LLC or sole entrepreneur in Serbia: which legal form is better for your business?

The choice between an LLC and a sole entrepreneur is often made based on the monthly amount of taxes and social contributions. The problem appears when the first serious debt, a new business partner or an interested investor shows that the legal form does not match the way the business is actually developing.

A sole entrepreneur usually means simpler operations and fewer administrative obligations. An LLC allows clearer separation between business and personal assets, regulation of relations between several owners and easier entry of investors. However, none of these advantages makes one form universally better.

The answer depends on the type of activity, business risk, use of profit, number of founders and planned development of the business.

Why the choice between an LLC and a sole entrepreneur is not only a tax issue

Tax burden is an important criterion, but it is not the only consequence of choosing a legal form.

Before registration, it is necessary to consider:

• who is liable for business debts
• who owns the assets used in the business
• how the owner may use the earned money
• whether the business is started by one person or several partners
• whether employment is planned
• whether an investor may later enter the business
• whether profit will be withdrawn or retained in the business
• whether the activity carries a risk of larger contractual obligations or damages
• whether a sale or transfer of the business is planned

A form that is suitable for an independent consultant does not necessarily suit a company that employs workers, purchases goods on deferred payment terms or concludes high-value contracts.

The lowest initial cost is therefore not necessarily the best long-term solution.

What it means to operate as a sole entrepreneur

A sole entrepreneur is a legally capable natural person who performs an activity for income and is registered in accordance with the law. Information on the documentation and procedure for registering a sole entrepreneur is available on the website of the Serbian Business Registers Agency.

A sole entrepreneurial business is not a separate legal entity distinct from the individual who performs the activity. The entrepreneur acts in business under a registered business name, but the same natural person still stands behind the business.

This model is often practical when the business is run by one person, there are no other owners, the business risk is limited and no imminent investor entry is planned.

A sole entrepreneur may employ workers, engage associates, register separate business units and appoint a business manager. Once a sole entrepreneur or an LLC becomes an employer, contracts, internal acts and procedures must be aligned with the rules governing labour law for employers in Serbia.

Depending on the legal conditions and the selected tax regime, a sole entrepreneur may operate as:

• a lump-sum taxed sole entrepreneur
• a sole entrepreneur keeping business books
• a sole entrepreneur keeping books who has opted for payment of personal salary

A lump-sum taxpayer is not a separate legal form. It is a sole entrepreneur whose tax liability is determined according to the rules of lump-sum taxation.

A sole entrepreneur with personal salary is also not a different type of business entity. Opting for personal salary changes the way tax and contributions are calculated, but it does not change legal status or liability toward creditors.

Lump-sum taxation is not available to all activities and all entrepreneurs. Before registration, it should be checked whether the specific activity and planned scope of business meet the legal conditions.

How a sole entrepreneur is liable for business obligations

The most important legal consequence of operating as a sole entrepreneur is personal liability.

A sole entrepreneur is liable for obligations arising in connection with the activity with all of their assets. Liability is not limited only to money in the business account, equipment or other assets directly used for work. This rule is set out in the Serbian Company Law.

As a rule, liability does not cease even after the entrepreneur is deleted from the register.

The practical significance of this rule depends on the activity. The risk is not the same for a professional providing consulting services without employees and for an entrepreneur who takes loans, purchases goods on deferred payment or performs an activity where a mistake may cause substantial material damage.

Administrative simplicity should therefore be considered together with the scope of personal risk assumed by the owner.

What it means to operate through an LLC

A limited liability company is a company with legal personality separate from its members.

An LLC has its own rights, obligations and assets. It concludes contracts in its own name and is primarily liable for its obligations with its own assets.

The company may have one or more members. A member holds a share in the company, while the director represents the company and manages its affairs within the limits of authority. An employee works on the basis of an appropriate legal ground.

The same person may be the sole member, director and employee of the company, but these roles should not be confused. Each creates different rights, obligations and tax consequences.

Setting up an LLC requires more formalities than registering a sole entrepreneur. It is necessary to adopt a founding act, regulate company management and comply with accounting, registration and corporate obligations.

This complexity allows clearer regulation of ownership, management, liability and relations between several members.

Is an LLC owner liable for company debts?

As a rule, a member of an LLC is not personally liable for the company’s obligations merely because they own a share. The company is liable for debts with its own assets.

However, limited liability is not absolute.

Personal liability may arise when a member abuses the company’s legal personality, uses company assets as private assets, acts with the intention of harming creditors or undertakes other actions recognised by law as abuse of limited liability.

Separately, a director may be liable for breach of statutory duties. Personal liability may also arise when the owner or director provides a guarantee for a loan or another obligation of the company.

An LLC therefore provides a higher level of legal separation between business and personal risk, but it does not protect against the consequences of personal guarantees, unlawful conduct or abuse of the company.

LLC money is not the owner’s private money

One of the most important practical differences between an LLC and a sole entrepreneur concerns the use of money.

Funds in an LLC account belong to the company. A company member cannot use them as private money simply because they are the sole owner.

