Marko is a freelance developer. He has been working for foreign clients through his personal bank account for years, but now wants to put everything on a legal footing. He asks one colleague and gets the advice: register as a sole proprietor, it's quick and cheap. He asks another: set up an LLC, it looks more professional. Both pieces of advice are incomplete. Because the real question is not which form looks better, but which form protects more, costs less and works for what Marko actually does.
Serbia currently has 376,535 registered sole proprietors, according to data from the Business Registers Agency. Both forms are widely used, but for entirely different reasons.
This blog breaks down what actually distinguishes them: founder liability, taxation, costs and the situations in which one form is better than the other. For a broader overview of registering a business in Serbia, see our blog on company formation in Serbia, which covers all legal forms and procedures step by step.
Contents
- The fundamental difference: what are a sole proprietor and an LLC?
- Liability: entire personal assets or just your contribution?
- Taxation of sole proprietors
- Taxation of LLCs: corporate tax and dividends
- Costs of formation and ongoing operations
- Comparison table
- Decision flow: which form is right for you?
- Frequently asked questions
1. The fundamental difference: what are a sole proprietor and an LLC?
A sole proprietor is not a company. The registration is made with the SBRA, but no separate legal entity is created. There is no share capital, no shareholders' meeting, no articles of association. The sole proprietor and their business are the same legal person. For the full registration procedure, see our blog on sole proprietor registration in Serbia.
An LLC is a company, a separate legal entity that exists independently of its founder. The member and the LLC are two distinct legal persons. The practical consequence: a member can sell their stake, transfer the company or step down from management without dissolving the legal entity. A sole proprietor cannot.
In practice, we see that founders most often choose a legal form based on what they heard from friends or what sounded more serious. Very few analyse the actual tax consequences before submitting their registration application. That is a mistake that can cost several thousand euros a year.
2. Liability: entire personal assets or just your contribution?
A sole proprietor is liable with all personal assets
An uncomfortable truth that few people state plainly: a sole proprietor who fails to pay a supplier or misses a tax payment can lose the family home. Liability is unlimited and covers all personal assets, including assets acquired outside the business, and it does not end when the activity ceases for obligations that arose while the activity was active.
An analogy that helps: a sole proprietor is like a driver who owns the car and has no third-party liability insurance. If there is an accident, they pay out of their own pocket. An LLC is like a driver using a company car with full insurance. Personal financial exposure is capped.
For freelancers with low risk (consultants, developers, designers who have no significant supplier debts) this risk is theoretical. But for activities involving credit, leases, employees or contractual penalties towards international clients, unlimited personal liability is a very real problem.
An LLC member is liable only up to their contribution
An LLC member does not answer for the company's obligations with personal assets. The maximum financial risk for a member is the value of the contribution they paid into the company. The formal minimum is RSD 100, a symbolic sum.
Piercing the corporate veil: when the protection disappears
The member's limited liability is not absolute. Article 18 of the Companies Act provides for piercing of the corporate veil, in plain language: a creditor breaks through the LLC's shield and collects directly from the owner. This happens when a member used the LLC as a vehicle to harm creditors, mixed business and personal assets, or transferred assets out of the company ahead of insolvency.
A second scenario of personal liability arises in compulsory liquidation proceedings, where after the compulsorily liquidated company is struck off the register, its controlling member continues to be unlimitedly liable for three years.
3. Taxation of sole proprietors
A sole proprietor can be taxed in several different ways under the Personal Income Tax Act. Which regime applies depends on the level of income, the type of activity and a personal election. The difference in tax burden between these regimes can be significant, which makes this one of the key questions when choosing a legal form.
An option that many sole proprietors do not consider seriously enough: a sole proprietor can pay themselves a personal salary as a business expense and thereby directly reduce the taxable base. This optimisation requires planning and a solid knowledge of the regulations.
Given the complexity and importance of this decision, the specific regimes and the thresholds at which one becomes more favourable than another are a matter for professional advice, not a one-size-fits-all answer.
4. Taxation of LLCs: corporate tax and dividends
An LLC pays corporate income tax at a rate of 15% on taxable profit, under the Corporate Income Tax Act. Taxable profit is the difference between income and tax-deductible expenses.
What founders rarely hear before registering: when an LLC distributes profit to a member as a dividend, that income is taxed again as personal income at 15%. The same income passes through two tax events. In tax terminology, this is economic double taxation.
A concrete example: an LLC earns RSD 1,000,000 in profit. It pays RSD 150,000 in corporate tax. The remaining RSD 850,000 is distributed to the member. The member pays a further RSD 127,500 in dividend tax. The total tax burden on the same RSD 1,000,000 is RSD 277,500, i.e. an effective rate of 27.75%.
The alternative is to reinvest profits within the LLC, or to pay the member a fee for their work as director or employee, which has different tax implications. The specific thresholds at which one form becomes more favourable are a matter for professional advice.
