How to Start an LLC (Limited Liability Company) | Full Guide
As the Silicon Valley of Europe, Estonia has become a haven for tech start-ups.
It's also gained a reputation for being a friendly and fast-growing environment for building a business.
One of the most preferred set-ups for business entities in the country is a LLC (Limited Liability Company).
While its history dates back just a few decades, not everyone is familiar with its nature, how it works, and how to start a LLC business arrangement.
If you're a business owner who's also clueless or has limited knowledge, but are keen on setting up a Limited Liability Company, today is your lucky day!
What Is an LLC?
A Limited Liability Company (LLC) known as osaühing or OÜ in Estonia is a type of business structure that combines sole proprietorship and partnership characteristics in a single business entity.
This is a common legal establishment in Estonia, where the share capital is divided into private limited company shares.
With such an arrangement, the shareholders of an LLC are not personally responsible for the business debts or obligations of the company.
Additionally, this management type provides shareholders (business owners and investors alike) personal liability protection.
Hence, they can dodge debts and lawsuits pressed against the company.
How to Start an LLC: Step-By-Step Guide
How do you start an LLC? What are the requirements you must prepare to apply as one?
Starting an LLC is not rocket science.
Remember, most services are already digitized, and online filing is possible, especially in Estonia! You can register an LLC in minutes with just a few clicks!
Start an LLC by following these 7 easy steps:
Step 1: Choose an Business Name for Your Limited Liability Company (LLC) and Reserve It
The first thing you must do is choose your LLC's business name.
You may need to double-check if another business entity has already taken the name or if it's still possible to use it.
Having a similar business name with a different company is a BIG NO-NO.
Even if it's allowed, it's also best to think of a UNIQUE name to avoid confusion and trademark infringement claims.
You are able to check the availability of the suggested name in the e-Business Registry's Name query.
Follow these tips when naming your LLC:
- The business name must contain the words Limited Liability Company or LLC, osaühing or OÜ in Estonia.
- DO NOT include words that might confuse your company with a government office.
- You are not allowed to use certain words like bank, university, college, attorney, and other related terms. You may need to submit legal documents supporting such claims.
Step 2: Choose an Estonian Contact Person/Registered Agent Service
The next thing you must do is contact registered agent services.
The LLC's registered agent will receive all the legal documents before passing them on to the designated personnel.
Your agent will take care of the LLC documents, and assist with subpoenas on behalf of your company. Hence, it's important to hire someone of legal age.
We recommend choosing someone who offers professional registered agent services because you'll be sharing confidential data with them, plus legal and public communications.
By doing so, you won't only have a registered agent to receive and pass on important files but someone you can trust to protect your privacy.
IMPORTANT: The registered agent/contact person must be a licensed provider that has a physical street address in Estonia.
Step 3: Form an LLC and File LLC Formation Documents with the Government
Aside from hiring a registered agent, you must also comply with the formation documents needed. You cannot form an LLC without filing the required documents.
Complying with these requirements is one of the most crucial steps when applying for an LLC! Hence, you must pay close attention to these LLC formation documents.
When you form an LLC, you must prepare the following:
- Articles of Association
- Bank statement showing payment of the share capital
- List of names, personal ID codes, and addresses of the Management Board members, in some cases Supervisory Council, and auditors
- Specimen signatures of the Management Board Members
- Contact information (telephone and telefax numbers)
- Certificate of Incorporation (if the founder is a foreign legal entity)
If the shareholders DID NOT bid for monetary contributions to the business, the following documents must be present (instead of the bank statement):
- Agreement regarding the transfer of contribution
- Documents supporting the valuation of the contribution
- Auditor's statement confirming the valuation of non-monetary contributions
Finally, the company must submit an application through a registration form with the Estonian Commercial Register.
The form must contain the signatures of the Management Board members and the following basic information:
- LLC name
- Fields of activity
- Company address
- Articles of Association + date of approval
- Share capital amount
- List of names, addresses, and personal ID codes of the Management Board members
NOTE: You should translate the original documents to be submitted into Estonian. It must also be signed, notarized, and apostilled or legalized before submission.
You must also be prepared to shell out money for business filing fees when forming an LLC. Your registration will only be successful once you have paid the filing fee required by the state (265€).
Step 4: Create an LLC Operating Agreement
After filing the official documents required to form an LLC and paying the filing fee, you should create an LLC Operating Agreement.
An LLC Operating Agreement is a legal document containing the structure of the business, as well as the roles of the LLC members.
In most cases, LLC Operating Agreements are not strictly required. However, most states highly encourage LLCs to draft an operating agreement.
At this point, you must determine if the business is manager-managed or member-managed.
The operating agreement covers sections including:
- Capital Contributions
- Membership Changes
- Management and Voting
- Business Organization
It will act like a HANDBOOK for how the business is structured and how it's supposed to operate. It also discusses ownership interests and rights of the members of the company.
As previously mentioned, an operating agreement is not necessary. However, most states recommend its compliance.
It should contain important information about the company, specifically defining the rights and responsibilities to avoid shareholder conflict.
Step 5: Determine Tax and Regulatory Licenses Needed
Another thing to do during LLC formation is to determine the tax and regulatory requirements.
As a business, you must possess the necessary licenses to operate legally, depending on the company's activities.
Obtaining a permit to operate in Estonia from the Commercial Registry is required for local and foreign companies wishing to render services or sell goods in the country.
