Sole Proprietor or an Ltd?

investment-novacon-the-payroll-and-accounting-company-bulgariaPerhaps any entrepreneur, when starting up a business, is probably asking himself how to do it – as a sole proprietor or via an Ltd?

I will not delve into legal analysis and comparisons, but will point a few basic tax points, assuming also that the owner of the Ltd is an individual. Let’s also assume that the individual, acting as an owner of an Ltd or as Sole Proprietor, does not pay social contributions on other grounds and does not receive other types of income.

Tax basis

The tax basis for estimation of due taxes for a sole proprietor (SP) is defined by the Corporate Income Tax Act at the same way as for an Ltd. The annual taxable basis of the SP are further reduced with the contributions under the Social Insurance Code and the Health Insurance Act that the self-insured person is required to pay for the tax year, as well as obligatory insurance contributions paid abroad and some other types of contribution that the Personal Income Tax Act (PITA) defines.

Conclusion: SP is the more practical form to make business, based on the first criterion.

Corporate tax and dividend tax

The sole proprietor is subject to taxation with an annual tax at 15% tax rate, while an Ltd is liable for taxation at 10% corporate tax rate. Respectively, SP does not pay additional tax on dividends, unlike the Ltd where 5% dividend tax is levied on all distributed profits. It should be noted that 15% tax is levied for each taxable year for the SP, but the Ltd owes only 10% corporate tax and the remaining 5% dividend tax can be delayed in time and depends solely on owner decision whether to distribute profits or not. The math also shows that cumulative tax for the Ltd compared to SP for the same tax basis is lower: 1000 tax basis, SP tax -> 150 (15%), Ltd corporate tax -> 100, Ltd net profit -> 900, Ltd dividend tax -> 45, Ltd cumulative tax -> 145 (14.5%).

Conclusion: the Ltd is the better form to make business, based on the second criterion.

Owner insurance and annual levelling

The comparison is done in terms of annual levelling of the insurance income (used for purposes of estimation of mandatory social contributions) for the SP or Ltd. In both cases the owner is obliged to perform annual levelling, but the SP income is included in the leveling, while the Ltd income is excluded during the annual leveling of the Ltd owner. In both cases, the individual is subject to social contributions as a self-insured person.

Conclusion: the Ltd is the better form to make business again, based on the third criterion.

Legal liability

the SP is actually the same individual with added capacity of a trader. In practice, the individual is liable without limitation for all liabilities of the SP (i.e. him/herself) with all his/her wealth. On the other hand, the Ltd and the individual owner are two separate entities, as the individual is responsible for the company liabilities up to the size of his/her share.

Conclusion: the LTD is definitely the more secure form of business ownership, based on the fourth criterion.

The general conclusion is that the Ltd is a legal form, which has more advantages and is the better form to conduct a business.

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