A limited liability company, and sole proprietorship – which is more advantageous?
At the present time, sole proprietorship and limited liability company are the most popular legal forms for businesses. Most beginner entrepreneurs decide, however, to open the first form, living in the conviction that running a limited company is way too difficult. In this article we will try to bring you closer to all the differences and similarities of both forms, thanks to which we hope to dispel your doubts and help you in choosing the business form that best meets your needs.
Already at the first step, i.e. starting your own business, you can see significant differences. Registration of a sole proprietorship is not complicated, and additionally it does not cost us anything. The only thing we have to do is submit the CEIDG-1 application form and relevant attachments at the City Hall, or simply use the option of submitting the application electronically. In the case of online registration, we will be required to appear at the office no later than 7 days from the date of filing the application.
It is a bit harder to register a limited liability company. First, to make an entry in the National Court Register, articles of association should be drawn up in the form of a notarial deed, and the fee for such a service depends on the amount of the company’s share capital. In addition, you must take into account the court fee and the announcement of the entry in the Monitor Sądowy i Gospodarczy.
In the case of a company, we can also take advantage of the online registration option, however, despite the lower costs of such a service, this form of registration allows the inclusion, in the articles of associations, of only basic elements that will not always be sufficient. In addition, by establishing a company, we will be required to pay tax on civil law transactions, and its amount depends on the amount of the declared share capital.
In the case of sole proprietorship, the taxpayer is the entrepreneur himself – as a natural person, which is why he is obliged to pay personal income tax.
The company, however, functions as a separate legal entity, therefore it is obliged to pay corporate income tax (19% on the gross profit achieved)
What is important, in the case of a company there is the so-called Double taxation. This involves paying income tax first on all income earned by the company and then on the dividend paid to the company’s shareholders.
A person running a sole proprietorship, unless he or she is also bound by an employment contract, is obliged to pay ZUS contributions, including health insurance contributions. The upside, however, is that for the first 24 months of operation, we can benefit from a discount, and pay only 30% of ZUS contributions.
The entrepreneur running the company, provided that he is the only partner, finds himself/herself in a similar situation – he or she must pay health and social insurance contributions, but is not entitled to any concessions. In a situation where there are several partners, there is no obligation to pay these contributions.
In the case of a company, accounting is required in the form of account books, and additionally we are obliged to prepare financial statements. This situation requires us to employ an accountant, and despite the fact that it is another financial burden, it gives us a clear picture of the financial situation of the company, and additionally relieves the subsequent obligation.
It is different in the case of sole proprietorship, because no requirements are imposed on us. With a little desire, with the help of online programs, we can take care of the accounts ourselves.
Another important issue that should be taken into account is the entrepreneur’s responsibility. A person running a sole proprietorship is liable with all his personal property for the company’s obligations resulting from its conduct. Different circumstances occur when running a company. At that time, the entrepreneur is liable only with the assets of the company, and liability is limited to the amount of contributions made by its shareholders.
According to the applicable law, the company is required to keep detailed cash records. Moreover, every received money documented with an invoice belongs to the company, not to its owner, so it can be used only when it comes to the time of payment in the form of a salary or a dividend.
At this point it is worth mentioning other issues that may outweigh to the benefit of a limited liability company. First of all, by conducting this type of activity, we have the option of issuing bonds. An additional advantage is that the management of the company is entitled to attract investors or even sell the whole business, which in the case of a sole proprietorship is virtually impossible.
As you can see, the choice of the legal form of your business depends mainly on your needs. If you are not sure about the business idea, you do not plan to take a large loan to start the company or large investments, and you also want to sell your goods or services mainly to non-professionals – then a sole proprietorship is a good choice for you. However, if you intend to operate on a large scale, you have clearly defined business visions and plan to take a loan for a company, then the company will be the most convenient option for you.