Starting a Business

Comparing the Most Popular Business Forms in Latvia

What are the differences between a private limited liability company and a sole trader in Latvia -- and which is right for you?
Comparing the Most Popular Business Forms in Latvia
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When it comes to starting a company in Latvia as a foreigner, there are two business forms that are used most often. These forms are defined by the Commercial law (Komerclikums).

Read on to learn more about each type and which might be right for your business.

Private limited company (SIA) with equity capital at least €2,800

The founder of the SIA can be any individual who has the right to engage in commercial activities. A SIA must have at least one founder. There is no limitation on the maximum number of founders. A SIA is a separate legal entity.

The share capital must be at least €2,800. The legislation does not limit the maximum share capital for this type of SIA. You can pay the capital both in cash and by property contribution. Usually, to pay the share capital, you need to open a temporary bank account. Before filing registration documents, you must pay at least 50 percent of the subscribed share capital.

Related: Overcoming Challenges in the Central and Eastern European Startup Ecosystem

To register a SIA in most cases need to prepare following documents:

  • The application for registration (the special form)
  • A decision of incorporation or a memorandum of association
  • The charter (articles of association)
  • Consent of a member of the board to take the position
  • The register of shareholders
  • Documents confirming the payment of share capital
  • A notification about legal address
  • Consent of the property owner to register the legal address, if the owner has not signed the application for registration
  • Documents confirming the payment of state duty and fee for publication

The board of directors represents the SIA and does daily management. Shareholders can make any decisions regarding a SIA. For example, shareholders can:

  • Appoint or withdraw members of the board
  • Approve the annual report.
  • Distribute the profit.

Shareholders may create a council -- a supervisory body that supervises the board. However, a council is not mandatory and a SIA can work without a council.

Legislation separates the responsibility of shareholders and the SIA itself. A SIA is not responsible for obligation of shareholders. And shareholders are not responsible for obligations of the SIA unless all the shareholders agree otherwise.

Unlike the owners of shares, the board members may incur personal liability to a SIA and creditors of a company. A member of the board is liable with all his or her property for damages (loss) if the board member did not act as an "honest and careful owner" (acted contrary to reasonable commercial practice). For example, if a board member entered into an unprofitable contract for a SIA (even if a member of the board entered into the contract, allowing a small carelessness).

Related: What It's Like to Start and Grow a Tech Business in Belarus

To register a SIA, you need to pay a state fee of €150 and a payment for publication of €27.

For a SIA, you can choose the following tax payment options:

  • The micro -- enterprise tax payment regime (must pay 15 percent from total amount of sales).
  • The general tax regime. In this case, a company must pay wage taxes. A SIA usually must pay company income tax (CIT) only if shareholders distribute profit to dividends. If shareholders do not distribute profit to dividends and the SIA does not have another taxable object, then there is no obligation to pay CIT.

Founders, in general, incorporate this kind of SIA if they have no rights to incorporate a SIA with equity capital less than €2,800, but there are other reasons. For example, founders know that a company will need to obtain a license for commercial transportation of goods. To obtain such a license, a company must meet certain financial requirements. And one of the ways to meet these requirements is to have a sufficiently large share capital.

According to the statistics of the register of enterprises, in Latvia there are approximately 106,000 SIAs with equity capital of €2,800 or more (54 percent of the total number of merchants).

Private limited company (SIA) with equity capital less than 2,800

This type of SIA is also called a "small capital SIA" or "one-euro SIA."

The founder of this type of SIA can only be an individual who has the right to engage in commercial activities. The minimum number of founders is one. The maximum number of founders is five. There are also other conditions and limitations to register this type of SIA.

Related: The Untapped Potential of Serbia's Entrepreneurial Scene

The minimum amount of equity capital is €1. The nominal value of the share capital must be expressed in whole euros (without euro cents), so the maximum share capital is €2,799. The share capital must be paid in cash. There is no obligation to submit additional documents, confirming payment of the share capital. Founders in the application check a special checkbox, confirming that they have paid the share capital.

The registration procedure and documents in general are the same as for a SIA with a registered capital of €2,800 or more ("general SIA").

The liability of owners of shares and members of the board does not differ from liability in a general SIA.

To register the small capital SIA, founders need to pay a state duty of €20 and payment for the publication of €14.23. Costs are less than for the registration of a general SIA.

Small capital SIAs must do accounting and pay taxes according to the same rules as general SIAs.

In recent years, founders often choose to register as a small capital company. The reason is lower costs and a simple registration process. Such SIAs are also suitable if you wish to engage in commercial activities alone (without co-founders). If necessary, you can attract new members (owners of shares) by selling shares or by increasing share capital.

In Latvia, there are approximately 46,000 small capital SIAs, approximately 6 percent of the total number of merchants.

Related: Entrepreneurship in the Western Balkans: The Next Frontier?

Sole trader (IK)

Any individual who has the right to do business can register as an IK. Only one person can register as an IK; there cannot be several co-founders for one IK. An IK can hire employees and engage in most business activities.

You can register an IK without equity capital. But, you need to take into account that for obligations of IK you will be responsible with all your property.

Registration is simple. It is necessary to fill out and sign the application form. If you register the legal address in real estate, owned by another person, then you need to get the consent of this person. You need to pay a state duty (€30) and payment for publication (€18.5).

In the register of enterprises, you cannot record members of the board of an IK (legislation does not provide such option). An individual (IK) represents himself or herself. You can record a procurator (an authorized person) in the register of enterprises. An IK can also issue a power of attorney to other persons, giving rights to the persons to make certain deals on behalf of the IK.

IK can choose to pay micro-enterprise tax (15 percent of total revenues) or personal income tax (20 percent to 31.4 percent of profit, with the rate depending on the amount of profit).

IK may be an acceptable form, if you plan to engage in commercial activities alone and are ready to be liable with all your property for obligations arising from commercial activities.

In Latvia, there are approximately 11,000 sole traders, which is approximately 6 percent of the total number of merchants.

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