Summary
The difference between PFA and LLC: Which option is right for you?
When you decide to start a business, one of the first choices you have to make is its legal form. The most common options for entrepreneurs in Romania are PFA (Persoană Fizică Autorizată) and SRL (Societate cu Răspundere Limitada). But which of PFA and SRL is right for you? This article gives you a detailed comparison to help you make an informed decision.
What is a PFA?
A PFA (Persoană Fizică Autorizată) is a form of organization dedicated to self-employed people. It is the simplest legal form and is aimed at people who want to be self-employed in a particular field of activity, such as services, commerce or liberal professions.
Benefits of a PFA:
- Simplified formalities: the set-up and administration procedures are simpler and faster.
- Reduced costs: set-up and administration costs are lower than an LLC.
- Tax flexibility: taxation is based on net income (after deduction of eligible expenses).
- Direct access to income: There is no split between company profits and dividends; all income accrues to the owner.
Disadvantages of a PFA:
- Unlimited personal liability: The holder is directly liable with all personal assets for financial obligations.
- Limiting the number of employees: A PFA can have a limited number of employees.
- Income cap: Revenues exceeding the annual ceiling of €100,000 require a change to another legal regime (e.g. LLC).
What is an SRL (LLC)?
An SRL (Limited Liability Company) is a separate legal entity with legal personality, which allows any economic activity authorized by the CAEN code.
Advantages of an LLC:
- Limited liability: Partners are liable only up to the limit of the share capital and not with personal assets.
- Expanded development possibilities: It can have more partners and attract investment.
- Easier access to finance: banks and other financial institutions prefer working with LLCs.
- Operational flexibility: An LLC can carry out a wider range of economic activities.
Disadvantages of an LLC:
- More complex formalities: the process of setting up and running a business is more complicated and time-consuming.
- Higher costs: Administrative costs are higher than those of a PFA.
- Strict profit distribution rules: Dividends can only be distributed out of the approved accounting profit.
Main differences between PFA and LLC
| PFA | LLC | |
| Legal liability | Unlimited (including personal belongings) | Limited to share capital |
| Number of employees | Maximum 3 | Unlimited |
| Minimum share capital | Not neccesary | Minimum 200 lei |
| Formalities when setting up | Simple | Complexe |
| Income/profit tax | 10% of net income | 1% or 3% (micro-enterprises) or 16% (profit) |
| Costs | Lower | Higher |
How to choose the right legal form?
The choice between PFA and LLC depends on several factors, such as:
- Type of activity:
o If you carry out a self-employed or seasonal activity, PFA may be the ideal solution.
o For activities that are complex or involve high financial risk, an LLC is a safer choice. - Volume of income:
o PFA is suitable for lower incomes, while the LLC is more advantageous for businesses with higher incomes. - Need for employees:
o If you plan to hire more than 3 people, the LLC is mandatory. - Financial risk:
o For high-risk activities, the limited liability of an LLC provides additional protection.
Conclusion
Both PFA and LLC have advantages and disadvantages, and the right choice depends on your business needs and objectives. It’s important to carefully consider the type of business, the volume of expected revenue and the level of risk involved.
If you need help to make the right decision or to set up a business, our team of accountants is here to help!
See other blog posts or a mini guide provided by the tax authorities.