Types of Business Structures in Montenegro
As you decide to incorporate your business in Montenegro, you will have to select the business structure that best suits your needs. This article provides an overview of the different business entity structures allowed in Montenegro and explains why a limited liability company is the best choice for most businesses.
Montenegrin law permits the establishment of six types of companies, the most common being: Entrepreneur, Limited Liability Company (d.o.o.), Joint Stock Company (a.d.), General partnership (o.d.), Limited partnership (k.d), and Part of a foreign company.
Foreign legal and natural persons have the right to establish a company in Montenegro under the same conditions as nationals.
- Sole proprietorship which is the simplest business form in Montenegro and is suitable for those who want to register one-man companies in this country;
- Limited liability company (Društvo sa ogranicčenom odgovornošću), which does need a minimum share capital of EUR 1, and which must have a director and shareholder, who assumes the responsibility for the eventual debts of the company;
- Joint stock company (Akcionarsko društvo), for the establishment of which it is required minimum capital of EUR 25,000
- Partnership which can be general or limited and implies at least two founding members.
Sole proprietorship in Montenegro
The sole proprietorship is the simplest type of company in Montenegro and it is suitable for various activities which need to be completed a single person. The registration of a sole trader in Montenegro is quite simple, requiring an application form to be filed with the Trade Register.
There are no share capital requirements when opening a sole trader in Montenegro, and the person setting up this business form must use their own names for registration. Also, once established the sole trader must apply for a business license in accordance with the activities to be completed.
Just like any other type of company, the sole trader is required to register for taxation and obtain a VAT number. Foreign citizens seeking to set up sole traders in Montenegro must also apply for a residence permit.
Private limited liability company in Montenegro
The private limited liability company is the most common business form among local and foreign investors in Montenegro. The requirements related to the opening of this type of company are quite relaxed, starting with the share capital which is established at 1 euro and up to the shareholding structure which is just as simple: the shareholder can be a foreign citizen or company and can also hold the role of the company director.
The joint stock company in Montenegro
Compared to the private limited liability company, the joint stock company is subject to more stringent requirements given the fact that it can also be used for stock exchange trading purposes. The joint stock company can be set up as a private or public company with one shareholder and one director, however, it is also required to appoint an auditor.
The partnership in Montenegro
The partnership is not often employed by foreign investors coming to Montenegro, however, it is suitable for those interested in entering the local market in cooperation with a local partner.
There are two forms of partnerships in Montenegro, the general partnership and the limited partnership. Each business form requires at least two members who will share the profits but will also participate in the obligations of the company.
In the case of a general partnership, both partners will have the same rights and obligations. In the case of a limited partnership, the business will have a general and a limited partner. The general partner will have full liability over the business’ debts, while the general partner will be liable for the business’ obligations to the extent of their contribution.
Private company limited by shares
A private company limited by shares is often referred to as a “private limited company”. A private limited company has between 1 and 50 shareholders, who can be private individuals or corporations. As of 2018, approximately 65% of all companies in Montengero operate as private limited companies.
Montenegro Government Statistics
Why are most businesses structured as private limited companies?
1. Separate Legal Entity with Limited Liability
A private limited company has its own legal identity separate from its shareholders and directors, allowing it to enter into contracts, acquire assets, go into debt and sue and be sued in its own name.As a result, the liability of the company’s shareholders is limited to the amount used to purchase shares in the company. Their private assets cannot be used to pay off the private limited company’s debts or liabilities; such debts stop at the company.
2. Tax Benefits
In Montenegro , the effective corporate tax rate is 9% . In addition, there is capital gains tax.Once income is taxed at the corporate level, dividends are distributed to shareholders who pay income tax at 9%. All of these tax benefits are available to a private limited company.
3. Ease of Raising Capital to Expand Your Business:
You can raise capital by issuing additional shares to current shareholders or by bringing in new shareholders without having to change the structure of your business. This is not readily possible with some of the other corporate structures.
4. Ease of Transfer of Ownership and Perpetual Succession:
Ownership in the company can be transferred easily through the sale of shares. That means the business existence does not rely on the continued membership of any member. If a shareholder dies or resigns, the business can continue to thrive. This is not possible in the case of some of the other structures.
5. Credibility:
Investing the time and effort in setting up a company tells potential employees, customers, suppliers, partners and investors that you are running a serious and scalable business.
For more information on the procedure for registering a company, see How to Register a Montenegro Company.
Options for Foreign Companies
Most foreign companies establish a subsidiary company in Montenegro
A foreign company that wishes to establish an office in Montenegrocan establish one of the following entities:
A limited liability company known as a subsidiary company
A branch office
A representative office
Subsidiary company
Foreign companies can establish a local limited liability company in Montenegro, known as a subsidiary company. They can also set up a branch office or a representative office.
However, a subsidiary company is the most common business structure for establishing an entity by foreign companies.
The subsidiary acts as a separate legal entity from the parent entity thereby allowing the following benefits:
1. Since the subsidiary is a separate legal entity, therefore, the parent company is protected from the liabilities of the subsidiary.
2. A Foreign company can be the 100% shareholder in the subsidiary:
3. Subsidiaries can take advantages of the same tax incentives and exemptions available to Montenegro resident companies.
4. Such a structure imposes simpler compliance requirements such as the financial statements of the parent company are not required to be filed. This is not the case with some of the other options.
For more details, see our article How to Register a Montenegro Subsidiary.
Branch office
A branch office is an extension of the foreign parent company, not a separate legal entity, meaning its liabilities extend to the parent company.
There are no practical benefits of setting up a branch office over a subsidiary company. Consequently most foreign companies opt to establish a subsidiary company in Montenegro.
For more details, see our article How to Register a Montenegro Branch Office.
Representative office
A representative office is only a short-term arrangement with a limited purpose. It has no legal status and is designed only for conducting market research or engaging in promotional activities.
A representative office cannot engage in business, enter into contracts, move goods, offer services or open a line of credit.
Setting up a representative office may make sense in certain situations where a foreign company is not yet ready to establish a permanent office.
Note, however, that the application to set up a representative office is subject to review and approval by government authorities.
For more, see our article How to Register a Representative Office in Montenegro.
Sole Proprietorship
A sole proprietorship is the simplest but riskiest business entity allowed in Montenegro. A sole proprietorship is not considered a separate legal entity and comes with significant disadvantages for small to medium sized enterprises:
If a sole-proprietorship is sued or cannot pay its bills, the owner must pay out of his personal assets.
Only a single owner can set up a sole-proprietorship. New equity holders cannot join the structure as the business grows and scales.
Serious investors almost never invest in a sole-proprietorships.
Sole proprietors have a poor perception among customers, suppliers, bankers, and staff.
They do not have perpetual existence. The business lives and dies with the owner.
It is often difficult to sell a sole-proprietorship.
Most of the tax benefits available to corporations are not available to sole proprietorships. Also, your effective tax rate will be higher than that for a private limited company.
Which entity is right for you?
For foreign companies, a subsidiary company provides the best liability protection and tax benefits.
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