The government may also require specific business licenses, like in most states. LLC owners will not be permitted to operate their small businesses or corporation without a license, if their field of activity requires a licence.
Activities required to obtain such licenses are those that concern the public, including the sale of tobacco, alcohol, and food products.
Licenses are also required for those involved in banking, gambling, and public transportation.
Aside from licenses, it would be best to determine your company's taxable income. Your business income, for example, may be taxable with income and social taxes.
This may also depend on whether your LLC is treated as a corporation, partnership, or a disregarded entity.
REMEMBER: You must strictly abide by the regulations set by the Estonian Tax and Customs Board.
Step 6: Get an EIN/Apply for a Business Bank Account
You should also remember to get an Employer Identification Number or Tax ID Number in Estonia (especially if the LLC has more than one member) and apply for a separate bank account for your business.
The EIN/TIN is like a Social Security Number (SSN) for your LLC.
It is issued by the Internal Revenue Service (IRS) in the US, and you get one by registering through the IRS website.
In the case of Estonia, the equivalent of this office is the Estonian Tax and Customs Board. You can visit their state website to learn more about taxes, filing an annual report, and the like.
The EIN/TIN is essential for LLC owners and the company for business necessities, including taxation, banking, and employee management.
You must also open a new business bank account to separate your personal assets from those owned by the company to avoid mix-ups and the risk of asset forfeiture if the LLC is sued.
Step 7: Grow Your Business
Once you're done, then you're all set to grow your business!
Start your business operations when your application to form an LLC has been approved. Better yet, expand your business in other cities or towns!
To register your small business in other places, you must comply with additional requirements specific to that state or city (if necessary).
Benefits of a Limited Liability Company (LLC)
Now that you already know how to start an LLC, allow us to discuss the benefits of applying as one:
#1 Personal Liability Protection
The main benefit of forming an LLC is personal liability protection, meaning you and all your personal assets WON'T be affected by business debts and lawsuits.
Given that it distinguishes personal from business assets, it also helps small business owners avoid conflicts of interest with their partners and shareholders.
#2 Management Structure Flexibility
In most states and other countries, small businesses are the ones who mostly prefer an LLC structure. While it acts like a corporation, it's also as flexible as a sole proprietorship.
A board can even manage an LLC, enabling members to contribute to decision-making and general business operations.
It can also be used as a general business set-up for different companies.
Despite its flexibility, you must also know that it has limitations, and not all businesses are qualified to become LLCs.
#3 Ownership Flexibility
An LLC has NO restrictions on the number and type of owners. You can have more than one owner, plus owners of other nationalities.
This is contrary to other corporations, like an S corporation, which is a federal tax election rather than a business entity.
#4 Single Tax for Owners
In most states, business owners also prefer a Limited Liability Partnership because it may be treated as a sole proprietorship, general partnership, or an S corporation.
With such an arrangement, they can avoid double taxation.
Benefits of Starting an LLC in Estonia
You'll be able to reap the following benefits when starting an LLC in Estonia:
#1 Tax Benefits/Burden Reduction
You can benefit from being charged ZERO TAX in Estonia on retained earnings. The tax is capped at 20% in terms of distributing the profits.
#2 More Money to Reinvest Into the Business
With all the money you can save from taxes, you'll have more to reinvest into the business, giving you more opportunities to expand, grow, and earn more!
This is especially true if the annual profit tax is not distributed in dividends.
#3 Ease of Application
You can register as an LLC online, thanks to digitization. The documents, forms, and certificates can be signed, processed, and submitted electronically.
You can even manage your company in a foreign country if you have an e-residency card.
#4 Opportunities in the European Market
Since Estonia is a part of the European market, European investors and those from other countries have the confidence to invest in your company.
Frequently Asked Questions
Do you still have questions about forming an LLC and LLC in general? Don't worry! We'll answer common questions in this section.
Can I Create an LLC for Free?
YES and NO.
You can file your application on your own without seeking professional help.However, you must pay a filing fee (state fee).
Additionally, you must prepare a minimum share capital investment.
What Does the LLC Business Structure Entail?
An LLC offers FLEXIBILITY for owners and management, single tax, and limited liability.
Is an LLC Better Than a Sole Proprietorship?
An LLC is more advantageous than a sole proprietorship in terms of flexibility.
With an LLC, you are not limited to the number of owners involved in the company. A foreign shareholder can also be part of the company.
Can a Foreigner Start an LLC in Estonia?
Yes, as long as you obtain an e-residency card.
Your company's registered agent, who handles business filings for the company, must also have a physical street address in Estonia, where the business is operating.
How Do I Register My Business in Estonia?
You can register your business online through the e-Business Register website. You'll be able to register a new business in just a few minutes.
That's everything you need to know about starting an LLC in Estonia! To recap, remember to comply with these requirements:
- LLC Name
- Important Documents (Articles of Association/Organization, Operating Agreement, Foundation Agreement, etc.)
- Tax and Regulatory Requirements
- Registered Agent Service
- Bank Account and EIN/TIN
You must also follow the requirements and regulations set by the particular state or city where you want to open your business.
There are also certain circumstances where you need specific licenses to operate.
Most states and cities in Estonia follow the steps and requirements provided in this step-by-step guide.
We guarantee that with this information, you'll be able to register your LLC successfully!
If you need assistance in establishing a LLC in Estonia or are looking for a licenced Contact Person service provider, feel free to get in touch with us via our webpage or write directly to firstname.lastname@example.org.
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