Sole Trader or Limited Company Montenegro

Choosing whether to run your business as a sole trader or limited liability company in Montenegro is one of the most crucial decisions you as a small business owner have to make, ideally right from the beginning. Depending on the complexity and activities of your business, you should carefully consider the pros and cons of each company type, their legal requirements, tax impications, and more.

Info: The terms ‘sole trader’ and ‘sole proprietorship’ will be used interchangeably in this article.

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Differences between sole traders and LLCs

The right business type for you and your business does rely on various elements. Before starting to deal with the required day-to-day business operations, you should give thought to the projected annual income, how much income you’d like to draw on a monthly basis, and how much (tax) admin you are ready to handle as a business owner.

The main distinction between a sole proprietorship and a limited liability company is that as a sole trader, you are not legally separated from your business whereas corporations are separate legal entities with their own rights and responsibilities. A limited company’s biggest advantage is that it offers limited liability to its shareholder, making it a very appealing structure for asset-protection.

In Montenegro, LLCs are known as ‘Društva sa ograničenom odgovornošću’ (D.O.O.), and can be established with a share capital of just 1,00€ by one founder, who can also be a director. Non-Montenegrin company directors (and employees) are required to apply for a temporary residence permit before the business can start operations.

Contrary to common belief, sole proprietors are also allowed to employ other people to work for them in their business. As a sole trader, you are considered self-employed (your business is not incorporated) and are subject to self-employment taxes. This implies that you need to file an individual tax return called ‘GPP-FL’ each year, and pay personal income taxes and social contributions as a percentage of all your taxable income.

While as a sole trader, you have absolute control over all business assets and profits, you are also personally liable for all business debts. Registering a sole proprietorship in Montenegro also requires you to obtain a residence permit before opening a bank account and starting invoicing customers.

Advantages and Disadvantages

To help you learn about the key differences, advantages, and disadvantages between the sole proprietorship and limited company, we weigh the benefits of each one bellow.

Advantages of being a sole trader

Registering a sole proprietorship in Montenegro is straighforward: it takes 2 days (instead of a week for a LLC), requiring no prior notarizaiton of corporate documents
Less expensive to get started and less ongoing administrative requirements
Only have to file individual income tax returns
Fewer bookkeeping, accounting, and legal requirements and costs compared to limited liability companies
As a sole trader, you have full ownership of the business and complete control over all business decisions
One layer of taxation: all after-tax profits belong to the sole trader – can be more tax-efficient when compared to a limited company
Lower business fines and penalties
Easier dissolution/deregistration and transition
It’s also easier to transition from a sole proprietorship to a limited company, rather than the other way around

Sole trader disadvantages

There is no legal distinction between your business and you as a self-employed sole trader
Because your personal and business finances are not separated, you have unlimited liability for all business debts incurred by your company
Banks and larger companies may prefer dealing with corporations rather than sole proprietorships; LLCs are often viewed as more trustworthy and professional
Harder to raise capital with limited funding options
All income of the sole trader is liable for personal income taxes and social contributions
Harder to sell or pass on the business through inheritance

Limited company advantages

Your liability is limited to the value of your shares and your personal assets are protected even if the company faces claims or lawsuits – a limited company is a distanct legal entity from its shareholders
Potential clients may prefer working with limited companies – they portray more prefessional credibility and are viewed as more established, even if operated by a single shareholder and director
Tax-efficient up to a certain amount of annual income – 9% corporate income taxes for the first 100.000,00€ in business income
As a company director, you can pay yourself a mixture of a salary and dividends
Easier to raise funds from banks and investors – you can sell shares in exchange for capital investments into your company
Limited companies enjoy perpetual existence: it’s more straightforward to pass on the business through inheritence or share sale

Disadvantages of a limited company

Can be costlier to incorporate and administer with more complex accounting and tax compliance
Must be incorporated at Montenegro’s Company Register and register for corporation tax
You need to notarize the company formation documents prior to incorporating the business
Must maintain a registered office address in the municipality where the company is incorporated
Must maintain a record of all beneficial company owners
More complex payroll accounting and calculation of social insurance contributions
You must follow strict formal procedures when distributing profits from your company’s bank account to pay yourself
The process of closing your limited liability company requires you to first complete a final income tax return, pay any outstanding taxes and contributions, before you can move forward with the (voluntary) liquidation procedure

Tax Considerations

As a sole proprietor, you’ll have to pay self-employment taxes on all profits above the personal allowance of currently 8.400,00€ per year. Personal income taxes in Montenegro are progressive and marginal, meaning that they (marginally) increase with higher incomes, with rates ranging from 9% to 15%.

Limited liability companies pay corporate income taxes instead, with rates marginally increasing.

9% for the first 100.000,00€ in annual corporate profits
12% for annual profits between 100.000,00€ and 1.500.000,00€
15% for profits above 1.500.000,00€

Bear in mind that corporations are also subject to another layer of taxation – when dividends are paid out to the company’s shareholders after the annual accounts have been approved. The dividend tax rate in Montenegro is 15%. However, by running your business as a corporation, you can optimize taxes by taking a director’s salary up to the allowable tax-free amount, and receive the rest as dividends.

Depending on the amount of profit your business generates and how you plan to use the profits from your business (you don’t need to pay them out as dividends but rather reinvest), a corporation may be more tax-efficient because corporate income taxes are lower than the rates of personal income tax for annual incomes above 12.000,00€.

Conclusion: Sole trader or Limited Company?

Whether becoming a sole trader or incorporate your business as a limited company is a decision which depends a good deal on your personal circumstances and future business goals. Broadly speaking, if you want to start as quickly as possible as a freelancer or micro business with a modest customer portfolio, then registering a sole proprietorship may be the most suitable and cost-effectlve option.

If your business and client base is growing at a rapid pace, or you’re planning to expand, get funding, and take on new business partners in the near future, then the benefits of a LLCs will most certainly far outweigh the increased complexity and administrative burden that comes with a corporation.

Whatever the decision, remember that it’s always possible (and quite common) to first start out as a sole trader and then incorporate a limited company later to suit your new circumstances and ambitions. If you’re unsure about the best type for your business, you should consider investing in some specialist advice. You should also ask yourself the following questions to help with the decision:

Do I want to have the ability to withdraw cash from my business whenever I deem it neccessary? Opt to become a sole trader.
Do I need to have complete control over my business operations without any other partners and retain all the profits? Registering a sole proprietorship may be the best solution for you.
Do I want to be legally protected from being held personally liable for my company’s incurred business debts? Then a limited company may be best option.
Do I plan to hold lots of inventory and engage in import/export operations? Do I plan to rapidly scale my business? A limited company offers better access to finance.

Explore more details about the process of setting up as a sole trader or limited company:

Registering a sole proprietorship in Montenegro

Registering a limited company