There is a question that everyone who enters the business world or is thinking of entering the business world is sure to face: Sole proprietorship or limited liability company? Both types of companies have their advantages and disadvantages. In this article, we will discuss in detail the main differences between sole proprietorship and limited liability companies and the characteristics and establishment processes of each.

Sole proprietorship and limited liability company are two of the most preferred company types in Turkey. However, there are significant legal, financial, and managerial differences between these two types of companies. Which type of company you choose depends on various factors such as the size of your business, your risk tolerance, and your long-term goals. Thinking of setting up a sole proprietorship? What is a sole proprietorship? How to start a sole proprietorship? You can click here to learn the basics of sole proprietorships and follow the incorporation process step by step;

You may be interested in: What is A Sole Proprietorship? How To Set Up a Sole Proprietorship?

Key Features of a Sole Proprietorship

Incorporation Only one person is sufficient to establish a sole proprietorship business.

Liability: The business owner is personally liable for all debts of the company. The company owner is unlimitedly liable for the debts of the company with his/her assets. In other words, if the debts of the company cannot be paid, all assets of the company owner such as personal bank accounts, house, and car can be seized.

Taxation: He/she is considered as an income taxpayer. The income is declared together with the other income of the person and taxed according to the income tax tariff.

Capital: There is no specific capital requirement.

Management: The business owner is also the manager of the company.

Registration: Registration with the trade registry is mandatory.

Features of a Limited Company

What is a limited company? Limited liability company is one of the most preferred company types in Turkey. Although it has a more complex structure than a sole proprietorship, it is preferred by many entrepreneurs due to the advantages it offers.

Establishment: It is established with at least two partners.

Liability: Partners are generally responsible for the company's debts in proportion to the capital they have invested.

Taxation: It is considered as a corporate taxpayer. Corporate tax is paid on the profits of the company. Sole proprietorships pay income tax on their profits. Income tax rates increase gradually according to the income generated.

Capital: There is a certain minimum capital requirement. There is no specific capital requirement for establishing a sole proprietorship. However, the capital can be increased according to the size and needs of the business.

Management: It is managed by the board of directors.

Registration: Registration with the trade registry is mandatory. Sole proprietorships must be registered with the trade registry. This registration shows that the company officially exists.

Advantages of Establishing a Sole Proprietorship

Sole proprietorship is a preferred type of company, especially for small businesses and start-up entrepreneurs. The ease and flexibility of its establishment are among the main reasons that make the sole proprietorship attractive. Here are the advantages of sole proprietorship:

Ease and Speed of Establishment: Establishing a sole proprietorship is faster and easier as it requires less bureaucratic procedures than other types of companies.

Low Cost: Establishment and operating costs are lower than limited liability companies.

Flexibility: The business owner can manage his/her business as he/she wishes since he/she makes all decisions alone.

Tax Advantages: In some cases, sole proprietorships may have tax advantages. In particular, situations such as easier acceptance of expenses can reduce the tax burden.

Simple Accounting: Accounting procedures are simpler than limited liability companies.

Benefits of Setting Up a Limited Company

How to start a limited company? This process includes the preparation of the company agreement, capital transactions, application to the trade registry, and other official procedures. A limited liability company is a preferred type of company, especially for medium and large-scale businesses. Although it has a more complex structure than a sole proprietorship, it is preferred by many entrepreneurs thanks to the advantages it offers. Here are the main benefits of establishing a limited liability company:

• Limited Liability;

Protection of Personal Assets: Partners are liable for the debts of the company only to the extent of the capital they have subscribed to. In other words, even if the company goes bankrupt, the personal assets of the partners (such as houses, cars, and bank accounts) are generally not put at risk. This is an important advantage, especially for large investments and risky businesses.

• Corporate Identity;

Reliability and Prestige: As a limited liability company has a more corporate structure, it creates a more reliable image in the eyes of customers, suppliers, and business partners.

Professionalism: A limited liability company has the potential to have a more professional functioning.

• Ease of Finding Capital;

Partnership Structure: It offers the opportunity to find more capital thanks to its ability to be established with more than one partner.

Investor Attraction: Limited companies may be more attractive to investors.

• Suitability for Growth;

Flexibility: Allows the company to grow and adapt to changing conditions.

Corporate Governance: A more complex structure allows the company to be better managed.

• Tax Benefits;

Corporate Tax: Limited companies are liable to corporate tax. This may be more advantageous than income tax in some cases.

Expense Acceptance: Company expenses can be accepted more easily.

Is it Possible to Convert a Sole Proprietorship into a Limited Company?

Yes, it is possible to convert a sole proprietorship into a limited liability company. This process is preferred in cases where the company grows and needs more protection. Requirements for converting a sole proprietorship into a limited liability company:

• Establish a new limited liability company: All assets and debts of the existing sole proprietorship are transferred to the newly established limited liability company.
• Closing the sole proprietorship: The sole proprietorship is closed after all transactions are completed.

Understanding the differences between sole proprietorship and limited liability companies is very important for you to choose the right type of company. Both types of companies have their advantages and disadvantages. Therefore, it would be useful to get support from an accountant or lawyer before making a decision.