Freelancing or opening a business: What fits my situation best?
The most common types of business in the Czech Republic are Ltd (s.r.o.) and freelancer (OSVČ). Let's have a closer look at the advantages and disadvantages of both types, to help you decide what might be the most suitable for you.
Advantages of an s.r.o.
Limited Personal Liability: The associate (společník) of the s.r.o. generally has limited personal liability for the company's debts and obligations. The personal assets are only at risk up to the amount of total unpaid contribution to the basic capital of the company. Once all associates have made their contributions, they are not personally liable for the company's obligations. Any potential damages are borne by the director (jednatel) provided it is proven that they did not manage the company with due diligence.
Increased Credibility: An s.r.o. is perceived as a formal and professional legal entity, which can enhance the trust of customers, suppliers, and other partners. This credibility can lead to better business opportunities and greater prestige in the market.
Ability to Attract Investment: An s.r.o. generally has greater access to external sources of financing than a freelancer. For example, the s.r.o. can issue shares or invite external investors to participate in the business, which can help fund the company's growth and development.
Legal Continuity: The existence of the s.r.o. is not tied to the activities of individual associates. The company can continue its operations independently of the personal circumstances of its associates, such as the withdrawal of an associate, or the sale of shares. This stability provides assurance for both employees and business partners, which can be crucial for the long-term growth and development of the business.
Disadvantages of and s.r.o.
Higher costs of establishment, formation and operation: Formation of an s.r.o. involves certain costs, including notary fees, registration in the commercial register, and other administrative expenses. Additionally, some operational costs may be higher than those for freelancers.
Complex administration: An s.r.o. requires compliance with certain legal and administrative obligations. For example the accounting is subject to Czech accounting standards and tax obligations, the commercial register needs to be updated regularly, etc..
Higher tax burden: An s.r.o. is subject to higher tax obligations than a freelancer. For example, the corporate income tax rate for 2024 is 21% for an s.r.o., compared to 15% for a freelancer. If an associate or director is employed by the s.r.o. under the Labor Code, salary costs in the s.r.o. are usually higher than the mandatory advances for freelancers.
Risk of multiple associates: There can be differing opinions and conflicts among the associates of the s.r.o. regarding business management, profit distribution, or strategic decisions. For these reasons, it is crucial to properly and clearly define the rights and obligations in the articles of association when establishing a company with multiple associates.
Freelancer’s advantages
Free Management of Financial Resources: Unlike an s.r.o. - which is subjected to the accounting standards - all earned financial resources are available to the freelancer and they can freely manage them.
Flexibility: Freelancers are not bound to specific working hours or locations, allowing them to better utilize time and space according to individual needs, which usually leads to greater satisfaction and productivity.
Simpler Administration: Freelancers often have simpler accounting and tax obligations. Instead of accounting they are obligated only to track assets, income and expenses and can use simpler record-keeping methods, such as tax evidence. With a flat-rate tax, it is even sufficient to track only income.
Low Initial Costs: Freelancers only pay an administrative fee for the notification of the trade to the authorities. There is no requirement to pay basic capital or fees associated with the establishment of an s.r.o., which reduces the financial burden when starting a business. It also allows more flexibility in the allocation of resources toward the development of products and services.
Freelancer’s disadvantages:
Personal Liability: One of the main risks of freelancers is personal liability for business debts and obligations. This means that if the business fails or is unable to repay its debts, all the assets of the freelancer can be used to satisfy creditors, including personal assets such as real estate, cars, or savings.
Limited Growth: In some cases, the development of the business may be restricted. For larger projects or expansion into new areas, it may be more advantageous to choose a formal legal entity that allows easier access to financing and other resources.
Lower Credibility: Regardless of the skillset of the freelancer, the perception of the business can be impacted by the lack of being a legal entity. Business partners, customers, and employees may perceive freelancers as less stable and less professional compared to legal entities, which can affect business relationships and market trust. The uncertain legal continuity of freelancers, tied to personal circumstances, can also lead to mistrust. Especially when an individual decides to end the business or change its focus.
Limited Social Security: Freelancers are not entitled to some social benefits, such as sickness benefits or vacation, which are common for employees. They must pay for their own mandatory insurance and retirement savings.
If you are interested in more information or consultation, please do not hesitate to contact us.
Šárka Houžvicová
+420 602 755 855