In the preceding section we discussed the legal aspects of the establishment and incorporation of companies.
However, if a new entrepreneur decides to implement their business plans, they might also consider conducting business as a sole trader on the basis of a trade license (i.e., a self-employed person, in Slovak SZČO).
Under the provisions of Section 2(1) of the Commercial Code, the term business means systematic activities that are independently conducted for the purpose of profit making by an entrepreneur in their own name and at their own responsibility.
That statutory definition sets out the characteristic features of business, i.e.:
Activities carried out systematically – activities carried out continually, repeatedly and/or regularly and not as a one-time, random activity without an intention to repeat it; Independence – unlike employment (dependence on employers), entrepreneurs organise their activities by themselves;
In their own name – entrepreneurs act on their own behalf;
At their own liability – entrepreneurs’ financial liability differs according to the form of business entity;
Profit making – the actual profit gaining is not decisive (i.e., a business may also generate losses), only the intention and endeavour to make a profit is decisive.
Entrepreneur’s conduct and liability
Entrepreneurs act in their own name and at their own responsibility. A sole trader – SZČO acts as a natural person and their liability for damage is unlimited (is liable for damage with all of their property), as opposed to a legal entity, whose statutory body acts on behalf of and at the responsibility of the legal entity.
Example:
An entrepreneur is a sole trader – SZČO. The entrepreneur’s scope of business is earth and excavation works. During excavation works, an important fibre-optic cable is cut or a gas pipeline damaged. In this case, a sole trader – SZČO has unlimited liability. Damage claims can be astronomical, resulting in a significantly negative impact on the person’s property.
On the other hand, an entrepreneur – legal entity, has limited liability to the amount of assets of the company. In addition, liability of a member of a limited liability company is limited to their unpaid contribution to the registered capital of the company.
We should certainly not omit the obligation of a managing director (statutory body) of a legal entity to act with due and professional care and in accordance with the interests of the company and all its members. A managing director that breaches those obligations when acting on behalf of the company shall compensate for damage they have caused.
Scope of business
The scope of business of an entrepreneur is one of the factors influencing the decision-making on the territorial extent and capital scope of business and the related decision on suitability of a certain form of business.
If the scope of one’s business is the manufacture of garments and the entrepreneur is a sole trader manufacturing and selling the garments alone, on a small scale and does not plan to expand, it is irrelevant to carry out those activities as a legal entity and contemplate switching to an s.r.o. for example. However, if an entrepreneur plans to carry out construction activities that may be associated with a higher risk of damage during construction and subsequent use of real property, for which the entrepreneur will be liable, the entrepreneur should certainly consider doing it as a limited liability company. Such an activity is usually associated with higher profitability, therefore conducting business as an s.r.o. would be more suitable also from the perspective of accounting and taxation.
Initial costs and operating expenses
Initial costs and operating expenses may be among the factors influencing one’s decision on the form of business. They are much higher in an s.r.o. and include the cost of incorporation, administrative load and subsequent business operation that entails higher operating expenses for example for bookkeeping.
Summary
When is it worth to be sole trader – SZČO?
Services providing or goods selling locally;
Low actual expenses, i.e., flat rate expenses claiming;
lower probability or lesser extent of damage potentially caused by the business activities;
Small scope of business activities.
When is it worth to conduct business as a limited liability company – s.r.o.?
Larger territorial scope of business activities;
Higher actual expenses and their application;
Higher probability or extent of damage potentially caused by the business activities;
Higher turnover and associated taxable income.
