How to choose the best company type for your Estonian business

Maya Middlemiss
Written by Maya Middlemiss
on August 22, 2022

The revolutionary e-Residency scheme makes doing business in Estonia a breeze, especially in combination with Xolo Leap. But before you jump in, you do need to make some important decisions, about the kind of business you need to create.

This matters because your e-Resident company is a legal entity, and it does need to be one which is appropriate within the transparent Estonian financial infrastructure and Commercial Code. Changing the business type in future is not impossible, but it’s best to make the right choice in the first place. The different structures have different costs and legalities and obligations, and confer different kinds of legal status.

Main legal forms of business in Estonia

The main types of business entity available under the Estonian Commercial Code (Äriseadustik) are as follows

  • private limited company (OÜ) — this is the most typical form of business for Estonian e-residents
  • sole proprietor (FIE)
  • public limited company (AS)
  • general partnership (TÜ)
  • limited partnership (UÜ)
  • commercial association (ühistu)
  • non-profit organization (MTÜ)

 

And there is also the option to register a branch of an existing foreign company to sell goods or services in Estonia, but this would not be a separate legal entity — the foreign enterprise remains liable for all obligations created in Estonia, and the branch office must adhere to certain criteria set by the Estonian tax board. For existing international companies who are looking to expand throughout Europe but keep the company management in their original country, a branch office is one solution.

Further, despite the ease and low operating costs of having your own Estonian business, thanks to Xolo Go, there is also the possibility to be part of a virtual umbrella company — and not have to worry about any of this stuff at all!

Private limited company in Estonia (OÜ)

Most new businesses in Estonia (for locals or e-residents alike) are formed as private limited companies — Osaühing (OÜ) in Estonian (this is the equivalent designation of LLC in the US or Ltd in the UK.)

In fact, there are 20,933 businesses registered by e-residents in Estonia, and 20,690 of these businesses are registered as an OÜ. 99% of all business types registered by e-residents are OÜs! Assuming you’re not intending to operate as a non-profit or to take your business public any time soon, this is generally a good place to start.

Benefits of operating as a private limited company (OÜ) as an Estonian e-resident:

  • Limited personal liability: shareholders are not personally liable for business activities
  • Low share capital requirement (and payment deferral)
  • Simple online registration process
  • Single founder/director possible

 

These benefits combined with the services of Xolo Leap make it the obvious choice for most e-residents of Estonia, who require the legal and reputational structure of a limited company to do business. 

To unpack those benefits, the main reason anyone has to open a limited company (as opposed to operating as a sole proprietor) is to create that legal distance, between themselves and the legal entity under which they operate. It’s the perfect model for freelancers, digital nomads, and other independent entrepreneurs, in a vast range of industries.

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Share capital contribution for private limited companies in Estonia

The liability of the shareholder is limited by law to that of the share capital they invest in the company, and this does not even have to be paid immediately. (The minimum share capital of €2500 can in fact be deferred for up to 10 years, which should be time to thoroughly test the viability of any business concept!) Before the minimum share capital is paid up, the business cannot pay dividends, but it can trade freely in all other respects, including the payment of salary or consultancy fees to the owner/director.

This deferral combined with the low amount of the share capital is one reason that many entrepreneurs are attracted to operating an e-resident business in the first place, even if they live in other EU countries for example, where business frameworks may be similar in other ways, but often demand far more and immediate investment — making it risky and expensive to explore an innovative business idea.

How to open a private limited company in Estonia?

For e-Residents, opening a OÜ online is very straightforward and rapid — in fact, the record was set earlier this year by Sign Online OÜ, who constituted their business in 5 minutes and 33 seconds! 

We cannot guarantee that every business will be formed in minutes, but same day or next day is well within the scope and requirements of most Xolo Leap clients. And Xolo will prepare the forms for you and guide you through each action step, including the signing off the contract using your digital ID.

Many OÜs are formed by solopreneurs, and although there is a requirement for a ‘management board’, this is frequently the sole owner/director. However, it is possible for more than one board member, founder, or shareholder to be part of the company, provided they are all natural persons with valid e-Residency cards. (‘Natural persons’ in law refers to living individual humans, with rights and responsibilities thereof, as opposed to ‘legal persons’ — which are usually groups acting in certain collectively in certain circumstances, for example as a company or trust.)

Related read: Guide to opening an Estonian company using e-Residency.

Sole proprietorship in Estonia (FIE)

You might be wondering why you would need a limited company, when you could simply trade as a sole proprietor, if you are a solopreneur?

Well, this legal structure does exist in Estonia (it’s called Füüsilisest Isikust Ettevõtja (FIE) in Estonian), and the structure is very simple. However it is rarely advantageous for e-residents, over simply doing the same in their home country, and this kind of trading is really intended for Estonian citizens and tax residents.

The pros and cons of establishing sole proprietorship in Estonia

Obviously there is no share capital to pay, nor do you require written Articles of Association and the establishment of shareholders and board members. If you are an Estonian resident, as opposed to e-resident, you can sell goods and services under your own name in Estonia in this way — but the major disadvantage is the unlimited personal liability. Sole proprietors are fully liable for any debts, problems or fines incurred by the FIE. 

When it is so affordable, rapid, and straightforward to form a limited company instead, it rarely makes sense to go down this route, even if you relocate to Estonia. We live in an increasingly litigious world, and it’s not possible to indemnify every vulnerability your business is exposed to, so limiting liability is an obvious smart strategy to derisk your professional activities.

Also, curiously, the tax system in Estonia for FIEs is more complicated than for an OÜ!

