How to switch from a self-employed person to a limited company
Business is booming; are you looking for opportunities for further growth? The solution may be to switch from a self-employed person to a limited company, i.e. to transfer your business from a natural person to a legal entity. We will advise you on how to make the change.
Setting up an LLC and the subsequent change of business form is a minor test of patience in Czech conditions. However, if you successfully make the transition, your company is on the road to greater success.
You have a total of 3 options to make the transfer from a sole proprietorship:
- Contribution of the business of the self-employed company to other capital funds Ltd,
- purchase of the original business plant by the new company,
- running both businesses simultaneously and making a gradual transition.
Contribution of the self-employed person's business to the new Ltd.
The first option is the insertion of the business plant (as the business is nowadays referred to by law) into the new company by way of a shareholder contribution. The assets and liabilities of the existing business will thus be transferred to the new company, and all contractual obligations (with employees, suppliers, etc.) will also be transferred.
However, this solution has several "buts":
- In order to make the contribution, you need to value the self-employed person's business. For this purpose, you need to hire a forensic expert (self-assessment is not allowed), which will make the whole matter longer and more expensive.
- The incorporation of the company is carried out by a notary - and his fee is usually based on the amount of the share capital of the Ltd.
Purchase of a business by a self-employed person
A slightly more elegant (and often cheaper) alternative is to buy out the original business establishment. The way it works is that you first set up the Ltd. and after its formation, the new company (as a legal entity) enters into a purchase agreement with you (i.e. an individual). After that, all assets and liabilities will be transferred between the two entities again. In this case, you do not have to find an expert to value the company - you determine the price yourself.
However, there is one significant catch. According to the law, this is a transaction between so-called related parties, which is subject to special rules designed to prevent tax evasion.
According to these rules, you must set the sale price at what is known as the "normal price", i.e. the amount that two completely independent parties would agree on. For this reason, you cannot buy a business for only a nominal amount. In addition, the selling party must pay income tax on such a transaction.
Gradual transition from self-employed to company
In practice, the most common variant of the transition consists in setting up an LLC in addition to the individual's business and running both forms of business at the same time for a certain period of time.
Gradually, you wind down your activity as a self-employed person, balance your business relations and balance your accounts. You sign new contracts with your business partners and employees under the LLC name and terminate the original ones. Once you have settled all the liabilities of the original business and dealt with all the paperwork, you cease to be self-employed - and continue to operate only as a limited company.
This is a cheap and relatively quick approach that does not require you to hire an expert, deal with a deposit or a purchase agreement.
How are self-employed and limited company businesses different?
Your legal status and obligations will change with the transition to another form of business. And it will take some time to get used to the new situation. To help you find your way around, here is a summary of the main new features that await you as a new Ltd. owner.
The first change is your liability for liabilities. As a self-employed person, you are liable for all your personal assets, but as a shareholder of an LLC, you take much less risk. You are only liable up to the amount of the outstanding deposit - and when you pay it back, your personal assets are safe from the company's creditors. However, if you are also the managing director, you must always manage the LLC with due care.
You are also subject to other tax and accounting obligations as part of the LLC. You must now keep full double-entry accounts and publish the company's accounts annually. Unfortunately, you can no longer use tax records or expense allowances.
The tax base of an LLC is subject to 19% corporate income tax. Paying out money from the company is also more complicated, as it is much more complicated for an LLC than for a self-employed person. You must also pay an additional 15% withholding tax on any share of the company's profits (if held by an individual) and meet other necessary criteria for payment.
Tip! Interested in more information? Read our comparison of sole proprietorships and LLCs, where we discuss all the differences in detail. Our guide to business owner responsibilities will also help you get started with your LLC.
Get your own business up and running with minimal effort
Setting up an LLC and switching to another form of business takes a lot of time and patience. That's why we're happy to make things easier for you. Book a turnkey incorporation with us or arrange a meeting with our experts who will make sure the whole transition goes smoothly. We can also help you with your accounting and taxes.