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How to register a sole proprietorship in Montenegro
Registering a Sole Proprietorship (Montenegrin: preduzetnik) is a fast and straightforward way for you to start your new business adventure, and become eligible for the popular 1-year temporary residence permit and tax residency in Montenegro.
While it’s relatively inexpensive and straightforward to set up as a sole proprietor; you do not have to take formal action and draft the typical set of corporate documents – like the Memorandum and Articles of Association – it does not offer you the same asset protection of a Limited Liability Company.
However, even when registering as a sole trader in Montenegro, you’ll have full control of your business, although there won’t be any legal separation between you and your ‘company’ and you will personally be liable for all its potential business debts and liabilities.
What exactly is a sole trader?
Being a sole proprietor (or sole trader; the terms are used interchangeably) means that you, as an indovidual, own and operate the business entirely by yourself as a self-employed entity. While most sole proprietorships are one-person enterprise, it does not mean that you must perform all the day-to-day operations by yourself without hiring employees.
But unlike a partership, where there’s also no legal separation between the partners and the business, in a sole proprietorship there is nobody else but you being responsible for the firm’s entire business debts. To put it simply: your individual financial health is directly affected by your business’s performance.
While from a legal standpoint, the sole proprietorship business structure can be chosen for most small business ideas, it is mostly used by small shopkeepers, tradespersons, taxi drivers, designers, programmers, freelancers, and others offering their services over the internet.
Sole Proprietor vs LLC
Not sure whether to register your business as a LLC or sole proprietorship? Get a full rundown in our detailed start-up guide.
The Registration Procedure
Before being allowed to run your business as a sole trader, you must file a registration form with Montenegro’s Company Register and provide information about yourself and your future business such as the registered business address and the business activity code, which must be in line with Montenegro’s law on business organizations.
While it is possible to trade under your personal name, you can also choose a separate business name. However, you need to make sure that it is not too similar to an already existing company registered in Montenegro (we can check that for you). Once registered, you’ll receive a unique Tax Identification Number (PIB), which you’ll need to open a bank account and order a stamp for your company.
But before doing that, you’ll also have to apply for a temporary residence permit at the local immigration office where you are staying, as well as registering with the local municipality, which requires gathering some additional documents: a proof that you don’t find yourself on Montenegro’s tax debt register, proof that have no overdue utility bills in your (or your business’s name). Follow the steps below to become a sole trader in Montenegro:
Register your business with Montenegro’s Company Register (Montenegrin: CRPS or Centralni Registar Privrednih Subjekata)
- Decide whether to register for the lump sum taxation scheme or if you’d prefer paying taxes on your actual revenue
Select a business activity code: bear in mind that some businesses further require a permit from a local authority or ministry to stay legal
- Collect the sole trader registration certificate from the Company Register
- Make a company stamp
- Obtain neccessary certificates from the utility companies and the tax office that you don’t have any outstanding debts
- Apply for a temporary residence permit
- Register as an employee with the tax office
- Open a sole trader bank account with a Montenegrin bank
- Sign up for public health insurance and social security
Taxation and Filing Requirements
As the owner of a sole proprietorship, you pay personal income taxes on profits generated from your business activities instead of corporate income taxes and dividend taxes as would be the case for corproations. You have to report your income, after deducting allowable expenses, on your individual tax return (GPP-FL).
Key Deadlines
- April 30: You must file your tax return by this date and, at the same time, pay any taxes you owe for the preceeding tax year
- 15th of every month: In case you are over the VAT threshold, you must file a monthly VAT return on the 15th of each month
Income Taxe Rates
Sole proprietorships aren’t taxed separately as legal entities – there is only one layer of taxation. They pay taxes at the individual income tax rate, which ranges from 9% to 15%. Personal income taxes in Montenegro are marginal and progressive, meaning that people with lower incomes pay a reduced proportion of their earnings in taxes. The current tax brackets and rates are:
A taxpayer earning less than 8.400,00€ per year will have to pay zero personal income taxes whereas someone earning 20.000,00€ annually will have to pay 1.524,00€ in income taxes at an effective tax rate of 7.6%:
- 0% on the first 8.400,00€,
- 9% or 324,00€ on the following 3.600,00€,
- and 15% or 1.200,00€ on the remaining earnings
Social Security Contributions
In addition to personal income taxes, sole traders also need to pay social security contributions, which consist of monthly payments to fund Montenegro’s disability and uninsurance fund schemes. Sole proprietors under current regulations do not have to pay monthly premiums into the public healthcare system. The current combined social security contributions tax rate stands at 11%; find out more about all self employment taxes in Montenegro.
Register for VAT
The moment your business turnover exceeds 30,000€ in a 12-month rolling period, you must register for Value-Added Tax, meaning that you’ll have to start charging VAT on all of your taxable sales of products and services, and are also required to include VAT on your invoices.
Even though you may not be required to register for VAT, you can still voluntarily choose to do so if you think it’ll benefit your business. For example, it’ll give you the right to deduct Input VAT charged on good and services supplied to you, reclaim it, and receive a reimbursement from the tax office.
In case you need more legal protection, foresee generating a large amount of revenue, or work with additional partners (natural or legal), you can also incorporate a formal company or enter into a partnership. If you’re unsure which structure is most suitable for your business, it’s a good idea to speak with a registered solicitor or accountant.
Frequently Asked Questions (FAQs)
Can I be a sole trader and employed at the same time?
Yes, you can both do business as a sole trader and be employed simultaneously. You will have to declare both types of income in your individual tax return and pay personal income taxes on it.
Do I have to pay corporation taxes?
No. Since a sole proprietorship is considered an unincorporated entity, you’ll only have to pay personal income taxes. Limited Liability Companies, however, also have to pay corporate income taxes.
Do I have to pay social security contributions?
Yes. Sole proprietorships are also subject to social security contributions, which are calculated based on your yearly income. As with income tax, this is paid through monthly installments, starting from the 2nd year of operations.
Is there a tax-free personal allowance?
Yes. If you choose to be taxed on your actual yearly income (rather than via the lump sum scheme), you are not taxed on your first 8.400,00€, and will have to pre-pay your annual income tax bill in equal monthly installments (from the 2nd year onwards).