Whether you are a small firm proprietor or a big enterprise, understanding the different types of legal entity in Hungary is crucial to your success. Hungary is a land of opportunity, with a booming economy and a profitable business environment. As a result, entrepreneurs and investors from around the world are flocking to the country to start new businesses or expand existing ones.
According to the World Bank’s Doing Business 2020 report, Hungary ranks 52nd out of 190 countries in terms of ease of doing business, indicating that the country has a favorable business climate. You can register a company in Hungary in a variety of ways, and being aware of the benefits and drawbacks of the numerous business structures can help you choose the structure that is ideal for your purposes.
There are four distinct kinds of business entities in Hungary: sole proprietorships, partnerships, limited liability companies (LLCs), and joint-stock companies (JSCs). Each entity has its unique pros & cons, making it crucial to comprehend the dissimilarities between them.
In this article, we will explore each type of legal entity in Hungary in greater detail, helping you to make an informed decision on the best structure for your business needs.
Multiple Types of Legal Entity in Hungary
There are numerous types of company in Hungary that corporations can select from, relying on their requirements and goals.
Here are some of the most common business entities in Hungary, along with a brief description of each:
1. Sole Proprietorship
Sole proprietorships are the most straightforward type of legal entity, suitable for individuals looking to start a small business. In a sole proprietorship, the owner has complete control and decision-making authority over the business.
The registration process is quick and easy, and there are no lowest funds mandated. Also, the tax system for a sole proprietorship is based on personal income tax, not corporate income tax. However, the owner has unlimited personal liability for business debts and obligations, which means that personal assets could be used to pay off business debts.
Pros:
- Easy and inexpensive to set up
- Comprehensive power and decision-making dominance over the firm
- Minimal paperwork and accounting requirements
- No corporate income tax, only personal income tax
Cons:
- Unlimited individual liability for business losses and duties
- Difficult to obtain financing or attract investors
- Limited capacity for growth and expansion
2. Partnership
Partnerships are suitable for businesses with multiple owners, offering a more complex ownership structure. In a partnership, each partner has unlimited liability for the business’s debts, making it essential to choose your partners carefully.
In Hungary, there are two types of partnerships: general partnerships (KKT) and limited partnerships (Bt.). In a general partnership, all members have complete individual liability for the partnership’s debts and obligations, while in a limited partnership, the general partner has a complete individual liability, and limited partners have limited liability.
Partnerships are fairly straightforward and affordable to set up, and there are no minimum capital necessities. However, partnerships have limited capacity for growth and expansion, and it can be difficult to obtain financing or attract investors.
Pros:
- Relatively straightforward and affordable to establish
- More resources and skills available than in a sole proprietorship
- Flexible management structure
- Only partners are subject to income tax
Cons:
- Unlimited personal liability for general partners
- Difficult to attract investors or secure financing
- Lack of continuity if one partner withdraws or dies
Read More: Benefits of setting up a business in Hungary
3. Limited Liability Company (LLC)
LLCs are the most famous form of legal entity in Hungary. They provide limited liability protection to owners, making them an appealing alternative for short to med-sized companies. LLCs also have a flexible management structure and are relatively easy to set up.
An LLC’s registration fees are higher than a sole proprietorship or partnership, but it is still relatively easy and inexpensive to set up. LLCs have a flexible management structure and can issue different types of shares, although the issuance of shares is more limited than for a joint-stock company.
LLCs have more complex accounting and tax obligations than sole proprietorships or partnerships but are less complex than joint-stock companies.
Pros:
- Limited personal liability for members
- Easy to form and operate
- Flexible management structure
- Ability to attract investors and raise capital
Cons:
- Higher registration fees than sole proprietorships or partnerships
- More complex accounting and tax obligations
- Limited ability to issue different types of shares
4. Joint-Stock Company (JSC)
A joint-stock company is a type of corporation where ownership is represented by shares of stock. JSCs have a board of directors and shareholders who own the company, as it is suitable for large businesses that require significant investment.
JSCs have limited personal liability for shareholders, which means that personal assets are not at risk if the company incurs debts or obligations. JSCs are more expensive and time-consuming to set up than other entities, and they have complex accounting and tax requirements.
However, JSCs can raise capital through the issuance of shares and can issue different types of shares, which makes them attractive to investors.
Pros:
- Limited personal liability for stakeholders
- Capability to boost funds through the distribution of stakes
- Ability to issue different types of shares
- Greater ability to attract investors
Cons:
- More costly & time-taking to establish than other entities
- Complex accounting and tax requirements
- Shareholders may have limited control over the company’s operations
Conclusion
Hungary, located in Central Europe, has experienced significant economic growth in recent years, making it an attractive destination for businesses seeking to expand their operations in Europe. As a result, entrepreneurs and investors need to understand the different types of legal entities available in Hungary to determine which structure best fits their business goals.
Whether you are an individual looking to start a small business, or a large corporation seeking to expand your operations, understanding the differences between sole proprietorships, partnerships, LLCs, and JSCs is essential.
FAQ’s
The most popular type of legal entity in Hungary is the limited liability company (LLC), which provides limited liability protection to owners and a flexible management structure.
Choosing the right type of legal entity in Hungary depends on various factors, including the size and nature of your business, your risk tolerance, and your long-term goals.
The registration requirements for forming business entities in Hungary vary depending on the type of entity. Generally, you will need to register with the Hungarian Company Court, obtain a tax ID number, and open a business bank account.
