Sole proprietorship or limited company?
Formation cost, tax rates, taking profit out, liability, social security and accounting burden; at what profit level does a limited company become worthwhile?
This is the first question people starting a business ask, and the answer does not depend on a single number. The comparison below shows what we look at when deciding together.
Comparison
| Sole proprietorship | Limited company | |
|---|---|---|
| Formation | Application to the tax office; 1–2 days, low cost | Articles, trade registry, fees; 1–3 days, higher cost. Company formation |
| Minimum capital | None | TRY 50,000 (payable within 24 months) |
| Tax | Income tax, progressive 15%–40% (non-wage brackets) | Corporate tax 25%; extra 15% withholding if profit is distributed |
| Using the profit | Profit already belongs to the owner; no extra tax | Dividend, attendance fee or salary |
| Liability | Unlimited (with personal assets) | In principle limited to capital; managers liable for public debts |
| Social security | Owner under 4/b (Bağ-Kur) | Partner-manager 4/b; non-partner manager 4/a |
| Books | Usually single-entry | Balance sheet basis, mandatory |
| Accounting cost | Lower | Higher |
| Corporate image, tenders, investors | Limited | Stronger |
| Adding partners, transfer | Difficult | Possible by share transfer |
Where does the tax burden roughly cross over?
We compare assuming all profit is taken out:
| Annual profit | Sole proprietor (income tax) | Limited (25% + 15% on dividend) |
|---|---|---|
| TRY 400,000 | TRY 70,500 (17.6%) | TRY 145,000 (36.25%) |
| TRY 1,000,000 | TRY 232,500 (23.3%) | TRY 362,500 (36.25%) |
| TRY 3,000,000 | TRY 932,500 (31.1%) | TRY 1,087,500 (36.25%) |
| TRY 6,000,000 | TRY 2,017,500 (33.6%) | TRY 2,175,000 (36.25%) |
If all profit is distributed, a sole proprietorship is cheaper for tax at most levels. However:
- If profit stays in the company and is reinvested, the burden in a limited company stays at 25%, while a sole proprietor's profit is taxed at 35%–40% in the higher brackets. Corporate tax · Dividend
- Profit in the company can be reduced by paying partners an attendance fee or salary. Attendance fee calculator
- Sole proprietors have advantages such as the young entrepreneur exemption for the first 3 years (under 29, with conditions).
Try the figures with your own profit: Income tax bracket calculator.
Practical advice
- One person, relatively low annual profit, individual customers: starting as a sole proprietorship usually makes sense.
- Business with partners, corporate customers, investors or a foreign partner: limited company.
- As profit grows: a sole proprietorship can be converted into a limited company (transfer); the tax conditions for the transfer are assessed separately.