Sole proprietorship or limited liability company – How different is income taxation? Which form of business should you choose?

Sole proprietorship or limited liability company – How different is income taxation? Which form of business should you choose?

Regardless of the industry that your future company will operate in, it is certain that you will have to pay income tax on generated revenues. When establishing a company, it is worth familiarizing yourself with the basic principles of business taxation. The next step that will save you money in the future is to analyze the pros and cons of each form of business. In case of doubt, please visit a specialist accounting office or tax advisor to help you select the right form of business.

Most entrepreneurs starting their adventure with their own business opt for sole proprietorships, or limited liability companies. These are the two simplest forms of doing business, but they differ significantly in income taxation.

In sole proprietorship, the owner is never treated as an employee, and does not receive a fixed full-time salary. His profits are profits obtained from the business immediately. Importantly, it does not have to account for withdrawing cash from the company account. So he or she pays one tax on earned income (income less costs of incurring it). The rate of this tax depends on the selected form of taxation. The sole proprietorship gives us four options, and the taxpayer is obliged to choose one of them:

  • General principles – tax scale 18% up to and income of PLN 85,528 and 32% on all income exceeding this value
  • General principles – a flat tax rate of 19%, regardless of income
  • Lump sum tax on recorded revenues – the rate is 2 to 20% depending on the type of activity performed
  • Tax card – the rate specified as an amount, by the Head of the relevant Tax Office

In limited liability company, the owner cannot directly benefit from the profits on the company’s account. The company’s revenues, i.e. revenues less costs, are taxed by CIT, e.g. 15% (if the conditions are met). On the other hand, if he wants to withdraw money, he must be employed as an employee in the company – then, receiving the payment, he pays 18% / 32% (according to the scale) or can pay out as a partner a dividend, which will be taxed with a 19% flat-rate tax. Therefore, regardless of which option the owner chooses, the tax is paid twice – once from the company and once from the payment withdrawn from the company.

The differences between a sole proprietorship and a limited liability company are also manifested in the form of the registration process itself and accounting. Establishing a sole proprietorship requires free registration at the Municipal Office or communes of CEIDG-1. In the case of a limited liability company registration is carried out in the National Court Register. Its traditional cost is PLN 600 (with an obligatory entry to MSiG) and PLN 350 in electronic form (with an obligatory entry to MSiG). Updates to entries in CEIDG are free and will be payable in the National Court Register.