PFA vs SRL: Choosing the Right Business Structure in Romania

Stefan-Lucian Deleanu -

Understanding PFA and SRL

If you're considering setting up a business in Romania, you'll have to decide between two primary legal structures: a PFA or an SRL. Here's a detailed look at what each entails:

PFA (Authorized Natural Person)

A PFA is a straightforward way to engage in economic activity. It's perfect for those eager to start their own business swiftly and with minimal red tape. Keep the following key points in mind:

  • You cannot have associates, and a maximum of three employees are accepted.
  • The PFA allows a maximum of five CAEN codes.
  • The share capital required for the establishment of a PFA is not divided into shares, and it cannot be less than 1 leu.
  • Payment of net income tax is 10%.
  • CASS 10% (health) is required if the income of the PFA exceeds 12 minimum wages per economy.
  • CAS 25% (pension) is required if the income of the PFA exceeds 12 minimum wages per economy.
  • Accounting is much simpler compared to other forms of organization.

SRL (Limited Liability Company)

An SRL is the most common form of organization in Romania. While it's more complex and costly to establish than a PFA, the benefit is that your professional assets are distinct from your personal ones. Here are some key points to consider:

  • Payment of income tax related to the turnover is 1% if the company has one employee and 3% if there are no employees, if the annual turnover is less than or equal to 1,000,000 EUR/year.
  • The profit distributed to associates is taxed at 5% together with the distribution of dividends.
  • If the annual turnover exceeds 1,000,000 EUR/year, then the profit tax is 16%.
  • An accountant will be needed to keep records of income, expenses, and employees.
  • In the case of an SRL, there is no limit on the number of employees.
  • The share capital required for the establishment of an SRL is divided into equal shares, and it cannot be less than 1 leu.

When deciding between a PFA and an SRL, it's important to consider your business needs and goals. If you're looking for a quick and easy way to launch your business, a PFA might be the way to go. However, if you're planning to grow your business and attract potential investors, an SRL might be a better choice.

Taxes and Accounting for PFA and SRL

When it comes to taxes and accounting, there are some key differences between PFA and SRL that you should be aware of. Here are some important points to keep in mind:

  • Net income tax: PFA and SRL have different tax rates for net income. PFA pays a flat rate of 10%, while SRL pays a tax related to the turnover, which is 1% if the company has one employee and 3% if there are no employees, if the annual turnover is less than or equal to 1,000,000 EUR/year. If the annual turnover exceeds 1,000,000 EUR/year, then the profit tax is 16%.

  • CASS and CAS: Complex Adaptive Social Systems (CASS) and Complex Adaptive Systems ( PFA and SRL also have different requirements for health and pension contributions. For PFA, CASS (health contribution) is required if income exceeds 6 gross minimum wages, and CAS (pension contribution) is required if income exceeds 12 gross minimum salaries. For SRL, labor insurance contributions are required if the company has employees, and the amount is 2.25% of the salary.

  • Accounting: Accounting requirements also differ between PFA and SRL. PFA has a simpler accounting system compared to other forms of organization, and the owner can manage the business themselves through simple, internal batch accounting. On the other hand, SRL requires an accountant to keep records of income, expenses, and employees, which means additional costs of 350 - 500 lei per month.

Understanding these differences can help you make an informed decision about which form of organization is best for your business. Keep in mind that tax and accounting requirements may change over time, so it's important to stay up-to-date with the latest regulations and seek professional advice if needed.

Advantages and Disadvantages of PFA and SRL

Limitations on Associates and Employees for PFA

One of the main advantages of PFA is that it allows for a quick and easy setup, making it the preferred form of legal organization for those who want to launch their own business quickly and with fewer administrative steps. However, it comes with some limitations. For instance, you cannot have partners, and a maximum of three employees are accepted. This means that if you plan to expand your business and hire more employees, you will need to switch to a different form of organization, such as an SRL.

On the other hand, SRL allows for an unlimited number of associates and employees, making it a better option for those who plan to grow their business. However, setting up an SRL is more difficult and expensive than setting up a PFA. Additionally, SRL requires an accountant to keep records of income, expenses, and employees, which means additional costs of 350 - 500 lei per month.

In conclusion, if you are just starting your business and don't plan to expand it significantly, PFA might be the right choice for you. However, if you plan to grow your business and hire more employees, SRL might be a better option, despite the higher setup costs and accounting requirements.

Setup Costs and Procedures for PFA and SRL

When it comes to setting up a business in Romania, there are two main options: PFA and SRL. While both have their advantages and disadvantages, one of the most important factors to consider is the setup cost.

PFA Setup Costs and Procedures

Setting up a PFA is generally quicker and easier than setting up an SRL. In fact, if you take care of submitting the necessary documents yourself, it won't cost you anything. However, if you call for assistance, be prepared to pay around 300 - 500 lei for the establishment of a PFA.

