The reason more than 100,000 people have applied for e-Residency in Estonia, is generally so that they can to open an Estonia-based business. While there are various legal set-ups which can be used to do this, the most common structure is the simple private limited company.
100,000 entrepreneurs can’t be wrong — but what is a private limited company in Estonia, and is it the right approach for you?
In this ultimate guide, we’ll unpack everything you need to know.
- Table of Contents -
What is a Private Limited Company in Estonia?
What are the benefits of establishing a Private Limited Company?
What are the accounting obligations for an Estonian Private Limited Company?
Why use Xolo Leap for your Private Limited Company in Estonia?
A private limited company is simply a kind of business entity in private ownership. So that means it isn’t publicly owned, and it isn’t traded on stock exchanges like public companies. Instead, it is owned by specific shareholders, who benefit from the profits that it makes.
Private limited companies exist around the world, with similar regulatory forms. They’re called Limited Liability Companies (LLC) in the United States, or private company limited by shares in the United Kingdom (PLC). You may also have seen the designation GmbH in Germany and Austria, or sociedad de responsabilidad limitada (SL) in the Spanish-speaking world, though there are many others. They can be simple companies-of-one, or huge corporations, provided they remain in private ownership and have not sold shares on the markets.
Private limited companies are designated as "osaühing" or "OÜ" in Estonian, so business names include those two letters, to indicate their status.
A private limited company is a separate legal entity to its owners, and in some cases acts as a separate legal person. This means that the company can enter into contracts and agreements in its own right, such as offering products and services, or applying for finance. This offers protection to the owners, who are not personally liable for the obligations of the OÜ (however they still have to act within the law of course.)
A private limited company in Estonia is required to have at least one shareholder, and can have up to 1,000 shareholders. Private limited companies in Estonia are also legally required to have a management board, which is responsible for managing the day-to-day operations of the company. The management board can have one or more members, and they are appointed by the shareholders. Once again, in a business of one, there is often one shareholder and one board member, who are the same individual (and who does all the other work in the company as well! But as a result, owns 100% of the value of the business, and all the profits it generates.)
The concept of limited liability is one of the primary benefits of creating a private limited company.
This recognizes that enterprise requires risk, while also adding value to the broader economy. It’s only fair that the individual shouldn’t have to take on all that risk personally.
So, the business enters into the credit arrangements and delivery contracts instead of the owner, whose personal liability is limited to their paid up shareholding (or a minimum of €2500, if the share capital is under this amount — because since February 2023, it has been possible to open an OÜ in Estonia with a minimum share contribution of 1 cent!)
Not having to put your house on the line to raise a bank loan is a powerful benefit on its own, for establishing a limited company, instead of simply trading as a freelancer. But there are plenty of other advantages, too, to doing business in this way, in Estonia and worldwide.
When you are operating a business, it can make things easier when it comes to entering into certain kinds of financial arrangements. It’s not just the liability aspect, but the way different kinds of legal entities make deals with each other.
It can be difficult for some potential clients to hire and pay you, if you don’t have a legal entity, because they face their own regulatory risks. Entering into a contract of work from one business to another offers some protection, and may help them choose you as the preferred supplier.
And those occasional bad debt risks that we all encounter occasionally, they’re not usually bad people, they’re simply short of cash… In this case, an overdue invoice from a limited company may well carry more weight and urgency, than one from a freelancer.
On a more positive note, there are sources of cashflow from EU grants to bank loans, which are easier to obtain (and may require) the status of a limited company in the first place.
Often the shift from freelancing to solopreneurship accompanies an upgrade in value perception.
With an Estonian OÜ, there’s no problem doing business in multiple fields of activity, you don’t need to open different businesses. So you can think about additional income streams and ways to increase your worth to your clients, and in your business.
In many countries, you pay tax as soon as your business starts earning anything, even before you pay yourself a single euro. This is a major inhibition to innovative enterprise thinking.
That’s why in Estonia, you are NOT taxed on income you keep within your private limited company — so you can use your profits to invest in learning, equipment, promotions, or whatever you need to grow bigger and better all the time. Of course you will be taxed when you pay out dividends, but not until that point.
When you operate a private limited company, you will need separate bank accounts for that purpose (any EEA based account is fine, including those offered by EU-licenced fintechs, and Xolo can help you decide which is most appropriate for your needs.)
This makes it straightforward to think about and operate your business and personal finances quite separately, which can make life much easier when it comes to budgeting and planning.
For example, your income and workload might vary a lot throughout the year, in the typical freelance ‘feast-or-famine’ cycle. But, you can decide to pay yourself a more-or-less fixed salary based on your cost of living, using your business account to smooth that income out over time.
There is nothing wrong with being seen as a freelancer or sole trader, and furthermore, here at Xolo we would never encourage anyone to present themselves as something they are not.
However, many freelancers collaborate with others to deliver services, and even when it’s just you, it can be preferable to create a public perception of something larger than one person.
Furthermore, some potential clients might see a private limited company as more reliable, substantial, and professional, than a freelancer. They might be more inclined to take a risk on you as an unknown supplier in another country, and who can say, they might even be prepared to pay you higher rates!
If these advantages have persuaded you to check out the possibilities of opening your first private limited company, then read on. We’ve got you covered.