Public limited company in Estonia (AS)

You’ve heard the saying, ‘go large or go home!’ Well, among the thousands of small medium enterprises and startups, Estonia is also home to many bigger businesses, and indeed 17 Public limited companies — that’s Aktsiaselts (AS) in Estonian — have been registered by e-residents.

If you know you’re going to scale fast and go public straight away, you can pursue this route for your e-resident Estonian business, for which the key requirements are:

  • Minimum share capital requirement of €25000
  • Minimum three supervisory board members, elected by shareholders
  • At least one founder
  • Auditors must be appointed

 

Individual liabilities for shareholders depends on the amount of share capital each has provided, but are limited by this. The management board works the same way as in an OÜ, functioning as the executive of the company, managing the company’s day-to-day operations and activities

The supervisory board consists of three members and is chosen by the shareholders to represent their interests and ensure the company’s long-term objectives meet shareholder needs. 

Auditing requirements for public limited companies in Estonia

An auditor is responsible for ensuring the company's financial statements echo financial reporting compliance regulations and sharing this information with the shareholders. They are required under audit or audit inspection needs which are established by articles 91 and 92 of the Estonian Auditing Act, and the external auditors reports form part of the public company record in the register of businesses. Furthermore, all registered shares in an AS company will be registered into the Estonian Central Register of Securities.

As you can see, the operating and formation requirements for a Public Limited Liability Company are more onerous than setting up an OÜ in less than a day — however, this structure may be ideal if you have many shareholders or investors in your company, who need to issue varying types of shares. 

Should you foresee the company going public, then an AS is the company type you need for your Estonian e-resident business. You should also consider it, and take specialist advice, if you have a large scale business project or wish to become a corporation, now or in the near term future.

General Partnership (TÜ) Estonian business structure

A General Partnership (TÜ) or Täis Ühing in Estonian is a particular type of company used to convey a business partnership between at least two business partners.

A TÜ functions very similarly to an OÜ, where the company members act as sole proprietors.

Key differences between a private limited company (OÜ) and a general partnership (TÜ) in Estonia

 However, unlike an OÜ the members are liable for all their assets — so it does not convey one of the key benefits of distributed liability. As such, all partners that form the TÜ share equal and complete responsibility and liability for the company activities. 

Dividends can be paid out according to the amount of share capital held within the partnership. Unlike an OÜ or AS, there is no minimum share capital, making it attractive for those with little to no share capital to invest, when more than one party wants to get started in business together.

What about a Limited Partnership (UÜ) for my Estonian business?

A Limited Partnership (UÜ) or Usaldus Ühing in Estonian is another kind of partnership company framework. However, unlike a TÜ, where the partners share equal capital and company responsibilities, a UÜ legally delineates the liability of each partner. This can reduce the risk for each, because they are less responsible for the actions and risks of the other party.

What are the different partner types in a Limited Partnership (UÜ) company?

Legally, there are two types of partners:

  • a general partner that holds full liability for any company legal obligations 
  • a limited partner that is limited to their share capital deposit only 

 

Sounds complicated and confusing? Well, yes, it is. And unless there are specific arrangements of share capital and liability that business partners require for particular reasons that they understand fully, it usually makes more sense to open an OÜ, over a TÜ or UÜ.

Finally, there is also the option of…

Opening a non-profit organization (MTÜ) in Estonia

A non-profit organization (or Mittetulundusühing, MTÜ, in Estonian) does not generate profits or income.  However, it does have set objectives, which can be revenue-generating, as declared in its Articles of Association. By definition, an MTÜ is not permitted to distribute profits among its members.

How to operate your Estonian non-profit organization (MTÜ)?

An MTÜ operates like any other business, meaning they can do things like opening a business bank account, offsetting expenses, even hiring salaried employees.  An MTÜ must have at least two members, and one of them must be on the board, but these can be quite separate from the operational employees

An MTÜ functions daily in quite a similar way to an OÜ, so if you wish to open a charity or NGO, particularly with a cross-border partner, then this framework may be ideal. 

Choosing the right company type for your e-resident Estonia business

So many possibilities… And such a critical decision point, in the formation of your new enterprise. But, don’t let it overwhelm and confuse you, or get in the way of taking action, and moving forward with your business right now!

The most popular choice of 99% of e-residents, that of a private limited company (OÜ), is popular for good reason — and if you are a freelancer, sole trader, or digital nomad, then it’s highly likely to be the right move for you. Unless you have specific intentions as regards going public or generating non-profit funds, the OÜ route is far and away the most straightforward, fast, and frictionless route to get going with your business. (And if for any reason it is apparent to your Xolo customer support professional that this is not the route you should be pursuing, they will be sure to let you know.)

When you combine the legal framework of an OÜ with the power of Xolo Leap, you can not only get started in record fast time, you can totally derisk the idea, with a full 3 months free of charge operation with Xolo Leap Pro. 

Remember, you have no upfront share capital and no personal liability, so can form that business in less than a day, so that you can focus on whatever your fee-earning business activity is — in a completely digital, location-independent, and professional manner.

What are you waiting for? 

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About Maya

Maya Middlemiss is a freelance journalist and author, excited about the future of work, business, money, and technology. She operates her e-resident business through Xolo Leap, so that she can work frictionlessly with brands and publications all over the world, and she is the host of the Future is Freelance podcast. Exploring the social impact of technology on our changing world, and bringing those stories to life in an accessible and inclusive way, is her passion — because all of this is far too exciting to leave it to the geeks. Maya is a 'digital slowmad', originally from London, presently living with her family in Eastern Spain.