How to Set Up a Limited Company in Estonia

What is the Scope of a Limited Company in Estonia?

A private limited company is a type of commercial business that is exclusively privately owned. This means it is not open to the public and is not traded on stock exchanges like public companies. Instead, it is owned by specific shareholders who benefit from the profits it generates.

Private limited companies exist all over the world with similar regulatory forms. In the United States, they are called Limited Liability Companies (LLC), or in the United Kingdom, private companies limited by shares (Ltd). You may have seen the name GmbH in Germany and Austria, or sociedad de responsabilidad limitada (SL) in the Spanish-speaking world, but there are many more. They can be simple one-person companies or large corporations, provided they remain privately owned and do not sell shares on the markets.

Private limited companies are identified in Estonian as "osaühing" or "OÜ," so their business names include these two letters to indicate their status.

A private limited company is a separate legal entity from its owners and, in some cases, acts as a separate legal person. This means the company can enter into contracts and agreements in its own right, such as providing products and services or applying for financing. This provides protection to the owners, who are not personally liable for the OÜ's obligations (though they still, of course, have to act within the law.)

A private limited company in Estonia must have at least one shareholder and can have up to 1,000. Private limited companies in Estonia are also legally required to have a management board responsible for managing the daily operations of the company. The management board can have one or more members, and they are appointed by the shareholders. Again, in a one-person business, there is usually one shareholder and one management board member, who is often the same person (and who also does all the other jobs in the company), but ultimately, they own 100% of the value of the company and all the profits it produces.

What are the benefits of setting up a limited company in Estonia?

The concept of limited liability is one of the main benefits of creating a private limited company.

This acknowledges that the enterprise involves risk and, at the same time, adds value to the wider economy. It is fair that the individual does not have to bear all this risk personally.

So the business enters into credit arrangements and delivery contracts instead of the owner, whose personal liability is limited by their paid-up shareholding (or at least €2500 if the capital is below this amount) — because since February 2023, it is possible to open a Limited Company in Estonia with a minimum share contribution of 1 cent.

Not having to risk your home to get a bank loan is a strong advantage in itself for setting up a limited company, instead of just trading as a self-employed person. But there are many other advantages to doing business this way in Estonia and around the world.

Get Information on Becoming an E-Resident and Opening a Company in Estonia

Business-to-business contracting and invoicing in Estonia

When you run a business, it can make things easier when it comes to entering into certain types of financial arrangements. This is not just the liability aspect, but also the way different types of legal entities make agreements with each other.

It can be difficult for some potential clients to hire you and pay you if you do not have a legal entity because they too face their own regulatory risks. Making a business-to-business contract provides some protection and can help them choose you as a preferred supplier.

On a more positive note, there are cash flow sources, from EU grants to bank loans, that are easier to obtain (and may require) first achieving limited company status.

Professionalizing your service and approach in Estonia

The transition from freelancing to solo entrepreneurship is often accompanied by an upgrade in the perception of value.

With an Estonian OÜ, it's no problem to do business in multiple fields of activity; you don't need to open different businesses. Thus, you can think about additional revenue streams and ways to increase your value to your clients and your business.

Grow your business by reinvesting profits in Estonia

In many countries, as soon as your business starts to earn something, you pay tax, even before you have paid yourself a single euro. This is the biggest obstacle to innovative corporate thinking.

That's why in Estonia, you are NOT TAXED on the income you keep in your private limited company; so you can always use your profit to invest in training, equipment, promotions, or whatever you need to grow bigger and better. Of course, you will be taxed when you pay dividends.

Managing your business and personal assets separately in Estonia

When you run a private limited company, you will need separate bank accounts for this purpose (any EEA-based account is suitable, including those offered by EU-licensed fintechs, and World Company Setup can help you decide which is most suitable for your needs.)

This makes it easier to think about and conduct 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 can vary a lot throughout the year, in the typical freelancer "feast or famine" cycle. However, you can decide to pay yourself a more or less fixed salary depending on your cost of living, using your business account to smooth out this income over time.