Sole Proprietorship or Limited Company? 6 Key Criteria

Short answer: For businesses with relatively low profit, a single owner and a need to start quickly, a sole proprietorship is usually more practical. As profit grows, when partners are involved or when working with corporate clients, a limited company often becomes more advantageous.

1. Taxation

A sole proprietor’s profit is taxed under the progressive income tax scale; as profit grows, it moves into higher brackets. A limited company is subject to a flat corporate tax rate, and withholding applies when profit is distributed to partners. Which structure is better depends on expected profit and the distribution plan.

2. Liability

In a sole proprietorship, the owner is liable for business debts with all personal assets. In a limited company, partners’ liability is, as a rule, limited to the capital they committed; however, special rules apply to managers’ and partners’ liability for public debts.

3. Formation and running costs

A sole proprietorship is set up with fewer documents and at a lower cost. In a limited company, the articles of association, trade registry registration, notary and capital add to the cost; the monthly accounting fee is usually higher as well because of double-entry bookkeeping.

4. Type of books

Sole proprietorships below certain thresholds can keep single-entry books. Limited companies always keep double-entry books.

5. Corporate image and access to finance

Large firms, public tenders and investors often prefer a company structure. In bank loans, the company’s financial statements are also decisive.

6. Partnerships and transfers

If you plan to take on partners, transfer shares or one day sell the business, a limited company offers a better basis for these transactions.

Decision table

At Ankara Muhasebeci we compare the tax burden of both options using your expected profit in the first consultation, so your decision is based on figures. For details, see our company formation service.