Choosing the appropriate legal form of business is one of the most important decisions an aspiring entrepreneur makes before starting a business. This choice determines the level of personal liability, tax obligations, and administrative requirements the entrepreneur will face throughout the business's operation. There is no universal answer to the question of which business structure is best, as the choice largely depends on the size and type of activity, expected revenue, and long-term business goals. The most common legal forms of business in Croatia are sole proprietorship (obrt), a simple limited liability company (j.d.o.o.), and a limited liability company (d.o.o.), each with its own advantages and limitations.
A sole proprietorship (obrt) is the simplest and fastest way to start a business. It can be established with minimal costs, administration is straightforward, and flat-rate taxation makes it particularly attractive to small entrepreneurs and freelancers. The main drawback is that the sole proprietor is personally liable for all business obligations with their entire personal assets, which presents a risk – especially in sectors requiring larger investments or carrying higher financial risk. Nevertheless, a sole proprietorship is a great solution for those who want to start small and gradually grow their business.
Sole proprietorships are classified as free, regulated, or privileged. Free trades can be operated without specific educational qualifications. Regulated trades – such as hairdressers, auto mechanics, or carpenters – require relevant qualifications, such as a secondary vocational education, a master craftsman exam, or a certificate of professional training. Privileged trades, like marine or freshwater fishing, require a special license issued by the competent authority.
A simple limited liability company (j.d.o.o.) represents a step toward a more formal business structure. It requires a minimum share capital of just one euro, making it accessible to anyone looking to start a business with greater legal security. Owners of a j.d.o.o. are not personally liable for the company's obligations, only up to the amount of their invested capital. A specific requirement for j.d.o.o. companies is to allocate 25% of annual profits into statutory reserves, which may only be used to increase share capital or cover losses. The remaining 75% of profit may be distributed to the owners. Once the reserves reach at least 2,500 euros, the company may convert to a d.o.o., at which point the obligation to continue reserving profit ends, and the entire profit becomes available for distribution.
A limited liability company (d.o.o.) is traditionally regarded as the most stable and reputable form of business. It requires a minimum share capital of 2,500 euros, and the owners have limited liability, meaning their personal assets are protected in case of business failure. A d.o.o. allows for the employment of a larger number of workers and easier access to loans and investors. However, it also involves a more complex and costly process of establishment, operation, and closure compared to a sole proprietorship or j.d.o.o.
When deciding on the most cost-effective business structure, it is important to consider several factors: projected revenue, growth plans, number of employees, and risk level. A flat-rate sole proprietorship is often the most economical choice for those just starting out, with lower income and a need for a simple, low-cost setup. A j.d.o.o. is a suitable option for those looking to protect personal assets and lay the groundwork for future expansion, while a d.o.o. is more appropriate for larger projects and entrepreneurs planning to invest and hire staff.
Sources:
Hrvatski zavod za zapošljavanje. (2022, January 26). Kako odabrati oblik poslovanja? Retrieved from https://poduzetni.mjere.hr/2022/01/26/kako-odabrati-oblik-poslovanja/
Hrvatska obrtnička komora. Obrt i oblici obrta. Retrieved from https://www.hok.hr/gospodarstvo-i-savjetovanje/registracija-obrta/obrt-i-oblici-obrta
Erste Banka. Pravni oblici poslovnog subjekta. Retrieved from https://www.erstebank.hr/hr/poslovni-klijenti/financiranje/poduzetnicki-starter-program-za-poduzetnike-pocetnike/poduzetnicke-teme-za-uspjesno-poslovanje/pravni-oblici-poslovnog-subjekta