Sole proprietorship versus limited company

I’ve been asked this a couple of times: what’s the benefit of having limited company versus having sole proprietorship? Let’s try to compare.

Assumptions:

  • I’m assuming a one-man freelancer thing again
  • I assume that operating costs for both options are about the same. They usually may be a bit higher for a limited company.
  • Your yearly income (sales – operating expenses) is 100k€ in both options.
  • You decide to have net salary of 2500€ per month for your daily life (30000€ per year).
  • Rest of the money you want to save up for future use

Sole proprietorship

Income 100k€
Personal taxes 33500€ (estimated tax % for that yearly income is 33,5%)
Your salary 30000€
Net savings, free to use: 36500€
Total tax payed: 33500€

Limited company

Income 100k€
Gross salary paid from company 37000€
Personal taxes 6845€ (18,5%)
Company gross profit 63000€
Company tax for profit 12600€ (20%)
Company profit after tax 50400€
Maximum dividends with lowest tax%: 50400€ * 0.08 = 4032€
Tax payed from dividends: 4032 * 0.075% = 302€
Total tax payed: 19747€
Net savings, free to use: 3730€
Gross savings: 46368€

By “gross savings” I mean that the money is in the company. If you want to use it for personal purposes, you have to pay income or capital tax. Here the comparison becomes difficult because there are so many ways to use the money. But the good thing is that it won’t get taxed again if you decide to keep it inside the company.  And the more money you have inside the company, the more you can pay lowest tax-% dividends.

Conclusions

My two key takeaways are:

  • With these assumptions, limited company seems to be better money wise
  • At the very least, limited company offers more flexibility to spread the income. This is useful because personal taxation is per year. You could, for example, work your ass off for a couple of years, save 200k€ for the company, then take the money away from the company gradually over years as dividends and small salaries.

I’m not 100% sure if I miss a key detail here, but roughly it should go like this. If I miss a key detail, please let me know!

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