Sole Trader Montenegro

When starting a business in Montenegro, it’s necessary to understand the various types of companies available. Freelancers, contractors, and small business owners should consider registering a sole proprietorship thanks to its inherent advantages over other business structures.

A sole proprietorship is also known as sole trader, and offers a simple and relatively inexpensive set up while also providing full control over every part and every aspect of the business. In this article, we will look into the characteristics, the tax implications, as well as advantages and disadvantages when operating as a sole trader in Montenegro.

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What is a sole trader?

Unlike limited companies, which exist as separate legal entities with their own rights and responsibilities, and are often owned by multiple shareholders, there are no legal distinctions between a sole proprietorship and its individual, self-employed owner. Stated differently, as a sole trader you quite literally are your business.

This means that your personal and business finances are entangled, and your business’s profits and potential debts also affect your personal financial well-being. Sole traders are the simplest company type in Montenegro, with a simpler registration procedure when compared to corporations.

While the sole proprietorship structure can theoretically be used for most business activities, it is predominantly associated with one-man enterprises such as freelancers, tradesmen, contractors, and taxi drivers among others. Contraty to popular belief, it is still possible for sole traders to hire other employees.

Benefits of being a sole trader

From a fast and straightforward registration process to relatively few reporting requirements, let’s take a look at the key benefits of being a sole trader in Montenegro:

Direct Access to Profits

Unlike limited companies and other corporations whose income is taxed wice, once at the legal entity level and again at the shareholder level as dividends, sole traders can immediately withdraw all the earnings from their bank account without having to formally declare them.

Complete Control

As the sole owner and decisionmaker of your business, you are free to make your own decisions without needing approval from other shareholders, directors, or board members first. This approach is ideal if you need direct involvement in the way you plan to scale your business and what to do with the business’s after-tax profits.

Ease of setup, transition, and termination

Starting out as a sole trader often means fewer startup expenses compared to other company types, with minimal fees and fewer administrative hurdles. It is also more straightforward to transition from a sole proprietorship to a limited company, rather than the other way around. Closing down the business is also cheaper and involves a cheaper strike-off instead of the more formal liquidation procedure.

Added Flexibility

A big advantage of registering as a sole proprietorship is the flexibility it brings. If, further down the line, you want to put your business on pause (i.e. temporary halting your business operations), you can do so for up to two years by notifying Montenegro’s Company Register.

Offers a residence pathway

Similarly to Montenegro’s residency by limited company formation program, setting up a sole proprietorship makes you eligible to apply for a temporary residence permit, which allows you to stay and work in Montenegro for up to one year, but can be extended indefinitely. Non-Montenegrin sole traders are actually required to obtain residency before commencing business operations.

Lower Business Fines

All businesses may potentially face penalties for failure to comply with Montenegro’s company law and tax code. For example, there are penalties for not registering when exceeding the VAT threshold, lodging late tax returns, not issuing invoices, and more. Fortunately, these fines are significantly lower for sole traders when compares with corporations.

Disadvantages

We’ve already looked at the benefits of registering as a sole trader, but there are also important disadvantages that you should be aware of:

Liability is not limited

Probably the single biggest disadvantage of running a business as a sole trader is its lack of liability protection, meaning that you are personally responsible for all business debts, and your possessions, including your properties and savings, are at risk from business-related asset seizures to pay off debts.

To reduce this risk, you may choose to take out professional indemnity insurance. While this won’t cover you entirely against your client’s claims of wrongful advice, it will help to compensate you at least partially. Alternatively, consider opting to change to limited company status to separate your personal from your business’s finances.

Perceived lack of status

Operating as a sole trader doesn’t offer the same degree of reputation and prestige as a limited company, which might undercut your credibility with certain clients, particularly in business-to-business relationships. Because of the unincorporated nature of sole proprietorships, they might see your business as more high-risk and choose no to work with you.

However, this appears to be far less of an issue for services provided over the internet, and customer-facing trades like the building and cleaning industry, where the quality of your work and your professional reputation will likely overshadow any concerns about your company type.

Potential tax inefficiency

You may benefit from greater tax savings if your annual profits stay under the threshold of 100.000,00€. Reason for this is that limited companies pay just 9% corporate income taxes on these earnings, compared to the 15% personal income taxes sole traders pay on all annual profits above 12.000,00€.

