What are differences between LLC and entrepreneur (sole proprietor) in Serbia?

1. Responsibility for obligations

Entrepreneur guarantees for  entrepreneurs obligations (possible debts) with whole his property, unlimited. He is also responsible for tax liabilities with the property of household members.

The LLC does not guarantee for LLC’s obligations with the personal property of the owner, but exclusively with the property of the company (LLC) itself. In case the founder uses the funds of the LLC company for his personal needs, then he guarantees with his personal property in amount of the funds he used LLC’s funds for his personal needs.

The minimum founding contribution when founding a limited liability company is 100 dinars, while when founding an entrepreneur there is no need to register the founding share.

2. Independence test for entrepreneurs

LLCs does not need to pass independence test, while it is very important test for entrepreneurs.

Independence test is a set of questions based on which it is possible to conclude if the entrepreneur is dependent or independent from his clients.

If entrepreneur is independent, then he is taxed as usual.

If independence test shows entrepreneur is not independent from his clients, then additional taxes would apply to transactions between clients and entrepreneur. It means – if clients are domestic firms, they should pay tax and social contributions to the amount which they paid to the entrepreneur. If clients are foreign companies, additional tax should be paid by entrepreneur.

If 5 out of 9 statements below are true, entrepreneurs fails independence test:

  1. the principal (client) or a person related to the principal determines the working hours of the entrepreneur or flat rate entrepreneur or the rest and absences of the flat rate entrepreneur or entrepreneur depend on the decision of the principal or the person related to the principal and the flat rate entrepreneur’s compensation is not reduced in proportion to vacation time;
  2. the entrepreneur or flat-rate entrepreneur normally uses the premises provided or performed by the place designated by the principal or a person related to the principal for the purposes of performing the tasks entrusted to him;
  3. the principal or a person related to the principal performs or organizes professional training or advanced training of the entrepreneur or flat-rate entrepreneur;
  4. the client has hired an entrepreneur or flat-rate entrepreneur after advertising in the media the need to hire natural persons or by hiring a third person who is usually engaged in finding persons suitable for employment, and whose service resulted in hiring that entrepreneur or flat-rate entrepreneur;
  5. the principal or a person related to the principal provides its own basic tools, equipment or other basic tangible or intangible assets necessary for the regular operation of the entrepreneur or lump sum entrepreneur or finances their procurement, except for specialized tools, equipment or other specialized tangible or intangible assets that may be necessary for the execution of a specific job or order, or the principal or a person related to the principal usually manages the work process of the entrepreneur or flat-rate entrepreneur, except for such management which involves giving a basic order in connection with the ordered work and reasonable control of the results of work. , over the performance of the work ordered by him;
  6. at least 70% of the total realized income of the entrepreneur or flat-rate entrepreneur in the period of 12 months beginning or ending in the respective tax year was realized by one principal or by a person related to the principal;
  7. the entrepreneur or flat-rate entrepreneur performs activities from the activity of the principal or a related person with the principal, and for such performed his engagement contract does not contain a clause according to which the entrepreneur or flat-rate entrepreneur bears the usual business risk for the work delivered to the client’s client. , if such a client exists;
  8. the contract on the engagement of entrepreneur or a flat-rate entrepreneur contains a partial or complete ban on entrepreneur or flat-rate entrepreneur to provide services under contracts with other clients, except for a partial ban covering the provision of services to a limited number of direct competitors;
  9. the entrepreneur or flat-rate entrepreneur performs activities for a fee for the same principal or for a person related to the principal, continuously or intermittently for 130 or more working days in a period of 12 months beginning or ending in the respective tax year. in one working day is considered to be performing activities in any period during that working day between 00 and 24 hours.

If entrepreneur fails independence test, general solution is to register his own LLC or to get employed by his client (if there is actually just 1 client).

3. Taxation and the need for an accountant

Flat rate taxation is possible only for entrepreneurs and not for all entrepreneur activities

Entrepreneurs can be taxed at a flat rate, while LLCs cannot. Flat-rate taxation means that the tax administration prescribes you a fixed amount of taxes and contributions that you pay, in which case you essentially do not need an accountant, unless you have employees. Certain activities cannot be taxed at a flat rate. Entrepreneurs with a turnover of less than six million dinars a year can be taxed at a fixed rate. Entrepreneurs with flat rates cannot be in the VAT system.

Flat-rate entrepreneurs do not pay tax on profit, as they do not need to do bookkeeping and not calculate profit.

Entrepreneur can keep books according to the double bookkeeping system (from 1.1.2019. simple bookkeeping is not possible any more)

An entrepreneur can keep books according to the system of double bookkeeping.

An LLC must keep books according to a double-entry bookkeeping system.

VAT (Value Added Tax) system

Both the entrepreneur and the LLC can be in the VAT system or outside the VAT system. If the LLC or entrepreneur realizes a turnover of more than 8 million dinars in last 12 months, then it must register itself to the VAT system. Otherwise it may or may not be in the VAT system.

When starting a business, you must state whether your business will be in the VAT system. Important is that, if you decide to enter VAT system when registering LLC or entrepreneur, you can not leave VAT system for at least 2 years. As pointed out earlier, entrepreneurs who have a flat tax cannot be in the VAT system.

Standard VAT rate is 20% and lower VAT rate is 10%.

4. Income tax (Tax on profit)

Income tax for an LLC is 15%, and for entrepreneurs it is 10%. Flat-rate entrepreneurs do not pay tax on profit, as they do not need to do bookkeeping and not calculate profit.

When an LLC owner wants to collect a profit, he must pay dividend tax. An entrepreneur does not pay this additional tax when he wants to make a profit.

Dividend tax depends from who is the owner of LLC

How dividend tax in Serbia depends from who is the owner of the Serbian company (LLC=DOO), you can see below:

Dividend tax is 20% if the owner is non-resident from the country with which Serbia does not have agreement about avoiding double taxation.

When owner is from the country with which Serbia has agreement about avoiding double taxation, dividend tax is according to that agreement. List of countries  with which Serbia has agreements about avoiding double taxation with dividend tax rates, you can find on next link.

Dividend tax is 25% if offshore entity is owner of Serbian company.

Dividend tax is 15% if owner is Serbian resident.

Personal income tax

An entrepreneur as person must pay 10% personal income tax if his personal income, from sources like salary, entrepreneurship, property rental and similar, is more than approximately 23,000 € in last calendar year, and he must pay 15% on a part over 46,000 €. The realized profit of the LLC is not included in the base for the annual personal income tax.

5. Change of legal form

An entrepreneur can make a transition to an LLC company, while an LLC cannot change its legal form to an entrepreneur.

An entrepreneur cannot merge, divide or change ownership, while an LLC can.

6. Temporary interruption of work

An entrepreneur may temporarily pause to operate for a limited or unlimited period of time, while an LLC can’t.

7. Liquidation

Liquidation of a limited liability company is significantly more expensive, longer and more complex than deleting an entrepreneur.

8. Cheaper and simpler procedures in the Business Registers Agency

The costs of registration, possible changes and liquidation in the Serbian Business Registers Agency are lower for entrepreneurs than for LLCs, and the procedures are simpler.

In the case of LLCs, the acts drawn up on that occasion must be certified, which requires additional costs. In the case of entrepreneurs, such acts need not be drawn up or certified.

Fees to the Business Registers Agency are lower for entrepreneurs than for LLCs.

An LLC can have multiple owners, and an entrepreneur can’t.

9. Penalties for misdemeanors

Penalties for violations are generally 2 to 10 times lower for entrepreneurs than for LLCs.