What is the difference between PFA and SRL in Romania?

1. Legal Structure

PFA (Persoana Fizica Autorizata): A PFA is essentially an individual who operates as a sole trader, authorized to perform economic activities independently. It is not considered a separate legal entity from the individual, meaning that the entrepreneur is personally responsible for all liabilities and obligations that arise from the business activity.

SRL (Societate cu Raspundere Limitata): An SRL, on the other hand, is a legal entity distinct from its owners. It can have one or more shareholders, and its liability is limited to the capital invested in the company. This means that the personal assets of the shareholders are protected from business liabilities, making it a popular choice for those seeking to minimize personal risk.

2. Taxation

One of the most significant factors when deciding between a PFA and an SRL is the taxation system.

Taxation for PFA: For a PFA, taxation is based on personal income tax, which is currently set at 10% in Romania. In addition, PFA owners are required to contribute to the social insurance system (CAS) and the health insurance system (CASS) if their net income exceeds a certain threshold. These contributions are calculated at 25% (CAS) and 10% (CASS) of the declared income.

Moreover, there are two types of PFAs in Romania: one taxed based on real income (PFA cu norma de venit) and another taxed based on income brackets (PFA cu norma fixa). The latter involves simplified accounting, where the owner pays a fixed tax irrespective of the actual revenue generated, which can be advantageous for businesses with lower income.

Taxation for SRL: An SRL is subject to corporate tax. Small companies with an annual turnover below €1 million are taxed at a flat rate of 1% of the revenue if they have at least one employee, or 3% if they have no employees. For companies that surpass the €1 million turnover threshold, the corporate tax rate is 16% of the company’s profit. In addition, dividends distributed to shareholders are subject to a 5% tax.

SRLs also have an advantage when it comes to VAT (value-added tax). While PFAs can apply for VAT registration, SRLs are more commonly required to register for VAT if their annual turnover exceeds RON 300,000 (approximately €61,000). This is crucial for businesses operating with clients or suppliers in the EU or other VAT jurisdictions.

3. Administrative Obligations

Administrative Obligations for PFA: As a PFA, administrative responsibilities are relatively simple. PFAs are required to keep single-entry accounting records, which track revenues and expenses. This means that the bookkeeping process is less complicated compared to an SRL, and there is no need to hire an accountant, although many PFAs still choose to do so for convenience.

PFAs must file an annual tax return to the Romanian tax authorities, and any relevant VAT or other contributions must be submitted accordingly. The process is streamlined compared to that of an SRL, which makes PFAs an attractive option for freelancers and small-scale entrepreneurs.

Administrative Obligations for SRL: Running an SRL involves more complex accounting requirements. SRLs must maintain double-entry accounting and are required to submit quarterly financial statements to the Romanian tax authorities. This level of reporting ensures transparency but also demands greater expertise in financial management.

Most SRLs hire an accountant or accounting firm to handle the bookkeeping, VAT submissions, payroll, and other administrative tasks. This adds to the operational costs, but it also ensures that all legal obligations are met in a timely manner.

4. Liability and Risk

Liability for PFA: As a PFA is not considered a separate legal entity from its owner, the individual is personally liable for all the debts and obligations of the business. This means that personal assets, such as homes or vehicles, could be at risk if the PFA cannot meet its financial obligations. For this reason, PFAs are often suitable for businesses with low risk or limited financial exposure.

Liability for SRL: An SRL offers a significant advantage in terms of liability protection. Since an SRL is a separate legal entity, shareholders are only liable up to the amount of their contribution to the company’s capital. In other words, the personal assets of the shareholders are protected, even if the business faces financial difficulties. This makes an SRL a more attractive option for entrepreneurs seeking to limit their personal risk, especially in industries with higher exposure to legal claims or financial volatility.

5. Flexibility and Growth Potential

Flexibility and Growth for PFA: PFAs are relatively easy to set up, and the low administrative burden makes them an ideal choice for freelancers, consultants, or those testing the waters of entrepreneurship. However, PFAs are limited when it comes to scaling the business. For example, a PFA can employ a maximum of three employees, and raising capital for expansion is challenging, as PFAs cannot issue shares or attract investors.

Flexibility and Growth for SRL: An SRL is far more versatile when it comes to growth potential. With an SRL, you can hire as many employees as needed and expand your operations without the same restrictions that apply to a PFA. Additionally, SRLs can attract investors by issuing shares, making it easier to raise the capital required for larger projects or expansion. As a result, SRLs are often the preferred choice for businesses with long-term growth strategies.