This is the first serious decision before you start, and it is often taken in a hurry. The legal form determines how much tax you pay, what liability you carry if things go wrong and how much the accounting will cost.
Sole proprietorship
The simplest form and the cheapest to set up.
For:
- quick registration and low cost to open and to close
- fewer formal obligations
- the profit is yours without an intermediate distribution step
Against:
- you are liable with all your personal assets for business debts
- as profits rise so does the tax rate, because the scale is progressive
- it is harder to bring in a partner or to sell the business
Private company (IKE)
The private capital company has become the most common choice for small and medium businesses in recent years.
For:
- limited liability, separating company assets from personal ones
- a flat tax rate on company profits
- partners can join and leave relatively easily
- a more solid image with suppliers and banks
Against:
- double-entry books and a higher accounting cost
- to take the profits you need a distribution, with dividend tax
- more corporate obligations and filings
General partnership
A partnership is simpler than an IKE and suits collaborations built on trust.
For:
- a simple structure for two or more partners
- it can keep single-entry books, depending on the case
- lower formation cost than a capital company
Against:
- general partners are personally and jointly liable for the debts
- a breakdown between partners quickly becomes a legal problem
Questions to ask yourself
- How much profit do I expect in the first three years?
- Are there partners or investors?
- How large is the risk towards suppliers or banks?
- Will I need staff from the start?
- Do I plan to sell or hand over the business at some point?
The answers to the first two questions usually settle the decision.
Do not forget social security
In every case there are social security contributions, with rules that differ according to the form and your role in the company. In a real scenario, the combined weight of tax and contributions can reverse which form looked better on paper.
Can I change later?
Yes. Many businesses start as sole proprietorships and convert into companies as they grow. Conversion has its own cost and procedure, so if you can already see it coming within the first year, start with the right form.
Would you like us to run the numbers for your own case? Contact us or see our guide to registering a sole proprietorship.
If you would like our office to handle it for you, see TAXGROUP services.
Frequently asked questions
What suits me if I am starting alone with a small turnover?
Usually a sole proprietorship, because of the low cost. If there is serious debt risk, however, an IKE is worth examining.
Does an IKE fully protect my personal assets?
It offers limited liability, but there are exceptions, for example personal guarantees on loans or manager liability for certain debts.
Can I convert my sole proprietorship into an IKE?
Yes, through a specific procedure that has a cost. If you can see it coming from the start, it is better to begin with the right form.
Which form has the lowest accounting cost?
Generally a sole proprietorship with single-entry books. An IKE with double-entry books costs more, but is also taxed differently.