5. Costs of formation and ongoing operations
Formation costs
Registering a sole proprietor with the SBRA costs RSD 2,500. There is no minimum share capital. Forming an LLC costs RSD 8,000, plus a mandatory constitutional document (memorandum of association), which is typically prepared by a lawyer.
| Cost item | Sole proprietor | LLC |
|---|---|---|
| SBRA fee for establishment | RSD 2,500 | RSD 8,000 |
| Minimum share capital | None | Minimum RSD 100 |
| Constitutional document | Not required | Mandatory document |
| Supporting documents | ID document only | Depends on founder and structure; extracts, legalised or apostilled as required, court sworn translation into Serbian |
Ongoing operating costs
Accounting services for a sole proprietor run approximately EUR 50–150 per month. For an LLC, expect EUR 100–300 per month, because double-entry bookkeeping is required, along with an annual financial statement submitted to the SBRA and the Tax Administration, and broader VAT obligations if the company is a VAT payer.
Both forms have the same threshold for mandatory VAT registration: RSD 8,000,000 in annual turnover (approximately EUR 68,000).
The cost of winding up also differs. Striking off a sole proprietor is straightforward and relatively inexpensive. Liquidating an LLC is a more complex procedure that can take several months and may require a lawyer. In both cases, tax clearance certificates confirming that there are no outstanding obligations to the Tax Administration and local tax authorities must be submitted as a condition for removal from the register.
6. Comparison table
| Parameter | Sole proprietor | LLC |
|---|---|---|
| Legal nature | Natural person | Legal entity |
| Liability for obligations | Unlimited: all personal assets | Limited to the member's contribution |
| Piercing the corporate veil | Not applicable | Possible where abuse of legal personality is proven |
| Minimum capital | None | RSD 100 (formal minimum) |
| SBRA fee for establishment | RSD 2,500 | RSD 8,000 |
| Income / profit tax | Depends on regime | 15% corporate income tax |
| Dividend tax | Not applicable | 15% on profit distributed to member |
| Economic double taxation | No | Yes (corporate tax + dividend = ~27.75%) |
| Monthly accounting costs | ~EUR 50–150 | ~EUR 100–300 |
| Administrative obligations | Fewer | More (annual report, SBRA filings) |
| Transfer of ownership | Not possible, except by inheritance | Transfer of membership stake possible |
| Suitability for investors | Limited | Standard (stakes, governance) |
| Winding up | Strike-off (straightforward) | Liquidation (more complex procedure) |
7. Decision flow: which form is right for you?
STEP 1: Do you plan to have co-founders or partners?
Yes: only an LLC is the appropriate form. A sole proprietor cannot have more than one founder.
No: proceed to step 2.
STEP 2: Is there a material risk of creditor claims (loans, leases, stock, employees, contractual penalties)?
Yes: an LLC protects your personal assets. Consider an LLC seriously.
No (low-risk activity): a sole proprietor is workable and cheaper.
STEP 3: Do you plan to raise external capital or bring in investors?
Yes: an LLC with a clear shareholding structure is the standard requirement of investors.
No: proceed.
STEP 4: Is administrative simplicity and low running cost your priority?
Yes, income is relatively low and stable: sole proprietor.
Income is high or variable, tax optimisation matters: professional advice.
Marko from our example is a freelance developer working for one steady client. He has no employees, no lease and no credit facilities. The risk of creditor claims is minimal. For him, a sole proprietor is a workable and cheaper option for as long as the business stays within those parameters. When Marko starts building a team and takes on contractual obligations towards clients, the conversation about forming an LLC becomes relevant.
8. Frequently asked questions
Can a sole proprietor convert to an LLC without closing the business?
Yes, it is possible to continue carrying on a sole proprietor's activity in the form of a company.
What tax does a sole proprietor pay in Serbia?
It depends on the regime. There are several taxation options under the Personal Income Tax Act. The optimal one depends on the level of income, the type of activity and how the personal salary is structured. The choice of regime is a matter for professional advice, not a one-size-fits-all answer.
Can an LLC member also be the LLC's director?
Yes. In single-member LLCs this is the most common arrangement. A director who works in Serbia must be enrolled in social insurance. The boundary between the liability of a member and that of a director becomes relevant in piercing-of-the-corporate-veil cases; full details are in our blog on director liability in Serbia.
How much does running a sole proprietor cost per month in Serbia?
Approximately EUR 50–150 per month for accounting services, depending on the volume of business and the accountancy firm. On top of that come mandatory social contributions, the amount of which depends on the tax regime and the level of personal salary. For an LLC, expect EUR 100–300 per month for accounting, with more administrative obligations.
Can a foreign national register as a sole proprietor in Serbia?
Yes. In Serbia, domestic and foreign nationals are treated equally as regards investment. A foreign national may register a sole proprietor provided they hold a temporary residence permit or permanent residence. More detail is available in our blog on temporary residence permits in Serbia.
What is piercing the corporate veil and when does it apply?
Piercing the corporate veil, in plain language: a creditor breaks through the LLC's shield and collects directly from the owner, is provided for in Article 18 of the Companies Act. It applies when a member used the LLC as a vehicle to harm creditors or mixed business and personal assets. More detail in our blog on director liability in Serbia.
About the authors
