Why e-residents should not register as sole proprietors in EstoniaWhatsApp
In this article, I will explain the main differences between having a limited company versus registering as a sole proprietor in Estonia. We would also look into other possible forms of registering a business, and give our best advice to first-time founders wondering what is the best solution for running a remote business online.
The most popular form for e-residents by far is OÜ (osaühing, or limited liability company). Starting from February 2023, Estonian OÜ can be opened with a share capital of 1 euro cent. Before that, some people were thinking twice about OÜ because of the minimum share capital requirement which was 2500 euros. The company registration state fee of 265 euros is still over ten times higher than the 20 euros you would pay for registering as a sole proprietor. However, the registration cost is the only upside we can detect when comparing a limited company to a sole proprietorship in Estonia.
Tax Complications for non-residents
Sole proprietors in Estonia are taxed on their income generated in Estonia with personal income tax and social tax, which might result in higher tax rates compared to corporate income tax on distributed profits from your Estonian company. For non-residents, personal taxation can become complex due to international tax treaties and the risk of double taxation. Being registered as a sole proprietor in Estonia does not change your tax residency.
The Estonian Tax and Customs Board details that a sole proprietor’s income and expenses from business activities are reported annually on Form E of the personal income tax return, reflecting the need for detailed record-keeping where you determine each expense as a business expense or personal expense not to be used for a tax deduction. Personal income tax is to be paid biannually in advance starting from the second year.
In Estonia, sole proprietors are also responsible for their own health insurance and social security contributions. This means quarterly payments for the Estonian social security, so if you do not live or travel to Estonia it would not make sense to have health insurance here. The minimum payment in 2024 is 717.55 euros per quarter. This can be avoided if you can prove that you pay social tax in another EU country with an A1 tax certificate.
Legal Status of Sole Proprietors
A sole proprietorship does not provide a separate legal entity and you are a natural person conducting business with full responsibility. This means being personally liable for business debts and obligations, putting your assets at risk. Understanding and complying with laws and regulations is an overwhelming job even for resident sole proprietors without having a professional accountant.
Limited liability companies are byt the way an important milestone in the history of capitalism. Before that people took fewer risks in the forms of general partnerships or personal ownership of a business, which were the only available formats of entrepreneurship. Realized business risk meant losing your property or even freedom when unable to repay business debts.
Banking and Financing
Opening a bank account in Estonia as a non-resident sole proprietor is nearly impossible, but you could use your personal bank account in any country theoretically. Estonian banks require physical presence and impose scrutiny on non-resident account applications, as mentioned in the Unicount banking article. The lack of a corporate structure might also restrict access to certain business financing options.
Sole proprietorships are not suitable for scaling a business with external financing. Investors and partners perceive companies as more credible and for a reason, you can’t give someone equity or convertible notes in your future income as an individual. Non-residents aiming for significant growth or seeking investment should look into a limited liability company.
Registration of a limited company
As a non-resident you can open an OÜ at a notary office and as an e-resident by using the Unicount service or the e-Business Register. The main expense item when opening a company will be the state fee of 265 euros. After registering a company, you can open a business bank account and start trading. Using a notary is the only option if you are not an e-resident yet. In addition to the state fee, a notary fee needs to be paid then. The contributed capital can later be used for business activities.
The limited liability company will be registered by the next business day in an expedited process. In this case, standard articles of association need to be used. Regular proceedings are slower, taking up to 5 business days, but allow you to file manually amended articles.
Monetary and non-monetary contribution of share capital
Typically, the founder contributes share capital in cash, each shareholder needs to pay at least 1 euro cent as this is the lowest value of a share in a limited company. However, tangible property or rights can also be used instead of money. To do this, upon establishment, it is necessary to change the charter and allow non-monetary contributions therein. In this case, an agreement on making a non-monetary contribution, as well as confirmation from the board of directors regarding the value of the property or right, must be submitted to the Business Register.
Other forms of entrepreneurship
In Estonia, it is also possible to engage in entrepreneurial activity in the form of FIE (sole proprietor, füüsilisest isikust ettevõtja), tulundusühistu (commercial cooperative), UÜ (usaldusühing, limited partnership) and TÜ (täisühing, general partnership). Registration of AS (aktsiaselts, joint stock company) is an opportunity that solopreneurs usually cannot take advantage of due to the high minimum share capital requirement.
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