Moreover, limited companies may offer greater flexibility in tax planning. Company directors can pay themselves a combination of salary and dividends and defer paying taxes altogether by reinvesting surplus profits back in the business to fund future growth. Sole traders in contast have less flexibility in tax planning because their income is typically taxed in the current year in which the profits occur.

Common sole trader businesses

As discussed above, the sole trader business structure is popular thanks to its relatively inexpensive and straightforward setup process, the low monthly running costs it entails, and the level of control it offers to the business owner. Here are some common examples of sole trader businesses in Montenegro:

Freelance Professionals: Individuals who offer specialized services like web development, writing, translation, or graphic design independently, mostly over the internet
Independent Consultants and Advisors: Professionals offering expert advice as business consultants, marketing strategists, and financial advisors among others
Tradespeople and Contractors: Electricians, plumbers, carpenters, and HVAC installers often operate as sole traders, providing installation, repair, and maintenance services to residential and commercial clients
Small Retailers: Owners of clothing boutiques, local shops, or small e-commerce stores selling (handmade) goods directly to customers
Cafe, Coffee Shop, and Bar: While a full-service restaurant restaurant may be safer to run as a limited company, a small cafe or bar is frequently operated as a sole proprietorship
Artisans and Craft Businesses: If you’re looking to start a business selling homemade art and crafted products like jewelry, pottery, soaps, or candles, starting out as a sole trader is often an excellent choice
Service Providers: Makeup artists, hairdressers, massage therapists, nutrition coaches, and personal trainers often offer their services as sole traders
Cleaning Services: Sole traders providing residential and office cleaning, as well as specialized services like carpet cleaning and auto detailing
Private Tutoring: Individuals offering educational sessions or classes either in person or over the internet

Sole Trader Taxation

For sole traders in Montenegro, there are two main types of taxes: personal income tax and social contributions. The amount of taxable profits (income minus allowable expenses) your business generates determines what your annual tax bill will be.

Personal Income Tax

Unlike limited companies, sole proprietorships don’t pay corporate income taxes on their earnings. Instead, they are required to pay personal income tax and file them on their individual income tax return (GPP-FL) by April 30. After the first year of operations however, income taxes are due in monthly installments instead of annual payments.

Moreover, there is a personal allowance in the amount of 8.400,00€ per year before any personal income taxes from employment are levied. Once above that threshold, you’ll either have to pay 9% (for annual profits up to 12.000,00€) or 15% on all earnings above this secondary threshold.

Social Contributions

Sole traders are also subject to social contributions, which are levied as a combination of the business’s annual profit and current average salary figures in Montenegro. They include contributions to Montenegro’s pension, disability, and unemployment insurance schemes. Learn more about self-employment taxes in Montenegro.

Value-Added Tax

Once your business’s 12-month rolling (not the calendar year’s) turnover exceeds 30.000,00€, VAT registration mandatory. However, you can also choose to register for Value-Added Tax voluntarily, deeming that it will financially benefit your business. You’ll then be able to claim input VAT on business purchases, but have to include VAT on every invoice, for all taxable goods and services that you provide.

How to register as a sole trader

Setting up as a sole proprietorship involves several steps. Whether you’re planning to run an online business or open a brick-and-mortar store, registering your business with Montenegro’s Company Register and the local governments are essential before you can get started. Here are some other necessary steps you’ll need to take to become officially self-employed in Montenegro:

Either opt to trade under your own name or choose a unique business name
Complete the CRPS registration form. You’ll be asked to provide personal details, your desired sole trader business name (if different from your own name), and the business activity code amongst others
Register for VAT (if requested and desired)
Register with the local municipality and obtain permits or licenses if needed
Obtain the Certificate of Registration, which includes your unique tax identification number
Order a company stamp
Apply for a temporary residence permit
Set up your bank account(s)
Register with Montenegro’s health and social security system
Consider hiring Adriacom to professionally guide you through the entire registration process

Registering as a sole proprietorship in Montenegro is an excellent way to commence your entrepreneurial journey. Given its low setup and administrative expenses, and the complete control over the day-to-day business activities it offers, setting up as a sole trader has many advantages. We believe in your success!