Thanks to the world-famous e-Residency scheme, the possibility of opening a business in Estonia is now accessible to almost anyone in the world!
You simply need to be eligible, and to register, as an Estonian e-resident first. There are some exclusions, such as people with criminal records, or citizenship of sanctioned countries, and acceptance of applications is at the direct discretion of the Estonian Police Border Guard. You will need to visit a pickup point (often your nearest Estonian embassy) personally, for an ID check and to collect your digital kit. However, for most potential company directors, the procedure is straightforward, and only takes a few weeks. We even have a full walkthrough to help you.
Once you have obtained your Estonian e-resident status, you have full access to the business and commercial digital infrastructure of Estonia, and forming a business is then easy and quick.
In fact, you don’t even need to visit Estonia to do it! (Though it is a lovely place to visit!)
Wherever you complete your application from, you will need to appoint a virtual office in Estonia to act as your representative locally, and provide a registered address, if none of your shareholders are Estonian residents.
Fortunately, this is all part of the Xolo Leap service, which also includes helping you navigate through the application form to create your business, and receive the necessary documentation. You are not required to have an Estonian partner or director, and you retain 100% ownership of your brand-new business — Xolo simply acts as your representative and authorized local contact.
Business formation typically happens in about 24 hours (although the record is about 15 minutes!)
Then your Xolo Leap dashboard can be configured straight away, so you can start raising invoices and managing the day-to-day activities of your business.
Thanks to Estonia’s unique digital access via public-private key encryption, it is inexpensive to form a private limited company as an e-resident. No legal fees or notary visits are necessary, which helps to keep things affordable as well as straightforward (assuming it’s just you, or that the other shareholders are e-residents as well.)
The state fee for the registration of a private limited company is 265 euros. This fee can be accounted to your business post formation as an out-of-pocket expense, as can the e-Residency application fee, and any costs associated with collecting the digital kit.
You will also have to pay the share capital, but this is now a minimum of 1 cent! Of course it can be more, and contributions to share capital may also be in the form of equipment such as required IT.
At the present time, Ukrainian nationals can receive a complete reimbursement of the state fee for e-Residency application and the business registration fee, worth a total of €410. This scheme is only available if you use certain specified partners to form your business, of which Xolo is one.
It is unlikely, but depending on your business’ core activities, you might have additional licensing cost as well (such as for certain kinds of trading or importing.)
You can register your business directly through the government Company Registration Portal, or Xolo can handle all of it for you via our dedicated e-Business Register API service.
There’s always a cost of doing business of course, and in the case of knowledge workers (a category which describes the large majority of e-resident OÜs), this often means a stack of software — the tools you use both to perform your work, and also carry out the necessary business admin.
The good news for Xolo Leap customers is that a great deal of functionality is bundled right into the platform itself. So in addition to the compliance and customer service you receive, use of Xolo means you don’t have to pay for bookkeeping or accounting software, or anything to make pretty invoices or reports. Even if you need to issue share certificates or payslips. It’s all included.
The costs of Xolo Leap itself depend on the level of activity in your business along with the different services you integrate, and you can start low and scale later as you grow.
You may of course have other software costs, and potentially fees like bank charges, especially if operating internationally. From time to time, there’s always capital expenditure too, like the technology and equipment you need to do your job. All of these business expenses can be managed directly within your Xolo Leap portal.
One thing which people can worry about when it comes to setting up a business for the first time, is the accounting obligations which go with it. This can be daunting, if you’ve never held the responsibility of acting as a company director before.
It is important to be aware of these obligations because they are legal requirements, and your company filings ultimately form part of the Estonian business register. Furthermore, they may differ in some respects to the way things are done in your home country. However the current Estonian Accounting Act (in place since 2019) has many similarities with the International Financial Accounting Standards (IFRS), and is recognized as one of the most transparent and clear in the world — nothing is designed to catch you out, only to provide a public record of your compliant business operation and success.
If you are operating on your own without the support of a service like Xolo Leap, you will need to understand all these requirements and obligations thoroughly, and most importantly, maintain your own documents, for presentation and inspection at any time (and going back 7 years.)
You will also need to prepare and submit annual reports and other statements, and post and record all transactions in ledgers, to document financial position, performance, and cashflow, (though these are in relatively simplified form for a company-of-one.)
Finally, you will also have to be across any changes to the accounting requirements, tax codes, and filing obligations, which are issued by the state from time to time.
Naturally, a lot of e-residents have no inclination to involve themselves in the bookkeeping of their business, nor to assume the responsibility for understanding and implementing all aspects of (and potential modifications to) the Estonian Accounting Act.
They prefer to focus their time and attention on their core business activity instead, and completely outsource the administration and compliance to a respected member of the e-Residency marketplace of providers — safe in the knowledge that they will get a timely notification every time they need to sign a document or pay a tax bill, and that their chosen provider has a close and proactive relationship with all relevant government departments, including the tax office.
The combination of smart automation in the Xolo UI, with our friendly, competent humans to help you navigate everything outside that you may need to interact with, is what our customers love. And this makes Xolo the top-rated provider in the e-Residency marketplace, for freelancers, solopreneurs, and teams.
Estonian e-Residency was created to support frictionless administration and operation of location-independent private limited companies worldwide. Xolo Leap is simply the easiest way to deliver that, straight to your desktop or phone, wherever you are.
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.
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