The process of setting up a PFA involves the following steps:

  1. Choose your CAEN codes: A PFA allows a maximum of 5 CAEN codes, so you'll need to choose the ones that best fit your business.

  2. Register with the Trade Register: You'll need to submit your application to the Trade Register, along with your ID card and proof of payment of the registration fee.

  3. Register with the tax authorities: You'll need to register with the tax authorities and obtain a unique tax identification number (CUI).

  4. Open a bank account: You'll need to open a bank account in the name of your PFA.

SRL Setup Costs and Procedures

Setting up an SRL is more complicated and expensive than setting up a PFA, but it offers the advantage of separating your professional assets from your private ones. To set up an SRL, you'll need to pay around 120 lei for the establishment fee.

The process of setting up an SRL involves the following steps:

  1. Choose your CAEN codes: Unlike a PFA, there are no restrictions on the number of CAEN codes you can have.

  2. Draft the articles of association: You'll need to draft the articles of association, which will outline the purpose of the company, the share capital, and the rights and obligations of the shareholders.

  3. Register with the Trade Register: You'll need to submit your application to the Trade Register, along with the articles of association and proof of payment of the establishment fee.

  4. Register with the tax authorities: You'll need to register with the tax authorities and obtain a unique tax identification number (CUI).

  5. Open a bank account: You'll need to open a bank account in the name of your SRL.

  6. Hire an accountant: You'll need to hire an accountant to keep records of your income, expenses, and employees.

In conclusion, while the setup cost for a PFA is generally lower than that of an SRL, it's important to consider the advantages and disadvantages of each option before making a decision.

Liability and Asset Protection in PFA and SRL

One of the primary distinctions between a PFA and an SRL is the degree of liability and asset protection they afford their owners. As mentioned previously, in the case of a PFA, the owner is personally liable for any unpaid debts of the company. This implies that if the PFA goes bankrupt or is unable to fulfill its financial obligations, the owner's personal assets, such as their home or vehicle, may be seized to settle the outstanding debts.

On the other hand, in the case of an SRL, the company's assets are separate from the owner's personal assets. This means that if the SRL goes bankrupt or is unable to pay its debts, the owner's personal assets are protected and cannot be seized to cover the company's outstanding debts.

It's important to note that while SRLs offer more asset protection than PFAs, they also require more administrative work and are subject to more regulations. Therefore, it's important to carefully consider the advantages and disadvantages of each type of company before making a decision.

Impact of 2023 Tax Changes on PFA and SRL

Starting from January 1st, 2023, new tax changes will come into effect for PFAs and SRLs. These changes will affect the way these two types of companies are taxed and administered.

For PFAs, the new tax provisions will bring about significant changes. For instance, for annual incomes exceeding 65,000 lei, an SRL is a much more advantageous option compared to a PFA. This is because PFAs will be subject to higher taxes on their net income and will also have to pay CASS (health contribution) and CAS (pension contribution) for incomes above 12 minimum gross salaries.

On the other hand, SRLs will be subject to a 1% income tax related to the turnover if the company has at least one employee and a 16% profit tax if the annual turnover exceeds 1,000,000 EUR/year. Additionally, SRLs will have to pay a dividend tax of 8% for the profit distributed to associates in the form of dividends, either quarterly or annually.

It's important to note that these tax changes will have a significant impact on how PFAs and SRLs are managed and operated. Business owners will need to carefully consider their options and choose the type of company that best suits their needs and goals.

In conclusion, the upcoming tax changes for PFAs and SRLs in 2023 will have a significant impact on the way these two types of companies are taxed and administered. Business owners should carefully consider their options and choose the type of company that best suits their needs and goals.

Business Growth and Development Plans

When deciding between a PFA and an SRL, it's crucial to keep your business expansion and evolution in mind. If growth is on the horizon, an SRL offers greater flexibility when it comes to bringing on additional associates and employees. However, if you intend to maintain a small and straightforward operation, a PFA might be the more convenient path.

It's also important to consider the complexity of your business activities. If you're planning on engaging in complex activities, an SRL might be a better option as it offers more flexibility in terms of conducting diverse business operations. However, if you intend to work as a freelancer in a specific field for one or more clients without aspiring to grow a large enterprise in that domain, a PFA could be more suitable.

Another factor to consider is your access to loans and potential investors. If you're planning to attract potential investors or access loans, an SRL might be a better option as it's perceived as a more "serious" company. However, if you just want to test a business idea or have a small and uncomplicated business, a PFA might be a better choice.

Ultimately, the decision between PFA and SRL depends on your specific business needs and goals. It's important to carefully consider all the factors and consult with experts in law, accounting, and economics before making a decision.