Many entrepreneurs in Slovakia consider whether it is worthwhile to change their business form from a natural person to a limited liability company. This step can be attractive for those who want to minimize personal risk, optimize their tax obligations, or simply adapt their business to growing needs. In this article, we will look at the main advantages and obligations associated with transitioning to a limited liability company.
Why Consider Changing Your Business Form?
Transitioning from a natural person to a limited liability company brings several significant advantages:
- Limitation of liability: As a natural person, you are personally liable for obligations with your entire property, whereas a limited liability company is liable only with the company’s assets. This means your personal assets are better protected.
- Tax optimization opportunities: At certain levels of income and expenses, a limited liability company may be more advantageous, especially in terms of social and health insurance contributions.
- Flexibility for business expansion: Establishing a limited liability company makes it easier to bring in new partners or investors, which can be important for the growth of your business.
How does the transition work?
Transitioning to a limited liability company is not just a simple name change—it is a process that involves ending business activities as a natural person and establishing a new company. The main steps include:
- Establishment of a Limited Liability Company:
- A limited liability company is established by signing the founding document and registering the company in the Commercial Register.
- It can be established either by one person or with additional partners, and it requires a minimum share capital.
- Transfer and Settlement of Assets Between a Natural Person and a Limited Liability Company:
- The method and form of asset transfer and settlement depend on the asset structure and type of business.
- Closure of Natural Person's Business:
- You must officially terminate the trade license with the relevant authorities, including deregistering from the tax office and health and social insurance agencies.
Tax Aspects of the Transition
Tax Return Upon Termination of Natural Person’s Business:
- You must file a tax return for the period you operated as a natural person, accounting for unused inventory, bad debts, and unpaid liabilities.
Transfer of Assets to the Limited Liability Company and Taxation:
- The method of transferring assets (e.g., asset sale, non-monetary contribution, business sale) has its specifics.
- If you own assets used during your business as a natural person, you can decide to transfer them to the newly established limited liability company. This transfer can take the form of:
- Sale of assets to the limited liability company: In this case, the sale is taxed as regular income for the natural person, with tax calculated on the profit from the sale.
- Non-monetary contribution: Assets can be contributed to the share capital of the limited liability company in a non-monetary form. This requires valuation by an expert. In some cases, the difference between residual and market value may be subject to taxation.
- Business sale: A business can be transferred to the limited liability company. In this case, the business must be defined, its value determined by an expert, and the difference between residual and sale value may be taxed.
Depreciation of Assets:
- Non-depreciated assets are not carried over. The new limited liability company must begin depreciation anew, based on the market value of the assets.
VAT and Registration Changes:
- If the natural person was registered as a VAT payer, the VAT registration must be canceled and re-registered under the limited liability company. Remaining inventory and assets are subject to VAT adjustment.
Tax-Deductible Expenses:
- Expenses related to establishing the limited liability company, such as notary fees and registration, are tax-deductible, which helps reduce the tax base for the new company.
What to Prepare?
- Plan Ahead: Decide when to close your business as a natural person and establish a limited liability company to minimize administrative costs and tax obligations. Sometimes it is advantageous to close the natural person’s business at the end of the year, but other times a different date may be better.
- Consult Experts: The transition to a limited liability company can be complex and requires knowledge in accounting, law, and taxation. Consulting an expert can help you manage all the details, avoid problems, and even legally save on taxes.
- Consider Tax Impacts: Transferring assets and changes in accounting can have various tax consequences. It is essential to calculate how the transition will affect your tax obligations.
Summary: Is Transitioning to a Limited Liability Company the Right Move?
Changing your business form to a limited liability company can be advantageous if your business is growing, and you need better asset protection. However, it also brings new challenges in accounting and tax obligations. It is crucial to plan all steps carefully and consider the long-term impacts before transitioning. With proper planning and expert support, you can prepare for a successful transition and further growth of your business.
Need more advice? Contact a tax advisor who can help you set up the right steps for transitioning to a limited liability company!
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