Sole Proprietorship to LLC in Serbia

Moving from a sole proprietorship to a limited liability company involves much more than drafting a memorandum of association and filing an application with the Serbian Business Registers Agency (APR). Before taking those steps, the owner needs answers to more consequential questions: who will collect invoices issued before the transition, what happens to leases, loans and employees, how business assets will be transferred, and whether the new company will be able to operate without interruption from the moment it is registered.

Preparation should therefore begin with an inventory of everything the existing business must retain, rather than with the cost of incorporating an LLC.

More than a change of name

What is commonly described as “converting a sole proprietorship into an LLC” is regulated by Article 92 of the Companies Act as the continuation of business activity in the form of a company. On the basis of the sole proprietor’s decision, deregistration of the sole proprietor and registration of the company’s incorporation take place simultaneously. The company assumes the rights and obligations arising from the sole proprietor’s business. The LLC is a new legal entity, rather than the same sole proprietor operating under a different designation in the business name. ^[1]

This distinction matters in practice. Ordinary incorporation of an LLC, accompanied by a separate closure of the sole proprietorship, should not be equated with the procedure under Article 92. If the intention is to continue the business with the legal succession prescribed by that provision, the procedure must be prepared and carried out accordingly. Two independent registration events cannot simply be treated afterwards as a single transaction.

Existing debts do not disappear

One of the most serious misconceptions is that incorporating an LLC will protect the sole proprietor’s personal assets against liabilities that have already arisen.

The company’s assumption of those liabilities does not release the former sole proprietor from personal liability for obligations incurred before deregistration. The Supreme Court of Cassation expressly confirmed this in judgment Rev 2493/2020 of 21 January 2021. The Court rejected the view that the individual ceased to be liable because the company, as legal successor, had assumed the earlier obligations. ^[2]

Before a decision is made, the review should cover more than debts recorded in the accounts. It should also include goods not yet delivered against advance payments, customer claims, disputed receivables, warranties and ongoing proceedings. Personal guarantees and other security provided by the sole proprietor require particular attention.

The transition should be planned as a way to organise future business, rather than a means of leaving past liabilities behind a new business name.

Coordinating deadlines can be the hardest part

For continuation in the form of a company, APR requires linked applications for deregistration of the sole proprietor and incorporation of the company, together with the decision to continue the business. The prescribed certificates from the Tax Administration and the local tax authority must also be submitted. At the time of filing, they must be no more than five days old. The applicant must obtain these certificates; the registrar does not obtain them ex officio. A sole proprietor registered for VAT must first complete deregistration from the relevant VAT register. ^[3]

The practical approach is to obtain the certificates only once the remaining documents are ready and the sequence of steps has been agreed with the accountant. Otherwise, one certificate may become too old while another is still being obtained or a defect in the incorporation documents is being corrected.

A further obstacle arises where APR has been notified of a tax inspection or the temporary withdrawal of the tax identification number. In the circumstances prescribed by law, deregistration cannot proceed until APR receives the appropriate notification from the Tax Administration. It is therefore unwise to promise a completion date before checking these matters.

There is also a procedural detail that is easily overlooked. APR provides an exception to the general requirement for electronic incorporation where a company is being incorporated through the continuation of a sole proprietor’s business. Instructions for an ordinary LLC incorporation should not be applied mechanically to this procedure. ^[4]

Contracts: preserve the relationship

The statutory assumption of rights and obligations does not mean that every contract must be terminated and signed again. Nor should the owner assume that all business partners will identify and record the change correctly without being informed.

Before registration, the principal contracts should be reviewed, particularly leases, loans, leasing arrangements, long-term supply agreements and contracts with major customers. For each contract, establish what requires notification, what calls for supporting documents, and whether any clause requires consent or regulates the consequences of the change.

Where an addendum is needed, its purpose should be to record the succession and continuation of the relationship accurately. There is no reason to agree to terminate the old contract, declare all obligations discharged or alter accrued rights unless that is actually intended and justified.

Consider a business premises lease under which the sole proprietor has paid a deposit and funded refurbishment. Simply substituting the tenant’s name may leave important questions unanswered. The documentation should state to whom the deposit will be repaid, whether the earlier payment remains recognised, and what happens to the agreed rights relating to those improvements.

A single notice to business partners, accompanied by the registration decision and clear instructions for future invoices and payments, can make the transition considerably easier.

Registration does not settle the tax treatment

Article 6 of the VAT Act provides that, subject to the prescribed conditions, the transfer of all or part of a business’s assets is not treated as a supply of goods or services. Those conditions include the recipient’s appropriate VAT status and continuation of the same activity. The VAT Rulebook expressly covers the transfer of all assets when a sole proprietor continues operating in the form of a company. This is not a general exemption from every tax, and citing Article 92 of the Companies Act alone is insufficient. ^[5]

A less obvious risk lies in the provision allowing a contract or decision to stipulate that VAT will be charged even where the conditions for the treatment described above would otherwise be met. The tax clause in the decision should therefore never be copied uncritically from an old template. The law also regulates the consequences where the conditions cease to be satisfied within three years of the transfer, with particular rules for equipment, buildings and investment in buildings.

