Opinion | Paušalni obrt, j.d.o.o. or d.o.o.? The decision that determines how much money you’ll keep in your pocket

By: Ivica Žuro, financial adviser based in Split, Croatia

When starting your own business in Croatia, the most common dilemma is not what to do, but which legal form to operate under, depending on the type of activity. Although at first glance it may seem that the only difference is in the name, the reality is far more complex—each form comes with different rights and obligations for founders. Choosing between a paušalni obrt — a flat-rate sole proprietorship — a j.d.o.o., and a d.o.o., among other things, directly determines how much money will remain in your pocket, how much time you’ll spend with an accountant, and how banks will perceive you.

There are also a few additional details that may seem like minor complications but can become a source of delays, drawn-out processes, and frustration. One of these relates to collateral instruments if you apply for startup funds and receive approval from the Croatian Employment Service (HZZ).

The rule is that for every form of business except a paušalni, a promissory note (zadužnica) issued by the owner and certified by a notary public is sufficient—while for a paušalni obrt, an additional promissory note from another natural person is also required.

But let’s return to the beginning: the fact that self-employment is possible either as a natural person or as a legal entity.

Among the first questions that arise are:

1. How much can this cost us?
2. How long can incorporation take?
3. Can any of this be done online?

The answers are in the table:

Criterion	Paušalni obrt (flat-rate sole proprietorship)	d.o.o.	j.d.o.o.
Share capital	€0	€2,500, of which €625 must be paid immediately and the rest within one year	€1
Incorporation costs	€0	approx. €530	approx. €180
Time to incorporate	1 to 3 days	5 to 10 days	3 to 7 days
Procedure	e-Građani or the local economy office	notary public and Commercial Court, or the START service	notary public or the START service
Number of founders	1 natural person	1 or more	1 to 5

A paušalni obrt is the independent and continuous performance of an economic activity by a natural person with the aim of generating income or profit, achieved through production, trade, or providing services on the market. In this case, no separate legal entity is established; instead, the natural person registers an activity. It is ideal for:

• beginners with lower income
• freelancers and consultants
• activities that require professional qualifications (hair salons, car mechanics, carpenters, etc.)
• those who want minimal costs and administration

Paušalni obrt –flat-rate sole proprietorship or craft businesses– can operate seasonally or year-round, and the law recognizes three types of craft businesses:

• Free crafts (slobodni obrti) – activities that do not require passing a professional competence exam or master crafts exam.
• Restricted crafts (vezani obrti) – activities that require passing a professional competence exam, having an appropriate secondary vocational qualification, or passing a master crafts exam.
• Privileged crafts (povlašteni obrti) – activities that can be performed only on the basis of a privilege/license, i.e., a special permit issued by the competent ministry or another authority whose jurisdiction is defined by special regulations, depending on the activity.

A specific feature of craft businesses is that there are two ways of operating—i.e., paying taxes and contributions: a standard (classic) craft business and a flat-rate craft business (paušalni obrt).

Standard craft owners pay taxes and contributions in the same way as if they were operating through a j.d.o.o. or d.o.o. However, the simplest and cheapest entry into entrepreneurship is still offered by the paušalni obrt. Opening costs are minimal—practically non-existent if the process is done through the e-Građani system—and no share capital is required.

Still, caution is necessary. A paušalni obrt is not a form of business in which you can have only one client/customer. If that is the case, the Tax Administration may consider such a relationship disguised employment, i.e., an attempt to avoid paying contributions that would exist in a standard employment relationship.

On the other hand, a company is most often established by two or more people with the aim of jointly generating profit. You can establish a limited liability company (d.o.o.) or a simple limited liability company (j.d.o.o.). They differ in the amount of share capital, the complexity of business management, and the ways profit can be distributed.

The simple d.o.o. is often called “the one-euro company” because the minimum share capital is exactly one euro, but total notary and incorporation fees typically reach around 180 euros.

A limited liability company (d.o.o.) is the most serious—and the most expensive—option. It requires share capital of 2,500 euros and incorporation costs of approximately 600 euros. This applies if the founder is a resident of the European Union; if not, the founder pays ten times the share capital amount and has a legal obligation to employ three Croatian citizens.

Below is an overview of what operating under each form means for every major aspect of business.

Expected annual costs

The main difference between these forms of business lies in how the state treats your work and the profit you generate.

