OK. We have an entrepreneurial idea, and we have made all the necessary preliminary work and preparations …as it is nicely written at http://www.bdm.hr/info/Od-nezaposlenosti-preko-poduzetnichke-ideje-do-businessa.hr.html
So now what? Through which form do you start with performance of a designed activity? A trade? A company (LLC)? This is the first question which starts worrying the potential entrepreneur. It is difficult to answer this question precisely, since the right answer depends on the nature of the business which we are planning to start. Why? Let's start with the definitions.
A TRADE stands for a continuous and independent performing of an economic activity by a private person, whose objective is achieving income (according to Croatian legal and tax terminology, private persons as a rule achieve income, while legal entities achieve profit.) It is very often a case that a private person, through registering a trade solves the question of their own employment, and only after do they become en employer who employs other employees for the purpose of their business activities. A trade is founded by registering in the Trade registry of the competent Public administration Office.
A COMPANY, most often a Limited Liability Company (abbreviated: LLC), is an entrepreneurial venture in which one or more private persons or legal entities invest shares (in a form of money or goods) into previously agreed base capital, with purpose of achieving profit. So, unlike trade, where the trade and its owner are one and the same private person, founder of the company (private person or legal entity) and the company itself in their ownership (which has a legal identity) are two different entities. A company is founded by registering in the registry of the competent Commercial court.
Registration of a trade is less expensive than registration of a company. It costs approximately 1.000,00 kunas, which is how much founding costs are. There is no base capital in a trade. Registration of a company costs approximately 6.000,00 kunas. These are only founding costs, plus a minimum of 20.000,00 kunas for base capital, which has to be paid in the account of a commercial bank before registration.
Responsibility for business activity is very different in these two forms. For a business activity of a trade, the owner is responsible with their entire assets, even personal ones, i.e. with the ones which haven't been invested in business activities of a trade (even though this is not mentioned in the Trade Act), whereas an LLC is responsible towards third persons in money transfers exclusively with their own assets (assets of a company are a sum of values of fixed assets, supplies: merchandise, materials and products, money, securities and claims in the ownership of the company). Company owners are not responsible for business activities of the company with their personal assets.
Bookkeeping is simpler (and less expensive) for a trade than it is for an LLC. Business books of a trade are kept by a method of simple bookkeeping (principle of a counter) where only charged deliveries of goods and/or services represent revenue (receivings), whereas expenditure (spendings) are only paid deliveries, i.e. business partners' invoices, increased by other paid costs of business activities (eg. paid salaries, paid contributions and various membership fees, as well as write-off of fixed long-term assets). Business books of a company are kept by a method of dual bookkeping, which due to its complexity requires engaging of an expert. The basic difference is that LLC's revenues is increased by a value of each carried out delivery – for which issuing an invoice is mandatory – no matter if the delivery has been charged/collected or not. Using this analogy, every received invoice can be booked under business expenses or under an asset item, no matter if we have paid it or are planning to pay it.
The same goes for VAT (Value Added Tax). In a trade, VAT is paid only on charged invoices, whereas an LLC pays VAT on all issued invoices, no matter their collection. However, this is why in an LLC all tax prepayments which are included in received incoming invoices (excluding R-2) can be deducted from obligation of paying VAT, no matter if they have been paid or not. This is not the case with trades. From obligation of paying VAT, tax prepayment can be deducted only for the invoices that have been paid.
Possibility of taking out cash is simpler in a trade than it is in an LLC. A trade owner can take out cash from their business account without any justification for that money, whereas in and LLC there has to be basis and justification for every kuna that's to be taken out.
Taxation rates in these two forms aren't same either. Income of a trade (as a positive difference between revenue and expenditures) is taxed progressively – according to a scale, at rates of 12%, 25% and 40%. Limited Liability Companies pay profit tax linearly, at a 20% rate on the achieved positive difference between revenue and expenditures in a fiscal year.
In a trade, trade owners have to pay mandatory contributions for retirement and health insurance, regardless of the fact that they are maybe paying these contributions on some other grounds as well (eg. if they are employed at another employer's). An LLC owner, if they are not this company's employee, doesn't have the obligation of paying mandatory contributions at the expense of business activities of a company whose owner they are. However, if they are employed in their company, their entire gross salary (net salary plus tax, surtax and retirement insurance contributions), increased by contributions on salaries, is considered as expenditure. In a trade, only paid contributions of the trade's owner are considered as expenditure; paid salary (which, as a payment to trade's owner isn't called ˝a salary˝, but ˝an income˝ and paid tax aren't expenditures of trade's business activities.
Closing down a trade is much simpler than closing down an LLC. Deletion from the Trade registry is a very simple and brief procedure. Deletion of a company from the Court registry is a long-term (lasts for about a year, possibly longer) and expensive procedure. Nevertheless, we'd like to repeat: we, as a trade owner, and our trade are one person, whereas our company is independent of us as its owner, which is why we can very simply alienate it (sell or give it as a present) to another private person or a legal entity through transfer of business shares ,with or without charge. In this way, we can ˝get rid of˝ our business venture without the need of starting with the long-term procedure of deleting the company from the Court registry, i.e. without liquidation of the company.
It doesn't hurt to emphasize that many business people and banks consider a business collaboration with LLCs much more serious than with trades. Why that is so – is hard to tell, but practice often confirms that.
And in the end: what is our recommendation to future entrepreneurs? If you, based on all above stated, cannot make a decision, we'd recommend that you, for beginning of your business activites – start with a trade, whose founding and managing is cheaper, faster and simpler. After that, if business opportunities and situation developments would require, you can very simply transfer complete business activities of your trade into a Limited Liability Company, which you will, in the meantime, register at the Commercial court, since there is absolutely nothing that prevents you from being the owner of both business forms at the same time.
If you already believe with considerable certainty that your business plans and ambitions surpass characteristics of doing business through a trade – start founding a company (popularly called – the firm) without hesitation.
Posted on November the 05th, 2010
