Different trading vehicles

Croatia has different trading entities for business and specific laws for each of them. After this article, you will know the main types of trading vehicles in Croatia, also I will explain the process of registration.

Generally, when we speak about business organizations, we can divide them into two main categories based on company responsibilities. Additionally, Ltd. (Limited) and PLC (Public Limited Company) have separate legal entities from their members. This means that the legal entity can sue and be sued in its own right, and members’ liability is limited depending on their shares. While sole traders and members of a partnership are jointly and severally liable for all the debts of the business.

#1 Sole trader / Obrt

A sole trader in Croatia is the best type for an individual who runs a small business. A small enterprise such as an independent software developer, a hairdresser, or a small shop. Highlights of being a sole trader or “lump sum entrepreneur” are independence, a small lump sum amount, minimum administration, and a small fee for opening, easy to close. 

The lump sum amount is determined based on the earned income in the previous year. The entrepreneur is required to submit the PO-SD form to the Tax Administration no later than January 15th. Upon receiving the form, the Tax Administration assesses the obligation for lump sum tax for the following year. The tax rate on annual lump sum income is 12%.

Check out the PO-SD form here: PO-SD.pdf (porezna-uprava.hr)

On the other hand, if a lump sum entrepreneur earns more than 39,816.84 EUR in a year, they automatically become a regular trader (obrt) according to the law. In the case of regular trade, there is no specific lump sum tax. The tax base for income tax consists of the income from the trade reduced by the carried-forward losses and personal deductions. Income tax is paid on the tax base at rates of 20% and 30%.

The sole trader or regular trader has more obligations compared to a lump sum entrepreneur. Some of these obligations include:

  1. Keeping business books.
  2. Maintaining a record of income and expenses (KPI form).
  3. Conducting an inventory of long-term assets (DI form).
  4. Keeping a record of sales (KP form).
  5. Maintaining records of receivables and liabilities (TO form).
  6. Keeping records of procurement and consumption of raw materials (the format of the record is not specified).
  7. Payment of contributions and taxes.

The sole trader is a great start for enterprises, but if the business grows quickly, there might be a better solution for your business.

Additionally, sole trader is headed by a single individual. The ownership and management are usually vested in the same person, who is personally responsible for all the debts of the business and may thus risk becoming bankrupt.

The main act in Croatia for a sole trader is Zakon o obrtu and tax laws Zakon o porezu na dohodak, Zakon o porezu na dobit, Opći porezni zakon, Pravilnik o porezu na dohodak.

#2 Partnership / Ortaštvo

Partnership is a common form of structure for certain kinds of business, for example accountants, solicitors, and architects. Partnership is well know as Ortaštvo is set out under code – Zakon o obveznim odnosima, starting with article nb. 637.

Partnership needs to have at least two members (partners), each partner invests a certain amount (money, assets and/or effort), the relationship between partners usually is drafted in the PA (Partnership Agreement). This can set out the duration of the partnership, it’s name and business, how profits, losses and running cost are to be shared, how much capital each partner is to contribure, what rules will apply to the capital, what grounds will lead to a partner being expelled from the company and so on,  A partnership agreement obligates two or more persons to invest their work and/or property in order to achieve a common goal. A partnership is a community of persons and goods without legal personality. Along with all the partners may be jointly and severally liable for all the debts of the business. 

Besides, PA is formal contract, so specific terms of contract are under code Zakon o obveznim odnosima – Zakon.hr.

#3 Private limited company/ Društvo s ograničenom odgovornošću

When we are talking about limited liability, also known as a “capital society,” the Ltd. (Limited) is most common in Croatia and worldwide. The Ltd. structure is ideal for larger businesses or well-established sole trader businesses.

The Law on Companies (Zakon o trgovačkim društvima) strictly regulates Ltd. from Article 385.

Article 385:

(1) A limited liability company is a business entity in which one or more legal or natural persons contribute shares into the predetermined share capital. The shares do not have to be equal. The founder can acquire multiple business shares during the company’s establishment. The total amount of all shares must correspond to the company’s share capital. The business shares cannot be expressed in securities.

(2) Members are not liable for the company’s obligations.

(3) If a person who is obligated to make a contribution to the company fails to do so, and the company cannot compensate for it by selling the business share, other members of the company are obliged to contribute the amount that is missing proportionally to their business shares in the company.

Furthermore, the minimum authorized share capital is 2,500.00 EUR, and it should be registered at the Commercial Court. The company is identified by its registered number (OIB), which remains the same regardless of any change of name.

It should be mentioned that there are two ways to establish a Limited Liability Company (LTC).

  1. By the Articles of association

The company is established based on an agreement concluded by the founders (articles of association). All founders must sign the articles of association, which can be executed in the form of a notarial deed or a private document certified by a notary public.

      2. By the statement of the founder.

On the other hand, if the company is established by a single founder, the articles of association are replaced by a statement of the founder regarding the establishment of the limited liability company made before a notary public.

The corporate income tax refers to the profit determined according to accounting regulations as the difference between income and expenses before the calculation of corporate income tax, increased or decreased in accordance with the provisions of the Corporate Income Tax Act.

The tax rate on profit will be 10% if the income earned during the tax period is up to 995,421.06 EUR, or 18% if the income earned during the tax period exceeds 995,421.06 EUR.

In Croatia, 102,011 limited liability companies were registered in 2022, which indicates that the legal entity of a limited liability company is truly popular among entrepreneurs.

#4. Joint-stock company (Dioničko društvo)

A joint-stock company is a business entity in which members (shareholders) participate with contributions in the share capital divided into shares. It can have a single shareholder.

Most important is that shareholders are not liable for the obligations of the company.

The founders of the company are the shareholders who adopt the articles of association. In cases of successive establishment, the founders are also shareholders whose contributions are not made in cash, although they do not participate in the adoption of the articles of association.

The articles of association of the company must be adopted by at least one person.

The minimum amount of share capital is 25,000.00 euros.

Business entities in numbers

Based on the statistics, Croatia had a significant number of registered businesses. The highest number was recorded for sole traders, with 102,153 individuals engaged in entrepreneurial activities. Limited liability companies (Ltd.) closely followed with 102,011 registered entities. On the other hand, joint-stock companies (JSC) had 689 registered companies.