It is one of the questions that quite rightly comes up most often. Any new business that is going to be established can, in principle, choose to register in one of two forms: (a) as a sole proprietor, or (b) as a legal entity, such as a limited liability company, or LLC.
Which form is the most suitable? Is there any difference in the level of taxes paid? Does it take longer to register a limited liability company? What are the advantages and disadvantages in both cases?.
These are some of the most common questions an entrepreneur faces when they decide to register a new business.
The most common answer in these cases is that the registration form depends on the circumstances and your plans. There is no single better form or one that offers advantages, and both options can work just fine for you. So what are the circumstances in which you should choose one form over the other?
The business you will create will have several partners or consist of only a single partner.
This is one of the most important elements in deciding on the form of registration.
If you're going to set up a business that you and your partners (the owners, the investors) will manage yourselves, it would be more practical and advantageous to choose the sole proprietorship form.
If, on the other hand, the business you have created consists of two or more partners, the form you need to choose is that of a limited liability company?
In this case, you must also plan for the future of the business and its expectations. If you start alone but expect other partners to join your venture in the future, you will need to choose the LLC structure.
The business you're going to create poses additional financial risks to third parties, and you don't want to assume any extra risks.
From its very name, a limited liability company is a form of registration in which its partners, in the event of bankruptcy or other future problems, are liable only to the extent of their investment in the company's founding capital. But what does this mean?
Suppose a situation in which your client has financial claims arising from damages incurred through business operations. If your enterprise operates as a limited liability company, even in the event of financial difficulties, losses, or other damages, you will not be liable for these obligations with your personal assets.
Otherwise, if you enter into this relationship as an individual, in the event of damages or other financial problems, you are liable with your personal assets.
Example: taking out a bank loan, disputes with suppliers, clients, or employees, ongoing losses, and other cases.
Under which registration form do we pay less in taxes?
The only difference in tax payments between the two forms is the dividend tax, which is paid at the moment the company distributes profits to the partner.
Although in essence we consider the business ours and the profits belong to us as individuals, the advantage of limited liability There is an additional cost, which is the dividend tax.
The current dividend tax rate is 81% of the gross amount of distributed profits, according to the assembly's decision on profit distribution.
Does this mean that we have to pay dividend tax every year?
Of course not. Tax will only be paid when the company distributes profit. If that profit is not distributed but retained in the company for future investments, the dividend tax is also not paid.
Conclusions
There is no registration form that is better than any other. Each one suits your situation and future expectations.
If you are a sole proprietor and your business does not present any additional financial risks, and you do not plan to bring in other partners, the most suitable form would be that of a sole proprietorship. This makes day-to-day operations easier and also saves on dividend tax when distributing profits.
If you are one or more entrepreneurs, and your business involves increased financial risks and you want this venture to have the possibility of being sold in the future, it would be more appropriate to establish a business in the form of a limited liability company.
To further emphasize: (a) Under Albanian law, you are not allowed to transfer a natural person into an LLC or vice versa. Therefore, if for various reasons the form needs to be changed, the existing business must be closed or suspended and a new business established with the appropriate registration form. (b) If you want to sell your business, at least legally it can only be done if it is registered as a limited liability company. (c) In the event that the LLC manager is also employed by another business, the individual is subject to payroll income tax on the dual employment. Meanwhile, if the individual establishes a sole proprietorship, they are not considered employed but self-employed, and in that case there is no obligation to file DIVA and an additional payment of individual income tax. (d) Although straightforward, in the case of an LLC there are some obstacles related to drafting additional documents such as assembly resolutions, obstacles to transferring funds to a personal account, and others. On the other hand, it must be acknowledged that the company presents itself better to third parties compared to a natural person, having a stronger “presence.”.
I hope this information has helped you, even if only a little, in deciding which registration form to use. There is no single best registration form for every situation; it depends on your circumstances, expectations, and preferences.