The choice between a trade licence and an s.r.o. is one of the first decisions every entrepreneur faces — and there is no universally correct answer. Both forms are legal and fully functional, but they differ in costs, liability, administration and taxation.

The decision should not be made according to what is more popular, but according to the specific situation: how much you earn, what risk you carry and how each option will tax you. Let's go through it.

When a trade licence is worth it

A trade licence is the fastest and cheapest way to start a business. Registration costs CZK 1,000, the administration is simple, and a sole trader can use expense allowances or the flat-rate tax, which significantly reduce the tax and contribution burden for many people. The downside is that a sole trader is liable for obligations with all their assets — they carry the business risk personally. For a starting and smaller business with lower risk, a trade licence tends to be ideal.

Tax-wise, a trade licence is advantageous thanks to two tools. Expense allowances let you claim costs as a percentage of income — 60 % for unqualified trades, 80 % for crafts — without documenting receipts. The flat-rate tax combines tax and contributions into a single monthly payment and frees the sole trader of most administration. Both are available up to statutory turnover limits.

When an s.r.o. is worth it

A limited liability company separates the company's assets from the shareholder's, so liability is usually limited to the contribution. It looks more credible to banks and partners and suits higher turnover and brand-building. Tax-wise, however, it is less favourable because of double taxation. Example: on a profit of CZK 1,000,000 the company pays income tax of 21 %, i.e. CZK 210,000; from the distributed CZK 790,000 the shareholder pays a further 15 % withholding tax, i.e. CZK 118,500, leaving CZK 671,500 — the effective taxation of distributed profit is around 33 %.

An s.r.o. also brings more administration — it keeps double-entry accounting, files a corporate income tax return and has more formal obligations than a sole trader. That burden is offset by limited liability and a stronger position when dealing with banks, investors and large customers.

What decides

Three things decide: the level of income, the degree of risk and the tax impact. At lower income and low risk, a trade licence usually wins thanks to allowances and simplicity. At higher turnover, cooperation with larger partners or activity with higher risk, the limited liability and prestige of an s.r.o. prevail. Many entrepreneurs therefore start with a trade licence and switch to an s.r.o. once the business grows.

Conclusion

A trade licence wins for a cheap and simple start, an s.r.o. for higher turnover, limited liability and a brand. There is no universally correct choice — the specific situation decides. How to set up an s.r.o. is covered in the article how to set up an s.r.o. in Czechia.

Frequently asked questions

Which is cheaper, a trade licence or an s.r.o.?

A trade licence is cheaper — registration costs CZK 1,000, the administration is simpler, and you can use expense allowances or the flat-rate tax. An s.r.o. has higher costs both to set up and to keep accounts for.

Why is an s.r.o.'s profit taxed twice?

An s.r.o.'s profit is first taxed by income tax at 21 %, and the distributed share of profit by a further 15 % withholding tax. The effective taxation of distributed profit thus reaches around 33 %.

When should I switch from a trade licence to an s.r.o.?

Usually when turnover grows, risk increases, or you need to limit liability and look more credible to partners. Many entrepreneurs start with a trade licence and move to an s.r.o. as the business grows.