When is it profitable to turn proprietorship into a limited company?
When is the change of corporate form usually relevant?
Usually changing a proprietorship into a limited company is needed when the company is growing or when ownership arrangements are necessary. The costs of the change of a company form are the registration fee for the officials at the Trade Register at a minimum. Naturally more costs can appear due using outside help during the process. At the state of change it is useful to contact an accountant.
Limited company makes tax planning more flexible
Periodizing tax and income is more flexible with a limited company than with a proprietorship. One should keep in mind that often income from business activities is worn out on daily life of an entrepreneur. In this case, turning proprietorship into a limited company might not be profitable. However, if the work produces significant extra earnings and “loose money”, consideration for company arrangements could be in place.
Limited company is a sensible choice also if the company in question is a part-time business. In this case, the owner might have higher income from a daytime job which cumulates with the taxable income from the proprietorship business, which results in higher total tax rate for the entrepreneur. Compared to proprietorship, limited company enables lessening of the total tax rate by periodizing personal income.
Personal risk decreases
Sole proprietor is in charge of the debt and liabilities of the business with their own assets. In a limited company, a shareholder is only tied to the liabilities of the company for the amount of financial input set in the company. From this point of view, limited company can be seen as a less risky option.
Ownership arrangements possible
Proprietorship is a company form for only one entrepreneur, or entrepreneurial spouses. A limited company can involve business partners and shares can be handed over by selling or donating shares. By handing over shares, a company can bind personnel or fund the company by external stakeholders.
The image of a limited company is often perceived more stable
A proprietorship is often stigmatized as an individual person and is seen as solo grinding, whereas a limited company is in sometimes seen as steadier and more reliable operator than proprietorship. In many fields there is no relevance in the matter, but some companies rather work with another limited company form companion.
Is there a euro-denominated limit when proprietorship is worthwhile to change into a limited company?
Situations vary, so precise euro-denomination for when the proprietorship is profitable to turn into a limited company cannot be lined. Often the examination should be started, if the proprietorship profit is close to the limit of 60-70 thousand euros. In that case, the tax benefits for limited company are likely to be utilized and the change possibly gives more savings and spending money for you
Summary:
- A limited company has taxation, image and administrative benefits for business activity
- The change decreases personal risk while the business is growing
- There is no precise euro-denotated limit for company form change, but when the proprietorship profit exceeds 60-70k euro limit, examination could be in place
- There are hardly any expenses from the company form change
