Sole proprietor vs. limited company — which structure should you actually pick?

Sooner or later every freelancer asks: should I incorporate? The answer isn't philosophical — it's arithmetic plus risk tolerance. The right structure changes as your revenue grows, and so does the right time to switch.

Here's how to think about it clearly.

What each structure actually is

A sole proprietor (sole trader, autónomo, egyéni vállalkozó, IE, Einzelunternehmer, auto-entrepreneur — every country has its version) is the business. There is no legal separation between you and the business. Your assets and liabilities are the business's assets and liabilities. You pay personal income tax on the net profit, plus whatever social contributions your country requires.

A limited company (LLC, Ltd, GmbH, SARL, KFT, Sp. z o.o.) is a separate legal entity. It owns its own assets, owes its own debts, files its own tax return, and pays you either a salary or a dividend. Your personal liability is limited to whatever you invested in the company (with some real exceptions we'll get to).

The four dimensions of the decision

1. Liability

The classic argument for incorporating is liability protection. In reality:

• If your risk is client lawsuits (professional errors, missed deadlines, breach of contract) — a company helps, but professional liability insurance helps more, and costs less than a company's overhead.
• If your risk is debt (you owe suppliers, landlords, or the tax office) — a company helps only until a court finds you were negligent or the debts are personal tax debts the director is personally liable for anyway.
• If your risk is "someone slips at my office" — general liability insurance is a cheaper and better answer than a company.

Liability protection is real, but it's not a magic shield. In most jurisdictions, courts routinely "pierce the corporate veil" for undercapitalised companies, commingled funds, or director fraud. If you're going to have a company, you need to run it like a company.

2. Taxes

This is usually the deciding factor. The maths:

Sole proprietor: you pay progressive personal income tax + social contributions on net profit. In most European countries, marginal rates hit 40–55% quickly.

Limited company: the company pays corporate tax on profits (typically 9–25% in Europe), then you pay dividend tax when you take money out (10–35%). Money left inside the company for reinvestment is only taxed at the corporate rate.

The break-even point depends on your country and how much you spend vs. reinvest, but a useful rule of thumb:

• Below ~€50,000 net profit — sole proprietor is usually cheaper and simpler.
• €50,000–€100,000 — mixed picture. Depends on country, whether you take salary or dividends, and how much you reinvest.
• Above ~€100,000 — the company almost always wins on tax, especially if you don't need to withdraw everything each year.

3. Overhead

Sole proprietor overhead: usually a few hours a year, an accountant on retainer for €50–€150/month, one tax return.

Limited company overhead: monthly bookkeeping (€100–€400/month), annual accounts, annual statutory filings, sometimes an auditor above certain thresholds, VAT returns, payroll if you're on the company's books, director's returns. Budget €3,000–€8,000/year for a small company's full compliance stack.

If you're netting €35,000, spending €5,000 to save €1,000 in tax is silly. If you're netting €150,000, spending €6,000 to save €30,000 is obvious.

4. Perception

Some clients — large enterprises, government, some agencies — simply won't contract with a natural person. They need a supplier with a company number, professional indemnity, and often an EU-established legal entity.

If your target market is other freelancers and small businesses, this doesn't matter. If you want to sell to Fortune 500 or ministries, it does.

The switching moment

Almost nobody incorporates too early — the pain of a company you can't afford is immediate and obvious. Plenty of people incorporate too late. Rough signals it's time:

• Net profit consistently above your country's break-even threshold for two years running.
• You're reinvesting significant profit (equipment, hiring, software) rather than withdrawing everything.
• A large client is asking for a company as a supplier condition.
• You want to bring on a partner or investor.
• You're planning a specific major purchase (property through the company, expensive equipment) where the tax treatment changes.

The transition itself

Switching from sole proprietor to a company means:

1. Form the company in the appropriate structure.
2. Transfer client contracts — many can be novated with a simple letter, some require full re-signing.
3. Move ongoing subscriptions and bank accounts to the company. Not overnight — allow a 1–3 month transition period.
4. Close the sole proprietorship with the tax authority (or keep it dormant for pipeline invoices).
5. File a final personal-business tax return for the sole-proprietor period.

Most people underestimate the admin. Budget 30–60 hours of your own time over the first quarter after switching, on top of the accountant's work.

The default answer

If you're brand new, unsure, and earning under your country's break-even threshold: stay a sole proprietor. Add professional liability insurance for real protection. Revisit the decision every 12 months.

If you're above the threshold, growing, and already treating your finances with company discipline: incorporate. You've already been running like a business — you just weren't getting the tax benefit.

The wrong answer is neither structure — the wrong answer is picking one and never re-examining it as your business changes.