What should be the legal form of your company for Business in Bulgaria? (Sole Trader Company, Limited Liability Company, Sole Proprietorship Limited Liability Company, Joint-Stock Company, Sole Proprietorship Joint-Stock Company)
18th September 2017
If you have a business idea, you definitely need to consider creating a company, with which to operate. That company will be eligible for 10% income tax, and VAT-free trade within the European Union. But what type of company should it be, in order to correspond to your specific business needs?
In Bulgaria, the process of registering a company is regulated by the Commercial Law. According to the law, the companies could be:
I. Sole Trader Company – can be registered by any individual over 18 years of age.
Advantages of a Sole Trader Company:
- there is no requirement for minimum capital upon registration in the Commercial Register;
- cheaper registration when preparing registration documents with the Registry Agency;
- applying a simpler form of accounting, which in turn leads to lower monthly accounting costs.
Disadvantages of a Sole Trader Company:
- the individual is liable unlimitedly up to his/her personal property and assets in the event of the eventual incursion of any liabilities to the State or other companies;
- annual equalization of the Social Security payments of the Sole Trader Company;
- higher taxes – 15% profit tax and patent tax, which is higher compared to other types of companies;
- the liquidation and the deletion of the Sole Trader Company in the Commercial Register at the Registry Agency is NOT easy and quick;
- does not compile annual financial statements - balance sheet, ODA and others. and is not obliged to disclose publicly the results of its activity in any past calendar year.
II. Commercial Companies, which are personal companies or capital companies.
The Personal Companies have the following characteristics: there is no requirement for the size of the company capital, each of the owners is jointly and severally liable for the company's liabilities and there is no appointed manager to represent and manage the company. Such personal companies are the general partnership company and the limited partnership company, which arise under a contract between several natural and legal persons for the purpose of carrying out a common commercial activity.
In Bulgaria the registration of such companies is not preferred, due to the fact that the owners bear unlimited liability for the liabilities incurred, the participation of many people in the management leads to the emergence of conflicts of different nature. Therefore, the next forms of registration of commercial companies are among the most popular and preferred cases in our country due to a number of circumstances.
The registration of the so-called Capital Companies in the Commercial Register is a common practice for DIVE Accounting in Bulgaria. The characteristic of this type of company is that the owner or owners have limited liability for the company's liabilities and up to the amount of paid-in capital. This in turn means that the personal property of the founder or the founders does not serve as a guarantor of collateral for incurred liabilities. They are also called 'capital' because they require a minimum subscription capital requirement. Until the end of 2009 in Bulgaria, the minimum subscribed capital for registration of commercial companies was BGN 5 000 and could not be reduced below that amount. After the amendments to the Commercial Law, the minimum amount of the subscribed capital at the registration of commercial companies was drastically reduced from BGN 5 000 to just BGN 2.
For their part, the capital companies are Limited Liability Companies, Joint Stock Companies and Limited Partnerships with shares. Of the above, the most preferred form of registration of a commercial company is the Limited Liability Company. It is preferred because, as we have already mentioned, the owners are protected from any future obligations of the company up to the amount of paid-in capital. The personal property of these owners does not serve as a guarantor for securing liabilities to the state, various creditors or other companies.
When the company is registered in the name of one person, who owns the capital, this is a sole limited liability company. When the owners are two or more persons, be it natural or legal, the company is a limited liability company.
2.1. Sole Limited Liability Company - 100% of the capital belongs to one owner. He a natural person who alone makes decisions related to the company's activity. That person may also be the manager of the company himself/herself, or may decide to appoint a different person as manager. It is important to note that the owner of the capital is the one who has the obligation to deposit it into a specially opened bank account - escrow account, and the manager is the one who undertakes the future actions for entering the company in the Commercial Register, opening of current accounts, concluding contracts with future counterparties.
2.2. Limited Liability Company – the owners of the capital are two or more natural or legal persons and each of them is responsible up to the amount of the contribution made to form the capital of the company. Similarly to the Sole limited liability company, this company may have one or more managers, and these managers may also be the owners themselves. The way of management can always be together - a very inconvenient practice, because the simultaneous presence of each manager in concluding a contract or opening an account in practice is very difficult to be achieved effectively. They can manage individually - everyone at any given moment can represent the company in front of an institution or counterparty, and the latter is together and individually - a preferred and combined option.
