Self-employment or LLC in 2021
Self-employemnt or LLC? This question is relevant every year, especially for start-up entrepreneurs.
There is no definitive answer, it is very individual. Therefore, we would like to list some important differences and advantages/disadvantages of these legal forms in 2021 for those who still have plans to start a business this year. This article briefly describes and summarizes the main information.
Questions we will answer
The difference between these forms of business is manifested in several areas. In this article, we will discuss the following areas in which self-employment and an LLC differ:
- Establishing a business
- Guarantees for liabilities
- Bookkeeping and withdrawing money from the business
- Income taxes
Establishing a business
When you set up a business as a sole trader, you have three options:
- Free, where only the general conditions – attaining the age of 18,legal capacity and lawfulness – need to be met.
- Craft, where, in addition to the general conditions, it is also necessary to have professional competence – for example, by obtaining an education in the field, or by experience.
- Bound, for which you must demonstrate professional or other competence
Although the sole trader is in the text, the same conditions apply to a limited liability company.
If you are setting up a company on your own, the administrative fee for each free trade is 5 €, for each craft or bound trade – 15 €.
In the case of e-filing, there is no charge for free trades and craft and bound trades will cost you only €7.5.
For an LLC you have to count on a court fee of 300 € (150 € – if filed electronically), and the certification of signatures at a notary or at the registry office.
Guarantee for liabilities
As the name implies, a limited liability company is liable only up to the amount of its share capital (at least €5,000), whereas in the case of a sole trade you are liable for your entire assets without limit.
Accounting and withdrawing money from the business
Every company registered in the Commercial Register of the Slovak Republic is obliged to keep double-entry books of accounts. In the case of a trade, you can choose either double or single-entry bookkeeping.
With single-entry bookkeeping, you can simply transfer the profits to your account and use them for private purposes. In double-entrybookkeeping (LLC), you can only access the profits if you pay them to yourself in the form of a regular salary, dividends or a one-off bonus.
Taxes in 2021
To calculate income tax for a sole trade, you must first calculate the tax base by deducting tax expenses from taxable income and reducing this by the non-taxable part of the tax base, losses and expenses for research or development if you have had any.
For the calculation of income tax in the case of an LLC, a calculation of the tax base is also required. The tax base here is equal to the difference between income and expenses and the adjustment of this difference by deductible and imputable items. It can also be reduced by tax losses of previous periods and by research and development costs.
The following table gives an overview of the tax rate.
|Amount of taxable income (revenue) for the tax period||Sole trade||LLC|
|Up to 49 790 €||15%||15%|
|Above 49 790 €||19% on that part of the tax base which does not exceed€37,981.94 (inclusive)|
25% on that part of the tax base which exceeds the amount of €37,981.94
On this link you will find more detailed information
If you pay yourself dividends, these are taxed at the tax rate 7%.However, except in the case of sources of income from a foreign non-Contracting State or if the individual is not a resident of the Slovak Republic or a Contracting State.
A sole trader is exempt from social security contributions for the first year after its establishment (or longer if you file an extended tax return).
|Sole trade||LLC – Employer||LLC – Employees|
|Social security contributions||33,15% (min.180,99 €, max. 2533,98 €)||25.2% of salary/regular reward|
22,8% from jobbing
|9,4% of salary/regular reward|
7% from jobbing
|Contributions to health insurance companies||14% (min. 76,44 €)|
7% (min. €38.22)if the person concerned is disabled
5% if the person concerned is a disabled person
2% if the person concerned is a disabled person
You can see a more detailed table of social security contributions here and on this link you can find more detailed information on contributions to health insurance companies.
If you are a sole trader, it is important to know that you will only pay the minimum health levy for the first year. For 2021, this amount is set at EUR 76.44. In the following years, of course, you will also have to pay contributions to the Social Insurance Institution – the more you earn, the higher the contributions you will have to pay.
With an LLC, you don’t pay social security and health insurance contributions until you start employing people officially. Naturally, however, only provided that you, as the company’s statutory director, do not set yourself any reward or salary for carrying out this function. Remember also that you can optimize your tax and levy burden in various ways with an LLC. For example, in the form of part-time employment.
Advantages and disadvantages
You need to consider your needs and goals before you commit to one of these forms of business. Only then can you make the right decision. That’s why we’ve prepared a final summary of the advantages and disadvantages for both ways of doing business.
Advantages and disadvantages of the sole trade
(+) small establishment fees
(+) easy and quick establishment
(+) simple administration
(+) you have a choice of bookkeeping
(+) you can claim the tax-free part of the tax base
(-) you must guarantee with all your assets (including personal assets)
Advantages and disadvantages of LLC
(+) you are liable only up to the amount of the state capital
(+) you have the option of paying out at a lower tax rate (7 %) – in the form of dividends
(+) the tax burden is more favorable at higher incomes
(+) partner does not pay social security contributions
(-) you pay higher set-up fees
(-) the establishment process is more lengthy and complicated
(-) several documents need to be drawn up
(-) you must keep double-entry bookkeeping
(-) you must provide a statement from the deposit manager
The above information shows that a sole trader is particularly worthwhile for someone who is a start-up entrepreneur and wants to start their business as quickly as possible. It is also useful for those who need to make frequent withdrawals and who expect lower costs and income when running their business.
Doing business in the form of a limited liability company is especially worthwhile for those who count on higher income in their business and also want to protect their personal assets. It is also worthwhile if you want to trade with foreign countries and would like to optimize your income.