Payment to the owner or director must have an appropriate legal and tax basis. This may include:

• salary
• director’s remuneration
• reimbursement of documented business expenses
• distribution of profit, i.e. dividends
• a loan under legally permitted and properly documented terms
• another appropriate basis

Each of these forms of payment has separate legal, tax and accounting consequences.

With a sole entrepreneur, there is no identical legal separation between the individual and the business entity. Nevertheless, a sole entrepreneur must also comply with tax, accounting and payment transaction rules.

Key differences between an LLC and a sole entrepreneur

Number of owners and ownership structure

Sole entrepreneurial activity is tied to one natural person. Another person may be an employee, manager or associate, but cannot acquire an ownership percentage in the sole entrepreneurial business.

An LLC may have one or more members. Their shares, voting rights and decision-making rules are governed by law, the founding act and, where necessary, a separate members’ agreement.

For that reason, an LLC is usually more suitable when the business is started by several partners.

Business management

A sole entrepreneur makes business decisions independently. In an LLC there are company bodies, more formal decision-making procedures and clearer separation of ownership and management functions.

This difference becomes especially important when not all owners are involved in day-to-day business management.

Investor entry

An investor cannot simply purchase a specific percentage of a sole entrepreneurial business.

In an LLC, investment can be structured through acquisition or transfer of shares, increase of share capital, member loans or other appropriate mechanisms.

For this reason, an LLC is a more suitable framework for start-ups, joint ventures and businesses planning external investments. Before investing, an investor will often conduct due diligence in Serbia to check ownership, contracts, obligations, permits and legal risks of the company.

Transfer or sale of the business

A sole entrepreneur’s business is directly linked to the natural person. The transfer of individual assets, contracts, employees and other business elements may require several separate legal steps.

In an LLC, ownership can be changed by transferring shares, subject to statutory and contractual restrictions. This enables a change of owner without the company losing its legal personality.

Special permits and conditions for performing an activity

The choice of legal form may also depend on special regulations governing the specific activity.

Certain businesses may require licences, consents, professional qualifications, minimum technical conditions or a specific organisational form. Registration with the Serbian Business Registers Agency does not by itself mean that all conditions for starting work are met.

Before choosing between an LLC and a sole entrepreneur, sector-specific regulations applicable to the activity should therefore also be checked.

Termination of business

Deleting a sole entrepreneur from the register is usually simpler than terminating an LLC. The termination of a company may require liquidation, compulsory liquidation, bankruptcy or an appropriate status change.

Simpler closure of a sole entrepreneur does not mean that previously incurred debts cease upon deletion from the register.

Tax differences between a sole entrepreneur and an LLC

Tax efficiency cannot be assessed by comparing only one tax rate.

For a sole entrepreneur, the overall result depends on whether they operate under lump-sum taxation, keep business books or have opted for payment of personal salary. Revenue level, recognised expenses, contributions, activity and VAT status are also important.

For an LLC, the company pays corporate income tax on taxable profit. However, company profit is not automatically private income of its member. If profit is paid to a natural person as a dividend, that payment has additional tax consequences. Salary, director’s remuneration and other payment bases have different treatment.

Imagine two businesses with approximately the same revenue.

The owner of the first needs almost all available money for personal spending. The owner of the second leaves most profit in the business for employment, equipment and further expansion.

Although they have similar revenue, the same legal and tax model may not suit them. It is important how much money remains in the business, how much is paid to the owner, on what basis it is paid and what expenses the business can recognise.

The comparison should therefore include:

• expected income and expenses
• taxes and contributions
• amount needed by the owner for personal spending
• planned reinvestment of profit
• method of engagement of the owner or director
• accounting and administrative costs
• VAT status
• possibility of using tax incentives

An individual calculation should be prepared before registration and reviewed again when the business model changes significantly.

The independence test and the choice of legal form

The independence test may be important for sole entrepreneurs who earn most of their income from one client.

Based on several statutory criteria, it assesses whether the relationship represents independent business or, by its characteristics, more closely resembles employment. The number of clients is not the only factor; the actual organisation and performance of work are decisive.

This issue should be checked particularly in long-term engagements in IT, consulting, marketing and similar service activities.

However, setting up an LLC should not be viewed as an automatic answer to every concern about independence. The specific contractual relationship, work model and overall consequences of changing the business form must be analysed.

When a sole entrepreneur is usually more practical

A sole entrepreneur may be a rational choice when:

• the business is run by one person
• there is no need for other owners
• the activity carries relatively low contractual and financial risk
• no imminent investor entry is planned
• large loans and other significant obligations are not being assumed
• administrative simplicity is particularly important
• the conditions for an appropriate tax regime exist
• the relationship with clients has the characteristics of genuinely independent business

A sole entrepreneur may have employees and a developed business. Still, as obligations and contract values grow, the importance of personal liability also grows.

