Two structures with many local names
Almost every country gives small businesses the same basic choice: run the business as yourself, or set up a separate company that runs it. The first is usually called a sole trader or sole proprietor, and in many countries you simply register as self-employed. The second is a limited company, known locally as an LLC, Ltd, GmbH, AB, Oy, OÜ, BV, SARL and many other names. The details of each, including tax rates, minimum capital and filing requirements, vary a great deal from country to country. This guide sticks to the differences that hold true almost everywhere. Use it to understand the trade-offs and prepare good questions, then check the rules where you live with your tax office or an accountant before deciding.
How a sole trader business works
As a sole trader, you and the business are legally the same person. You register with the tax office, sometimes with a business registry as well, and start invoicing. All profit is your personal income and is taxed through your own tax return, usually along with social security or self-employment contributions. There is no separate legal entity, so there is nothing to set up beyond registration and, ideally, a separate bank account. Bookkeeping requirements are usually lighter, and in many countries you can keep simple records on a cash basis. The money in the business account is yours; you can move it to your personal account without any formalities. That simplicity is why most freelancers start this way, and many stay sole traders for their whole career.
How a limited company works
A limited company is a separate legal person. It signs contracts, sends invoices, owns equipment and pays its own tax on its profits. You own the company through shares and usually work for it as a director, and often as an employee too. The money in the company account belongs to the company, not to you. To get it out, you pay yourself a salary, take dividends from profits after company tax, or both, depending on what your country allows. Setting up a company involves registration with a company registry, sometimes a minimum share capital, and ongoing duties such as annual accounts, company tax returns and, in many places, a public filing of financial statements. It is more structure and more paperwork in exchange for some real advantages.
Personal liability
The biggest legal difference is liability. As a sole trader, you are personally responsible for the debts of the business. If a client sues you or the business cannot pay a supplier, your personal savings and in some cases your home can be at risk. In a limited company, the company's debts generally belong to the company, so your personal risk is limited to what you invested in it. That protection is not absolute. Directors can still be personally liable for things like unpaid taxes in some countries, wrongful trading or personal guarantees they have signed, and banks often ask small company owners to guarantee loans personally. For many freelancers with low-risk work, good contracts and professional liability insurance cover most of the practical risk, whichever structure they use.
Tax: where the real difference usually is
Tax is the reason most people look at incorporating, and also where general advice is least reliable. In broad terms, a sole trader pays personal income tax on all profit, at rates that often rise as income rises. A company pays corporate tax on its profit, and you then pay personal tax on whatever you take out as salary or dividends. Depending on your country and income level, that two-step route can cost less overall, cost about the same, or cost more. The point where a company becomes worthwhile is very different in different countries, and it shifts with every budget. Ask an accountant to run the numbers on your actual profit for both structures. A comparison using your real figures is worth far more than any rule of thumb.
Admin, cost and time
A limited company costs more to run, in both money and time. Expect registration fees, possibly a minimum capital deposit, an annual filing with the company registry, a company tax return, more formal bookkeeping usually on an accrual basis, and payroll if you pay yourself a salary. Many company owners pay an accountant for the year-end work, which can be a meaningful cost for a small business. You also need to keep business and personal money strictly separate, since taking company money for personal use without recording it properly can create tax problems. As a sole trader, most of this falls away. If your profit is modest, the extra admin and accounting fees can easily outweigh any tax saving. That is a common reason to wait.
Signals that it might be time to switch
You do not have to get the choice right on day one. Many people start as sole traders and incorporate later. Signals worth discussing with an accountant include profit growing well beyond what you need to live on, so you could leave some money in the company; taking on work with higher liability risk; clients, often large companies, that prefer or require contracting with a company; plans to hire people or bring in a partner or investor; and wanting to build something you might one day sell. If none of these apply, staying a sole trader is usually the simpler and cheaper option. If several apply, ask for a proper comparison. When you hire, read our guide to running payroll for your first employee, as the steps apply in either structure.
Questions to ask your accountant
Go into the conversation prepared. Bring your profit for the last year and your estimate for this year, and ask: what would my total tax be as a sole trader versus a company at this profit level? How would I pay myself from a company, and how would that be taxed? What are the setup and yearly running costs, including your fees? What extra filings would I be responsible for, and when? Are there any local rules, such as minimum capital or requirements for directors, that apply to me? What happens to my existing contracts, bank account and VAT registration if I switch? The answers will make the decision for you in most cases. Keep your books tidy beforehand, as covered in bookkeeping for freelancers, and the meeting will be short.
Keep the books either way
Whichever structure you choose, the day-to-day work is the same: send invoices, record expenses, know your profit. Kelvo Books handles that for sole traders and small companies alike, with invoices, expense tracking with receipt photos, VAT tracking, a live profit and loss, cash flow and ledger, and a choice of cash or accrual basis. When you hire, payroll pay runs and pay stubs are included on Pro, and a CSV or ledger export gives your accountant everything they need at year end. The free plan includes 10 invoices a month, unlimited clients and expenses, and the P&L. Pro is €7 a month. Start at books.kelvo.app and keep your numbers ready for whatever you decide.