The advantages of Sole Limited Liability Company over a Limited Liability Company lies in the fact that the owner alone decides on issues that arise about the future activity of the company and, as such, receives a 100% dividend in the distribution of profits. While the decisions in the Limited Liability Company are made after a General Meeting of the owners is convened, more than 50% of them must be present. This, in turn, hides some risks because the absence of an owner may not influence the decision making process for the company's future business. The profit distribution in the form of a dividend is accomplished through a decision of the General Meeting of the Company's owners. From another point of view, however, the Limited Liability Company is a convenient form for raising more funds for starting the future activity of the company, because each of the owners contributes part of the subscribed capital and thereby generates funds for the initial start in the business.
Advantages of Sole Limited Liability Company / Limited Liability Company:
- unlike Sole Trader Companies, the owners of the Sole Limited Liability Company / Limited Liability Company are limited to the amount of the contribution made to the company's capital in front of the State, banking institutions or counterparties;
- owners of Sole Limited Liability Company / Limited Liability Company do not equalize social security payments at the end of the year;
- the change in the amount of paid-in capital from BGN 5 000 to BGN 2 allows the registration of a company without the necessity of large initial investments;
- the introduction of flat tax at the rate of 10% of the profit realized is preferable to that of a Sole Trader Company at the rate of 15% or the patent tax.
Disadvantages of Sole Limited Liability Company / Limited Liability Company:
- additional costs associated with notary fees, bank charges when opening an escrow account for paid-in capital;
- higher fees for the company's registration service in the Commercial Register at the Registry Agency;
- the necessity of a qualified accountant because of the specificity of the company's activity and respectively higher fees for monthly accounting services;
- draws up annual financial statements for its activity in each calendar year, even if it does not carry out activity, and has the obligation to publish the same within the statutory term according to the Commercial Law;
- when certain criteria are met, the company is subject to a mandatory financial audit performed by a specialized audit firm, which is an additional cost for the company.
The other two types of Limited Liability Companies - Joint Stock Company and Limited Partnership with shares and their registration in the Commercial Register takes longer than the registration of Sole Limited Liability Company and Limited Liability Company. This is due to the fact that the preparation of the documents takes longer, the formation of their capital is related to the issue of shares, which can be owned by many owners.
Advantages of Joint Stock Company / Limited Partnership with shares:
- -the recruitment of a large number of shareholders guarantees the formation of a large initial capital for the start of the company's activity.
Disadvantages of Joint Stock Company / Limited Partnership with shares:
- the minimum size of the subscribed capital may be reported as the most serious shortcoming - BGN 50 000, and 25% of the amount must be deposited in a special account certifying its presence before the Registry Agency. For Sole Limited Liability Company and Limited Liability Company, the minimum subscribed capital is BGN 2;
- another disadvantage is the high fees for the registration itself - they are about 2 to 3 times higher than the registration of Sole Limited Liability Company;
- the third major disadvantage is the conduct of a mandatory financial audit by a specialized audit firm at the end of the accounting year. The auditing company carries out an audit of all accounting operations in the current year and only after certification by an auditor, the annual financial statements of the company's activities can be publicly disclosed in the Commercial Register. The Audit Inspection Service is fully paid by the company, and this is an additional annual cost. The audit is obligatory for each calendar year, respectively, from the date of registration of the company in the Commercial Register, regardless of the fact if the company did or did not operate during any of the previous years.
III. Public Companies The Shareholding companies may, depending on the shares held by them, become public pursuant to the Public Offering of Securities Act after filing and approving a Prospectus for admission to trading of shares and being entered in the public register of the Financial Supervision Commission. The shares of the public companies are traded on the Bulgarian Stock Exchange - Sofia JSC.
Regardless of your chosen company, we at DIVE Accounting can help with your registration and all accounting and administrative processes here in Bulgaria. We will be happy to work together.