Embarking on a new business journey is thrilling, but it comes with various challenges. Surely, one of the most significant challenges is understanding the laws and rules which your startup needs to follow. Matters such as registration of the company, intellectual property rights, employee recruitment, tax compliance etc. can be confusing for an entrepreneur to understand.
The startups, in Republic of Serbia, have received increased attention in recent years. Their numbers are on the rise and they are now being widely recognised as important engines for economic growth and jobs generation.
Simply put, a startup is a company in its early stages of operation. Startups are typically characterized by a small number of employees, limited operating history, and a focus on innovation and growth.
In this article, we’ll talk about the most important legal requirements you need to know when you’re commencing on a business venture in the Republic of Serbia.
- Choosing the Corporate Form and Incorporation of the Company
The choice for appropriate corporate form of your startup boils down to a Limited Liability Company („LLC“) or Sole Trader.
How to choose between them?
The Sole Trader is liable for all obligations with his entire personal assets (including the assets acquired with regard to the performance of business activity). In the matter of debts for taxes and contributions, all adult household members of Sole Trader are subsidiarily responsible for the Sole Trader’s obligations arising from performing of business activity (Article 157 of the Law on Personal Income Tax).
On the other hand, owner(s) of the LLC are not liable for its obligations with their personal assets and LLC is solely liable with its own assets. The owner could be liable with his personal assets in situation of Piercing the Corporate Veil and only if he uses company assets for his personal needs, which represents a specific liability prescribed by the Companies Act.
Sole Trader can qualify for flat-rate taxation, but he must have a primary activity code that allows him to be considered as a flat-rate taxpayer. If eligible for flat-rate taxation, the Sole Trader will pay taxes and three types of contributions based on a determined taxable base set by the Tax Administration. Sole Trader can maintain his flat-rate taxpayer status as long as his annual turnover remains below RSD 6,000,000. Once this threshold is exceeded, Sole Traded is obliged to start keeping proper business records and to pay taxes and contributions based on the actual income, irrespective of his activity code. If Sole Trader’s income for the preceding 12 months (calculated backwards from the current date) surpasses RSD 8,000,000, Sole Trader must register for Value Added Tax (VAT) payments.
LLC is obliged to pay profit tax in the amount of 15%. Also, the owner(s) must first pay the tax on the dividend in the amount of 15%, if he wants to withdraw the profit which means that owner to get a profit, he must pay 15% tax twice, once on the profit and again on the dividend.
The independence test represents a noteworthy distinction between Sole Traders and LLCs. In general, test comprises of a set of criteria outlined in the Individual Income Tax Act. Based on these criteria, the tax authority, in the event of an audit, will determine whether the Sole Trader is truly independent or if their business depends on their largest client. The independence test for Sole Traders represents a particular risk because it can make their business practically unprofitable – If it is determined that the Sole Trader is not independent, the income that the entrepreneur receives from that client is taxed as “other income” – 20% from gross income without deduction for standardized costs. This rule is not applicable to LLCs.
To summarize, there is no definitive answer to the question as to what corporate form is better because it depends on the objectives you have set for your startup. But there’s a simple rule of thumb: the Sole Trader is a better option for entrepreneurs who do not plan to overly „expand“ their business activities.
- Intellectual Property Rights (IPR)
For any business, like any other corporeal property, Intellectual Property („IP“) is also an essential asset. Trademarks, Copyrights, Patents, Trade Secrets, Designs, etc are parts of intellectual property, and like any other property, it is very important for an entrepreneur to preserve it. It is very vital for your startup to register your IP as it prevents others from stealing the goodwill and ideas you have established with your branding.
For an entrepreneur, the process of protecting one’s IP can be perceived as complex. To secure one’s trade secrets and confidential data, non-disclosure agreements (NDAs) are often used by employers to get signed by their employees. It is important to make sure that the staff and other collaborators understand the importance of securing the establishment’s IP and are also familiar with any established protocols or guidelines in place to protect it. For a startup, it’s important to ensure that IP rights are transferred in favour of the company from all of its founders, contractors, employees, and domestic and foreign entities. This requires the execution of an agreement with the above-mentioned parties under which the rights to all of the IP are transferred to the company. This is something you need to be very specific about in agreements with your team, as overlooking this can seriously hinder your company’s ability to protect its assets.
- Labour Law
Compliance with labor laws is fundamental for every startup business, whether small or big. When you are established as a company and have hired people to work for your organization, you are subject to several labour laws regardless of the size of the company.
Laws with regards to minimum wages, gratuity, weekly holidays, maternity benefits, sexual harassment, payment of bonus among others will need to be complied with. Having a well-designed employee policy can be a major differentiator for startup companies. An attractive employee policy can be the key to attract and retain good talent.
Before employing any person, your startup must ensure to enter into clear employment contracts detailing terms and conditions of employment. The contract must specify the details regarding the job profile, compensation, and other associated benefits, a number of clauses may be inserted to safeguard and protect the interest of the startup – such as stopping employees from setting up competing entities, prohibiting employee from exercising any legal right on IP on the work done/developed during the course of employment (as mentioned above).
Also, if you are a company that wants to stimulate and promote the engagement of its own employees and earn their loyalty, and also ensure the long-term retention of quality personnel who will grow and develop together with the company, then the financial instrument called as the Right to Acquire a Share is a legal institute that is worth paying attention to.
- Conclusion
Starting a business is a significant endeavor and it can seem like there aren’t enough hours in the day to get it all done, therefore it’s essential to have the right legal support to guide you through every stage in accordance with the well-known proverb – “Prevention is better than cure“.
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