When an LLC is usually the better choice

An LLC is often more suitable when:

• the business is started by several founders
• ownership and management relations need to be regulated
• investor entry is planned
• higher-value contracts are concluded
• the activity carries a higher risk of debts or damages
• a larger number of people is employed
• a significant part of profit remains in the business
• the business works with large domestic or foreign partners
• transfer of shares or sale of the company is planned
• the business needs to exist independently of one natural person

Business size is not the only criterion. Even a small business may have a reason to operate as an LLC if the type of activity carries significant legal or financial risk.

Is an LLC always safer and a sole entrepreneur always cheaper?

An LLC usually provides a higher level of separation between business and personal assets. However, protection does not cover personal guarantees, abuse of the company or unlawful conduct by the owner or director.

A sole entrepreneur often has simpler administration, but is not necessarily cheaper in every situation. Total cost depends on the tax regime, income and expenses, contributions, use of money and business development.

A wrong choice may become visible only when a partner needs to be included, contracts transferred, an investor attracted or personal risk separated from the growing obligations of the business.

Therefore, it is not enough to ask which form currently costs less. It is necessary to assess which form can support the next phase of business development.

Can a sole entrepreneur later continue business as an LLC?

A sole entrepreneur may decide to continue performing the activity in the form of a company, through the procedure prescribed by law and registration rules.

This is not merely a change of name.

Before the procedure is carried out, the following should be analysed:

• existing contracts with clients and suppliers
• receivables and debts
• employees
• loans, guarantees and other security instruments
• ownership of equipment and other assets
• licences and permits
• VAT and other tax obligations
• business accounts
• trademark, domain, software and other intellectual property rights

A company registered for the purpose of continuing the activity of a sole entrepreneur assumes the entrepreneur’s rights and obligations in accordance with the Company Law, while the natural person remains personally liable for obligations incurred until the entrepreneur is deleted from the register.

The transition should therefore be legally and tax prepared, not reduced to filing a registration application.

Five questions before choosing a legal form

1. How much risk does the activity carry?

The greater the possible obligations toward clients, banks, employees and suppliers, the more important it is to consider separating business and personal assets.

2. Will the business have one or more owners?

Sole entrepreneurial activity has one holder. For joint ownership and regulation of relations between partners, the form of a company is usually needed.

3. Is an investment or sale of the business planned?

Investor entry and transfer of ownership share are structured much more simply through an LLC.

4. How will the earned profit be used?

It is necessary to assess how much money the owner withdraws for personal needs and how much remains in the business for investment and growth.

5. Does simpler administration fit the long-term plan?

A simpler model may be sufficient at the beginning, but the costs and legal consequences of later reorganisation should be taken into account.

LLC or sole entrepreneur: how to make the decision

A sole entrepreneur often suits an independent service activity with one owner, limited business risk and no planned investor entry.

An LLC is usually more appropriate for a business with several founders, significant contracts, employees, investors or greater risk of debts and damages.

However, turnover or number of employees alone do not provide the final answer. Two businesses of similar size may require different structures because of different contracts, risks, financing methods and owners’ plans.

The decision should therefore be based on a legal and tax analysis of the specific model, not on a general rule that one form is always more favourable.

How JP Law can help

JP Law supports domestic and foreign founders with:

• choosing a legal form that matches the business model
• registering a sole entrepreneur and incorporating an LLC
• drafting the founding act and regulating relations between members
• defining the powers and responsibilities of directors
• continuing the activity of a sole entrepreneur in the form of a company
• legal coordination with tax and accounting advisers

Before registration, it is necessary to check whether the selected form matches the risks, ownership structure, use of profit and planned development of the business.

Frequently asked questions

Is it better to open an LLC or register as a sole entrepreneur?

A sole entrepreneur is often more practical for a simpler business with one owner and limited risk. An LLC is usually more suitable when there are several owners, larger obligations, employees, investors or a need to separate business and personal assets.

Is a sole entrepreneur personally liable?

Yes. A sole entrepreneur is liable for obligations arising in connection with the activity with all of their assets. Liability does not automatically cease upon deletion from the register.

Is an LLC owner liable for company debts?

As a rule, an LLC member is not personally liable for company debts. Exceptions may exist in cases of abuse of legal personality, personal guarantees or another statutory basis.

Can a sole entrepreneur have employees?

Yes. A sole entrepreneur has the status of an employer and may conclude employment contracts with employees.

Is a lump-sum taxpayer the same as a sole entrepreneur?

A lump-sum taxpayer is a sole entrepreneur whose tax is determined according to the rules of lump-sum taxation. Lump-sum taxation is a tax regime, not a separate legal form.

How can an LLC owner legally withdraw money?

Payment must have an appropriate legal basis, such as salary, director’s remuneration, dividend, reimbursement of documented expenses or another lawful and properly documented basis.

When does it make sense to switch from a sole entrepreneur to an LLC?

The change should be considered when contract values and business risk grow, when partners or investors are included, when employment becomes more significant or when clearer separation between business and personal assets is needed.

Can a foreign citizen set up an LLC or register as a sole entrepreneur in Serbia?

A foreign citizen may be a member of an LLC or register as a sole entrepreneur under the statutory conditions. In addition to registration, residence, right to work, tax status, beneficial ownership and opening of a business bank account should be checked.