Doing business in Estonia is easy.
Setting up a company, whether as a resident, business, e-resident or freelancer makes it even easier.
With several choices as to the type of legal entity you can create, it can, however, puzzle entrepreneurs, company owners and freelancers as to which business framework works best for their interests.
Typically, most new businesses in Estonia are Private Limited Companies or Osaühing (OÜ) in Estonian.
However, several other types of business frameworks are available to business owners beyond that of an OÜ. There is even an option to be part of a virtual company that has no business running costs.
Whilst an OÜ is probably a solid choice for most location-independent freelancers; other scenarios could better suit.
For instance, if you plan to take the company public, wish to run a charity, or are a freelancer looking to minimise company costs.
The Estonian Commercial Code (Äriseadustik) lists six different business entities that can be established in Estonia. These are:
Although not a company in the traditional sense, those looking to utilise the Estonian business environment can use a virtual company through Xolo Go.
Before establishing a business, entrepreneurs must decide which entity best suits their current business needs, assessing the costs and legalities involved.
This decision will impact not only the required equity capital but also the legal status of the business and other related issues, for example, will the setup be a natural or legal person:
Natural person - refers to a living human being, with certain rights and responsibilities under the law.
Legal person - is a group of people that is considered by law to be acting as a single individual, in the form or a company, a trust, a partnership, or some other group.
In Estonia, a Private Limited Liability Company is called an Osaühing (OÜ) with the minimum share capital required being €2,500, which can be deferred for up to ten years if needed.
So, shareholders are not obliged to make the share capital payment immediately once setting up the company. However, there is a caveat - the company is not permitted to distribute dividends until payment has been made. Company salaries can be paid, however.
Shareholder liability is limited to the amount of the share capital they invest in the company.
A management board heads the OÜ and must include at least one member.
If using the e-Residency programme to open a company online, all board members, founders and shareholders must be natural persons with a valid e-Residency card.
Setting up an OÜ is ideal for most small to medium-sized businesses, including solopreneurs (one person-owned company). Most likely, this will be the primary choice. Opening an OÜ is even easier if you use a leading service provider.
A Public Limited Liability Company (AS) or Aktsiaselts in Estonian requires a minimum share capital of €25,000 with the liability for each shareholder dependent on the amount of share capital they have deposited.
An AS must also have a:
The management board works the same as an OÜ, functioning as the executive of the company, managing the company’s day to day operations.
The supervisory board consists of three members and is elected by the shareholders to represent their interests and ensure the company’s long-term objectives meet shareholder needs.
An auditor is responsible for ensuring the company's financial statements echo financial reporting compliance regulations and sharing this information with the shareholders.
All registered shares in an AS company will be registered into the Estonian Central Register of Securities.
A Public Limited Liability Company is 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 for you.
An AS should also be considered for if you have a large-scale business project or wish to become a corporation.
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.
TÜ functions very similarly to an OÜ where the company members act as sole proprietors. However, unlike an OÜ the members are liable for all their assets.
All partners that form the TÜ share equal and complete responsibility 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.
A Limited Partnership (UÜ) or Usaldus Ühing in Estonian is another partnership company framework. However, unlike a TÜ, where the partners share equal capital and company responsibilities, a UÜ delineates the liability of each partner.
Confusingly, within a UÜ there two types of partners:
Unless there are specific arrangements of share capital and liability that business partners require, it makes more sense to open an OÜ over a TÜ or UÜ.
A Sole Proprietorship (FIE), or Füüsilisest Isikust Ettevõtja in Estonian is a legal entity that does not require written Articles of Association or establishing shareholders or board members. Because of this, there is no share capital to contribute.
Sole proprietorships are targeted for sole proprietors or solopreneurs in Estonia.
Although this is a solution for those living in Estonia, it is not a suitable option for digital freelancers or e-residents.
First, to set up an FIE in Estonia, sole proprietors need a registered address within Estonia and be tax domiciled within the country.
Sole proprietors are also fully liable for any debts, problems or fines incurred by the FIE.
Whilst this may sound attractive for those looking to launch a freelance business, it would make more sense to have a one-person Osaühing (OÜ) that absorbs full liability or a Xolo Go account that incurs fewer costs.
A Non-profit Organisation (MTÜ) or Mittetulundusühing 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.
An MTÜ operates like any other business, meaning they can do the following:
Plus, an MTÜ must have at least two members, and one of them must be on the board. An MTÜ functions daily very similarly as an OÜ, so if you wish to open a charity or NGO, then this framework will be ideal.
An MTÜ is not permitted to distribute profits amongst its members.
Maybe you have a parent company that wishes to open a Branch Office in Estonia to pursue commercial interests in Estonia. In that case, you can open a Branch Office and register it in the Commercial Register.
Although it is not a legal entity, and the parent company will be fully liable, 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.
A virtual company is not setting up a business in the traditional sense - it will not make you a business owner per se. Yet, it eradicates the responsibilities and most costs, including share capital required to set it up.
Meaning that a virtual company is ideal for those entrepreneurs who wish to run a lean business operation yet still invoice clients from the EU to North America.
Freelancers can send invoices, pay expenses and pay themselves out of the company minus any fees and taxes due. The payment of taxes is calculated on the customer’s country of residence.
A virtual company like Xolo Go is a solution for those solopreneurs looking to run a profitable side business yet not worry about the legal compliance required with managing an Estonian company.
Plus, you do not even need to apply for Estonian e-Residency either. Xolo Go is open to all regardless of where you are located, even invoicing businesses in the EU, USA and Canada.
Don't let the different types of Estonian companies confuse you. Most of the time, the popular choice is popular for a reason - because it suffices several business times. So, a Private Limited Liability Company (OÜ) is a sound choice. Using a service provider like Xolo Leap would make this business opening process even smoother.
Suppose you are seeking to establish a larger corporation by going public. In that case, a Public Limited Liability Company (AS) is a better alternative.
Other company types are less chosen, except for specific circumstances and don't contain as much liability.
As discussed above, if you're a solopreneur and don't wish to stress managing a business, then a virtual company will be for you.
In the last example, a virtual company like Xolo Go is the best option as it can be set up in 10 minutes. The other legal business entities can take from days to months to get going when you include setting up bank accounts.
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