When starting a business or organisation in Estonia, the two most common legal forms are OÜ (Private Limited Company) and MTÜ (Non-profit Organisation). While both structures offer specific benefits, many entrepreneurs find that an OÜ provides greater flexibility and advantages in the long run. Here’s a breakdown of the key differences and why an OÜ may be the better option for you.

Purpose and Profit Distribution 
The primary distinction between an OÜ and an MTÜ lies in their purpose and how profits are managed:
OÜ: An OÜ is designed for profit-making activities. The shareholders of an OÜ can distribute profits among themselves in the form of dividends. It’s ideal for entrepreneurs who aim to generate income from their business ventures.
MTÜ: An MTÜ, on the other hand, exists to serve a non-commercial purpose. It cannot distribute profits to its members. Any profits generated must be reinvested into the organisation’s activities or mission. MTÜs are best suited for charities, sports clubs, or other non-profit initiatives.

Taxation
OÜ: Estonia is well-known for its 0% corporate tax on reinvested profits, meaning that profits are only taxed when they are distributed as dividends. This creates a tax-efficient environment for businesses looking to grow and reinvest their earnings.
MTÜ: Although MTÜs are typically exempt from corporate income tax, the lack of profit distribution can be a limitation for those looking to monetise their efforts. Additionally, MTÜs are still subject to VAT and payroll taxes if they have paid employees.

Flexibility and Control
OÜ: An OÜ can be established by a single individual, while an MTÜ requires at least two founders. Shareholders of an OÜ maintain full control over the business. They can decide how to manage the company’s assets and can exit by selling their shares. OÜs also allow for external investors, which can support growth and scalability.
MTÜ: While MTÜs offer some degree of control, they are subject to stricter rules regarding their management. All decisions must align with the organisation’s non-profit goals, and members cannot profit from the organisation’s activities.

Investment Opportunities
OÜ: Investors are more inclined to support OÜs because of the potential return on investment. Startups and small businesses often seek funding, and the OÜ structure facilitates this through shares and equity.

MTÜ: Since MTÜs are non-profit by nature, attracting investment can be more challenging. Donations and grants are typical sources of funding for MTÜs, but these can be more limited and less predictable compared to business investments.

Long-Term Sustainability
OÜ: If your goal is long-term sustainability, an OÜ provides the flexibility to grow, seek investment, and distribute profits, all of which make it easier to maintain and scale your business over time.
MTÜ: MTÜs are usually more suitable for short-term or specific-purpose organisations, where generating profit is not the goal. As a result, they may struggle to remain sustainable in the long run, especially if they rely heavily on donations or grants.

Why registering an OÜ is the better choice
While both OÜ and MTÜ have their places in Estonia’s legal framework, registering an OÜ is often the more practical option for most entrepreneurs. Here’s why:
Profitability: If you aim to create a growing, profitable business, the OÜ structure allows you to generate and distribute profits.
Investment and Growth: OÜs can easily attract investors and scale, thanks to the flexible share structure and profit potential.
Tax Benefits: The 0% tax on reinvested profits gives businesses the opportunity to grow without immediate tax liabilities.
Control: With an OÜ, you have full control over the company’s decisions, assets, and direction.

In conclusion, an OÜ provides a more versatile and growth-oriented structure for those looking to build a sustainable, profit-driven business. On the other hand, if your mission is purely non-profit, an MTÜ might still be a good fit. However, for the vast majority of entrepreneurs, especially in Estonia’s dynamic and startup-friendly environment, registering an OÜ is a smarter, future-proof choice.

1Office can assist you with the legal and tax compliance related to these options.