Establishing a Company

You will find out about the benefits and disadvantages of establishing a company in different regions of the world and also what type of a company is most convenient for a startup.

Establish your company at the latest before your first client invoice is issued or before an entry of an investor. When doing so, you should consider the legal form and the country in which jurisdiction you want to set up your company in. We covered the process of choosing a correct trade name for your company in our guideline How to Protect your Intellectual Property (IP).

1. Where to Establish your Company?

You have 3 main options: CEE, western Europe & US, unique countries.

CEE (central eastern Europe) – you are the strongest on your home ground

Visegrad countries, Ukraine & the Baltic region

The first choice for the majority of startups and almost all development and design studios is a company in a state, in which most of the members are based, i.e. management and ideally at least a part of the development team. In general it is not necessary to have an established company in every country you are doing business in. However, a company is needed to monitor the tax implications of a cross-border business.  

Advantages

  • Low cost of establishing and maintaining a company.
  • Managing a startup is usually less energy intensive for founders.
  • More accessible tax regime for local taxpayers due to lower costs of tax advisors.
  • If you are all from one country, the transfer of intellectual property rights from the authors (developers and designers) to a company is simpler.
  • Overall, CEE countries offer interesting benefits for innovative companies, e.g. so-called superodpočet – a tax benefit (100% in Czech Republic a 200% in Slovakia), paying a corporate income tax at the time of its distribution (in Estonia) and easier regulation of bank licenses (in Latvia).

Disadvantages

  • Foreign investors and foreign B2B clients (mainly from the West) might have a problem to trust a CEE company, which decreases its potential in those markets.
  • If planned expansion and investment rounds in western countries are planned within 12 months, it is better to set up a company directly in those countries. Otherwise you will face unnecessary financial and time costs of corporate restructuring. This applies especially in the US, because in the EU, investment is not always a condition.
  • With the exception of Estonia, electronic communication with the authorities does not work at all or is only partially functioning.
  • If you contract your team as employees through employment contracts, as a result of intricate employment law regulations the running costs and the complexity of agenda will increase.

With the exception of specific startup documentation (e.g. a Shareholder’s’ agreement or ESOP), it is possible to establish a company (s.r.o.) through Firmáreň in Slovakia for approx. EUR 250 and through any notary office in the Czech Republic for approx. CZK 3,000.

Western Europe & the US –  where “the business” is

The United Kingdom, the Netherlands, Ireland, the US

This is an interesting choice for teams that intend to apply for an investment in these countries within 12 months or plan to set up their dominant market there. After the seed investment by european investors, many startups establish a holding in the US. Through this connection there is a business running (typically, the startup is established in Delaware and the business runs in California, New York or in other states), while the team of developers stays connected to a Czech or Slovak company, where the product is formed. It is important that the creation of this structure  is well timed, because it is not suitable for early-stage startups. There are also startups that were primarily established by european founders in the US, where the sales activities and the team will be based and the service part (usually development team) will be based in the EU. In any case, it is important to think through the creation of the structure well, both from the legal point of view as well as from the tax perspective.

Advantages

  • Access to lucrative foreign markets.
  • Higher level of trust of foreign investors and clients.
  • Digital establishment of a company is mostly fast and cheap.
  • Often favourable tax regime for dividends and capital revenues.

Disadvantages

  • Higher costs of maintaining a company (foreign accountants, legal and tax counselling).
  • More complex transfer of intellectual property rights from the authors (developers and designers) to a foreign company.
  • If one company is established abroad and another one at a home country, it is necessary to apply transfer pricing to their mutual contractual relationship.
  • Members of the team sent outside their home country must meet the requirements of the country’s immigration policy.

You can establish a company in the UK here.

You can establish a company in Delaware here.

Unique countries supporting your business model

E.g. Latvia for fintech, Lichtenstein for blockchain

In order for some industries to work properly, establishing a company in a country with favourable legislation is more favourable. Common examples are the regulated financial sector (with associated blockchain and crypto) and healthcare sector (healthtech).

Advantages

  • Firstly, there is a fair opportunity to run your business effectively. As an example, crypto wallets face the new EU regulation that will significantly increase the cost of building a pilot version. However, if the crypto wallet is built by a company established outside the EU, this regulation and the associated costs will not be applied.

Disadvantages

  • High costs of establishing and maintaining a company (foreign accountants, legal and tax counselling). In some countries the cost may add up to around EUR 10,000 annually.
  • Limited possibility of gaining an EU investor, because the EU grant schemes do not apply in countries outside the EU. Also many VC funds cannot invest in companies outside the EU and investors are rather careful when it comes to unfamiliar jurisdictions, as they dont know them as well.
  • If one company is established abroad and another one at a home country, it is necessary to apply transfer pricing to their mutual contractual relationship.
  • Members of the team sent outside of their home country must meet the requirements of the country’s immigration policy.

2. What Type of a Company Should you Establish?

In most countries, you can choose from two main options: limited liability company (s.r.o., GmbH, ltd., LLC) and joint stock company (a.s., A.G., Inc.).

Until a startup has a turnover of at least 1 million euros annually and 50 team members, establishing an s.r.o. is the recommended option. Mainly in the Czech Republic and Slovakia, s.r.o. represents quite a flexible form of company, which suits the vast majority of startups during the first years of business. Joint stock companies are exceptionally complex, and therefore will pay off only in later stages, if ever. Many startups with turnovers of tens of millions of euros still operate as an s.r.o.

In Slovakia, a lot of consultants recommend a simplified joint stock company (j.s.a.) or even a cooperative (j.r.d.) for an early stage startup, under the pretence of tax advantages or for the implementation of  employee shares. With similar advice you should better be alert and think twice.

From our experience, a cooperative society is in the Czech Republic and Slovakia immensely inappropriate and startups should always avoid it. In the best case, a cooperative society will save you a couple of % when distributing profit (but usually in startups distributing profit doesn’t happen). Furthermore, you will pay for this benefit by higher legal costs to keep your cooperative society running, worse corporate control and in the case of Slovakia, many legal questions, because Slovak legislation does not cover this form of a company thoroughly.

Because of high corporate complexity and high financial costs of its administration, j.s.a., allowed by Slovak legislation, also almost never pays off for early-stage startups. To establish j.s.a. is reasonable only for the above mentioned startup size. For the purpose of implementing the employee shares (through ESOP scheme) as a form of remuneration of employees, it is much easier and more convenient to choose s.r.o.

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