79.31 euros per month
Partner in s.r.o. (without remuneration, or payment from profit after tax) does not pay contributions to the Social or Health Insurance from this remuneration
Tax burdenIncome tax 15% (for income up to 49,790 euros), otherwise 19% or 25%, but have the opportunity to claim a flat rate of 60% of income (for non-VAT payers)The profit shareholder pays a dividend tax of 7%

S. r. o. pays income tax 15 or 21%
Entry of a new business partnerE.g. by concluding a cooperation agreementE.g. by merging another company with s. r. o.

By transfer of a business share

By increasing the registered capital s. r. o.

Silent Community Treaty
Disclosure of financial informationIt does not publish data on its business results, but it can be found in the database of debtors, e.g. Social insuranceMandatory disclosure of financial statements
Administrative burden of closing a businessJust notice the end of the business (suspension is also possible)Deletion of the company from the commercial register, which is preceded by the approval of the s.r.o. cancellation by general meeting and liquidation of the company