Opening a Craft Business: Common Mistakes and Things to Watch Out For

In recent years, Croatia has seen a strong increase in the number of craft businesses, while at the same time, the opening of commercial companies, especially d.o.o. and j.d.o.o., is stagnating or declining. According to data from the Croatian Chamber of Trades and Crafts (HOK), in 2024, there were 123,485 active crafts registered, which is an increase of almost 10 percent compared to the previous year, while, according to data from Fina, the number of newly established d.o.o. and j.d.o.o. in the same period fell by 4.8 percent.

Judging by this data, it is clear that craftsmanship is becoming an increasingly attractive form of business, but this also brings a number of challenges that new craftsmen face.

While the flexibility of working through a craft is undoubtedly appealing, many entrepreneurs enter this world without adequate preparation. A lack of planning, financial literacy, and legal understanding often leads craftsmen to problems that can ultimately jeopardize their business. We analyzed the key mistakes made by Croatian craftsmen and how to avoid them.

Insufficient understanding of tax and financial obligations

One of the most common traps that new craftsmen fall into is underestimating the complexity of the tax system. Although a flat-rate craft is initially simpler in administrative terms, it comes with limitations, so it is very important to pay attention to this before difficulties arise in understanding their obligations. An example of this is the fact that many do not know that if they exceed the annual income threshold of 60,000 euros, they automatically enter the VAT system. Entering the VAT system means greater accounting obligations, and unpreparedness for this can result in delays in filing returns and paying taxes, which incurs penalties and interest since, as craftsmen, you are legally responsible with your personal assets. Of course, your accounting will warn you about this, but the fact is that many keep their books themselves, so there is no one to alert them.

Advantages and disadvantages of small income earners

A significant advantage for those who do not enter the VAT system is that they do not have to calculate VAT on taxable services, which is particularly favorable when providing services to individuals or legal entities that are not in the VAT system. Namely, individuals, associations, institutions, most crafts, and some small businesses do not have the option to deduct VAT. As a result, deliveries with VAT are more expensive for the end consumer, which means a lower margin and profit for the service provider.

The key disadvantage is that the entrepreneur cannot recognize VAT on received invoices for the supply of goods and services for the purpose of conducting economic activity. Thus, the purchased materials, tools, and goods necessary for business will be more expensive by the amount of VAT, i.e., 25 percent.

Should you immediately enter the VAT system?

For entrepreneurs who supply products and services to other entrepreneurs in the VAT system, it is smartest to register in the VAT system immediately. This way, you can immediately recognize VAT on input costs, as their price to the customer is the same with and without VAT, since they can deduct VAT on input costs anyway.

On the other hand, if you supply most of your sales to individuals or legal entities outside the VAT system (hairdressers, beauty salons, dog salons…), it is better for you not to enter the VAT system immediately because your customers cannot deduct it. Of course, there are exceptions (acquisition of high-value fixed assets, working with foreign clients, etc.), but in that case, it is best to consult with an accountant.

Neglecting contractual obligations with clients and suppliers

One of the common problems in craft business is operating without clear contractual obligations. Many craftsmen agree on jobs ‘on trust’, and then are surprised when misunderstandings or non-payment of invoices occur, which they may have never even issued because they had various agreements with the client. For example, craftsman X agreed on a large construction project without a signed contract. When the investor stopped paying, craftsman X had no legal basis to collect his claims. Such scenarios are unfortunately common, and many craftsmen face collection problems due to the lack of clear contracts that could have been avoided with proper contractual business practices.

Not investing in marketing and digital presence

Despite the increasing reliance of consumers on the internet and social media, most craftsmen still do not use digital marketing. Although almost all companies (not just crafts) in Croatia use technology, the latest data from DZS shows that just over 70 percent of them have a functional website, and even fewer invest in paid ads on social media. However, although there is no conducted research that we could find, it seems that more and more craftsmen are managing to achieve better sales of their services or products precisely thanks to targeted ads on social media such as Facebook, Instagram, and recently TikTok.

Of course, none of what we have mentioned guarantees success. Although more and more people are motivated to start their own business, many enter this world without enough knowledge and preparation because entrepreneurship sounds attractive. Craftsmen who do not understand their tax and accounting obligations, do not invest in marketing, and do not secure their business relationships with contracts often face financial problems and business failure. Therefore, it is especially important to have a product or service that is truly needed in the market, and by using modern business tools, engaging quality accountants and lawyers, and investing in digital marketing, you significantly increase your chances of long-term success in the market.