Item	Paušalni obrt (flat-rate craft business)	j.d.o.o. / d.o.o.
Contributions (pension & health insurance)	Fixed amount. This year it is €290.98 per month. It does not depend on earnings.	Based on the legally prescribed director’s salary. This year the monthly obligation is €472.84.
Income/profit tax	A flat-rate amount which this year ranges from €203.40 to €1,080.00, paid quarterly.	10% corporate income tax, plus 12% capital income tax on profit distributions.
Accounting	You can keep it yourself and submit reports to the Tax Administration. In practice, apart from regular payments, there are no major administrative requirements other than submitting annual forms by January 15 for the previous year.	Mandatory and strongly recommended so you can focus on your core business. The service typically costs €100–€300 per month.
Membership fees and levies	Chamber contribution.	Forest contribution, monument annuity, and membership fee to the Croatian Chamber of Economy after two years of operation.

Tax treatment and access to money

This is one of the key points that new entrepreneurs often do not fully understand.

With a paušalni obrt (flat-rate craft business), you and the business are the same legal person. All money in the account can be used without special justification. You can spend it on everyday needs, withdraw it at an ATM, or invest it without additional taxation. The limit is 60,000 euros in total annual receipts.

If a paušalni obrt (flat-rate craft business) owner exceeds that amount, they lose the right to flat-rate taxation and move to keeping business books under the rules for taxation of income or profit, which also includes mandatory entry into the VAT system.

It is important to keep in mind that the total amount of receipts generated under the same Personal Identification Number (OIB) is considered. For example, if you earned €45,000 in receipts through a flat-rate craft business and additionally had €16,000 in income from tourist rentals as a registered landlord, you have exceeded the threshold. All receipts are taken into account.

If you are taxed as an income-based craft owner—either from the very beginning or after crossing the limit—access to money must be documented and justified. Funds cannot be used arbitrarily, and any responsible accountant will warn you about this. On the other hand, this opens up the possibility of using non-taxable allowances and offsetting input and output VAT, which is not possible while operating as a paušalni obrt (flat-rate craft business).

With a j.d.o.o. or d.o.o., the company is a separate legal entity, and the money in the account belongs to the company, not the owner. To use it legally for private needs, you have three options:

• salary payments, with regular taxes and contributions
• profit distribution at the end of the year, after paying corporate income tax and capital income tax on dividends
• non-taxable payments during the year, which must be purpose-specific and supported by appropriate documentation

Liability and risk

In every industry, there is a certain level of risk of lawsuits. In the IT sector, that risk may not be as pronounced as in construction, but it still exists—for example, data leaks, failure to meet contractual obligations to a major client, or other business errors. Therefore, it is important to understand which assets the entrepreneur is liable with in case of obligations.

• Craft business (obrt) – you are liable with all your personal assets. If the business owes €50,000 and does not have enough money in its account, enforcement may be carried out against your personal car, real estate, or savings.
• d.o.o. – liability is limited to the company’s assets. Your personal assets are generally protected, except in cases of proven piercing of the corporate veil—i.e., intentional extraction of funds or other forms of abuse of the company.

Creditworthiness and how banks view you

If you plan to scale the business and already have contracts in place, a d.o.o. is a far better structure for growth and development.

Bank loans

Banks still view flat-rate craft owners with a certain degree of caution. They most often require at least three years of operation and recognize only part of the income as the basis for assessing creditworthiness, regardless of actual earnings.

On the other hand, a d.o.o. with orderly financial statements and at least two financial years behind it obtains leasing, investment loans, and other forms of financing much more easily.

HAMAG and HBOR financing

Although craft owners can also apply for financing, a d.o.o. often has an advantage due to more transparent bookkeeping and a stronger capital base.

HAMAG and HBOR programs are particularly interesting for IT companies that need funds for equipment and working capital, as well as for smaller manufacturing companies planning business development.

In practice, HAMAG—through financing programs up to €100,000 and repayment terms of up to ten years—regularly includes craft owners, while HBOR, due to the larger financing amounts, in most programs primarily works with companies such as d.o.o.

When is it time to change your legal form?

Most entrepreneurs start their journey as flat-rate craft owners because it is the cheapest way to test a business idea. It is a kind of test environment for getting started. If the idea fails, the cost of that attempt is the lowest among the legally permitted options.

However, as business circumstances change, switching to a d.o.o. makes a lot of sense when:

• Annual revenues exceed €60,000, including all income earned by a person who shares the same OIB with the craft business they own.
• You plan to hire your first employee, because contributions and administration related to employees are more complex in a craft business.
• You are entering projects with a higher level of liability and risk.
• You want to build a brand that you may one day sell, since a craft business cannot be sold (it is tied to the owner), while a d.o.o. is a separate legal entity that can be transferred or sold.

If for any reason you decide to shut down your business venture, keep in mind that a craft business can be closed very quickly and with no significant costs, while liquidation of a d.o.o. takes months and most often costs at least 600 euros in notary and other administrative fees.

Read the original piece in Croatian here.