Advance payments received and made, stock, unpaid invoices and services spanning the registration date all need separate consideration. For each uncertain situation, the parties should establish in advance who will issue the document, which supply it concerns and how it will be recorded.

This is a stage at which the lawyer and accountant need to work together. A decision that is acceptable for registration may still lack the detail needed for correct tax and accounting implementation.

Assets and bank accounts: establish what is being transferred

Before filing, a detailed inventory of business assets, receivables and liabilities should be prepared, together with the documents supporting them. A total balance-sheet value is insufficient. The owner needs to know which equipment exists, where it is located, whether it is encumbered, and whether the sole proprietor owns it or uses it under another legal arrangement.

Real estate requires particular care. Transferring ownership cannot be reduced to an accounting entry. The legal basis, the required form of the instrument and the conditions for registration must be checked. APR expressly points out, for example, that the memorandum of association must be notarised where it serves as the basis for transferring title to real estate. ^[4]

A sole proprietor who keeps, or is required to keep, double-entry accounts must also plan for an extraordinary financial report on deregistration. The prescribed filing deadline is 60 days from the date as at which the report is prepared. ^[6]

The bank should be consulted in advance about the documents and steps needed for the company to receive and make payments. The same plan should cover online banking, cards, POS terminals and access to the relevant invoicing and fiscalisation systems. Before new payment instructions are circulated, the account details should be checked and the account confirmed as operational.

Employees should retain their rights

The Labour Act regulates the transfer of existing employment contracts and the applicable general act on a change of employer, as well as notification obligations. A transition to an LLC should therefore not automatically be implemented through mutual termination agreements followed by the re-employment of every worker. That approach can unnecessarily put continuity of employment and accrued rights in question. ^[7]

Before the change, the documentation relating to salaries, unused annual leave, other absences and employment rights should be reconciled, together with the necessary social insurance registrations. Employees on sick leave or maternity leave require particular care.

Where employees are foreign nationals, the effect of the change of employer on their residence and work status must be checked separately. Continuity of employment and compliance with the conditions for employing a foreign national are distinct issues; the relevant permit and procedure must be examined. ^[8]

Licences, subsidies and trading history need individual review

For activities subject to special conditions, registration of the company alone may be insufficient. The Companies Act allows sector-specific legislation to make an activity conditional on a licence, approval or other act of the competent authority.

For each material licence, establish whether updating the registered details is sufficient, whether succession is recognised, or whether a new approval is required. Where the position is unclear, seeking a written response from the competent authority before registration is a sensible precaution.

The same applies to subsidies and other contractual benefits. Check whether the change requires the funder’s consent and how compliance with existing commitments must be demonstrated.

The business’s trading history should also be documented. If the owner plans to apply for a loan or take part in a procedure requiring prior experience, establish in advance how the bank or other decision-maker will assess the results of the previous business. Financial statements, references and evidence of succession should be retained in one organised file.

Registration brings new organisational duties

Before incorporation, decide who will act as director, the legal basis on which that person will work, and the grounds on which the founder will receive money from the company. The costs of salary or remuneration, insurance, accounting and planned profit distributions should be calculated in advance. The decision should not rest on a comparison of a single tax rate.

Beneficial ownership registration must also be addressed. For newly incorporated entities subject to the requirement, APR specifies a deadline of 30 days from registration and requires the supporting documents used to identify the beneficial owner to be uploaded at the same time. Having a single founder does not, by itself, remove this obligation. A lawyer or accountant may prepare the filing, but, outside the special option available during electronic incorporation, it must be signed by the registered legal representative. The necessary electronic access should therefore be arranged in good time. ^[9]

Where the procedure could be improved

In my view, the main opportunity for improvement lies in connecting the registration procedure more effectively with tax, employment and sector-specific procedures.

First, the necessary tax information could be obtained through official exchanges between the authorities. This would reduce the applicant’s need to collect documents with a very short period of usability and coordinate their issue dates.

Second, clearer sector-specific rules on continuity of licences would be useful. Where the premises, equipment, qualified staff and other material conditions remain the same, a simplified procedure recognising continuity should be considered, while preserving the necessary supervision.

Third, consistent operational guidance should be developed for this particular procedure. It could cover the order of tax and registration steps, evidence of succession, treatment of advance payments and documents required by other institutions. That would make the process less dependent on later interpretations and individual requests.

These are proposals for improvement, rather than a description of an existing unified procedure. Their purpose would be to make the continuation of a compliant business simpler and more predictable while maintaining protection for creditors, employees and public revenue.

Conclusion

A successful transition from a sole proprietorship to an LLC should be measured by whether contracts have been preserved, liabilities dealt with correctly, employees’ rights protected and uninterrupted operations secured.

The best preparation is a single plan identifying, for every step, the responsible person, the documents needed and the time for completion. With that plan in place, registration marks the end of the preparation, rather than the start of discovering problems.

From Sole Proprietorship to an LLC in Serbia: Legal Continuity and Practical Risks