Sole Proprietorship or Limited Liability Company? Tax and Liability Differences

The short answer to the question “sole proprietorship or limited company?” depends on the size of your profit and the risk you are prepared to take on. A sole proprietorship (legally, a şahıs işletmesi) is a one-person commercial business with no legal personality separate from its owner, whose profit is taxed under the progressive personal income tax. A limited liability company (Ltd. Şti.), on the other hand, is a capital company with its own legal personality, whose profit is subject to 25% corporate income tax. At low and medium profit levels, a sole proprietorship may remain lighter in terms of tax; as profit grows, a need for partners arises and personal risk increases, the limited company pulls ahead.

In this article, we compare the two structures under six headings: tax burden, liability, formation and running costs, use of profit, bureaucracy and growth potential. We have also prepared a fictional calculation table using the 2026 personal income tax brackets. In the last section, we explain when a switch from a sole proprietorship to a limited company comes onto the agenda.

What does “sole proprietorship” mean legally?

In everyday Turkish, “şahıs şirketi” refers to a commercial business opened by one person in their own name. Its legal equivalent is a sole proprietorship (şahıs işletmesi or ferdi işletme); there is no articles of association or separate legal entity. The business’s tax number, debts and profits belong directly to its owner.

There is a small but important difference in terminology here. In the Revenue Administration (GİB) guide on commercial income, the term “şahıs şirketleri” (partnerships) is used for general partnerships and ordinary limited partnerships. The partners of these companies declare their profit shares separately on their own personal income tax returns. In this article, by “şahıs şirketi” we mean the one-person sole proprietorship that most of our readers have in mind.

We cover the legal structure of a limited company, the number of shareholders and the share transfer rules in detail in our article what is a limited liability company . Below, we focus only on the points that distinguish the two structures.

Sole proprietorship or limited company: 6 key differences

When deciding, most entrepreneurs look only at formation costs. Yet the real difference between the two structures shows up in the tax paid and the risk carried in the years after formation. The six headings below cover the issues our clients weigh most in this decision.

1. Tax: progressive personal income tax or a flat 25%?

A sole proprietorship’s profit is taxed together with the owner’s other income under the schedule in Article 103 of the Personal Income Tax Law. In the 2026 schedule set by General Communiqué on Personal Income Tax Serial No. 332, the brackets for non-wage income are: 15% up to 190,000 TL, 20% up to 400,000 TL, 27% up to 1,000,000 TL, 35% up to 5,300,000 TL and 40% above that. As profit grows, each additional lira is taxed at a higher rate.

The picture is different for a limited company. According to the Revenue Administration’s guide on Corporate Income Tax Rate Applications , corporate income tax is, as a rule, levied at 25% on corporate profit. This rate does not change whether profit is 300,000 TL or 30 million TL. The rate for banks and certain financial institutions is 30%; the domestic minimum corporate tax rule is also taken into account.

The second half of the story is profit distribution. When a limited company distributes its profit to a shareholder, it deducts a 15% dividend withholding tax under Presidential Decree No. 9286 published in the Official Gazette of 22 December 2024. Under Article 22 of the Personal Income Tax Law, half of dividends received from fully liable corporations is exempt from personal income tax; if the shareholder is required to file a return, the withholding tax deducted is offset against the calculated tax.

2. Liability: how well are your personal assets protected?

In a sole proprietorship, the business and its owner are the same person. If a supplier, bank or landlord cannot collect its receivable from the business, it can pursue the owner’s home, car and bank account. As commercial risk grows, this becomes an even more important part of the decision than tax.

In a limited company, a shareholder is, as a rule, liable for commercial debts only up to the capital they have committed. For public debts, protection is narrower: under Law No. 6183, a shareholder may be pursued in proportion to their capital share for taxes and similar receivables that cannot be collected from the company; the manager representing the company may also become liable as a legal representative. In other words, a limited company does not eliminate risk; it limits it and makes it predictable.

3. Use of profit: taking money out of the business

The owner of a sole proprietorship may withdraw profit from the business at any time during the year; tax is in any case calculated on the entire profit. On the other hand, under Article 41 of the Personal Income Tax Law, wages the business owner pays themselves and money they withdraw cannot be recorded as expenses. The value of your own work is not deducted as an expense item separate from profit.

In a limited company, if a shareholder is also the manager, they can be paid a wage through payroll, and this wage is an expense for the company; on the shareholder’s side, the wage is taxed under the wage schedule. If the shareholder withdraws money from the company without supporting documents, the receivables from shareholders account grows, which may lead to interest being charged and even a disguised profit distribution dispute. For those planning to leave profit in the company and allocate it to investment, the limited company’s flat 25% rate is a clear advantage.

4. Cost of setting up a sole proprietorship versus a limited company

The cost of setting up a sole proprietorship is generally lower, because there are no items such as articles of association, capital and company registration at the trade registry. The main costs are the notification of commencement of business to the tax office, registration with the trade or artisans’ registry and chamber depending on the nature of the activity, books, a financial seal or e-signature, and accounting fees. There is no statutory minimum capital requirement either.

Under Presidential Decree No. 7887, the minimum share capital of a limited company is 50,000 TL for companies established from 1 January 2024. Capital is not an expense and may be paid within 24 months after registration; however, the articles of association, registry service fees, announcement fees and formation advisory fees are added to the budget. We examined all of these items one by one in our article cost of setting up a company .

5. Bookkeeping, returns and bureaucratic burden

A sole proprietorship may keep books on the business account basis (işletme hesabı) as long as its business volume stays below the statutory thresholds. The annual personal income tax return is filed in March of the following year; according to the Revenue Administration’s guide, the tax is paid in two equal installments in March and July. Since the thresholds are set anew each year, the type of books should be checked annually.

A limited company, on the other hand, keeps books on the balance sheet basis regardless of its volume, under Article 177 of the Tax Procedure Law. The corporate income tax return is filed in April following the accounting period. In addition, an ordinary general assembly meeting is held each year, resolution and share ledgers are kept, and changes of managers and shareholders are registered with the trade registry. This extra workload is why accounting fees are higher than for a sole proprietorship.

6. Growth, taking on partners and transfer

It is not possible to take on a partner in a sole proprietorship; when a partnership comes up, either a new company is set up or the business is transferred to a company. Selling the business or passing it on to the next generation is also cumbersome, as it means transferring assets one by one.

In a limited company, new shareholders can join and shareholders can exit through share transfers, and the company can later be converted into a joint stock company (A.Ş.). Corporate customers, banks and foreign business partners also often prefer a capital company when signing contracts. If a foreign partner plans to operate in Turkey, the limited company is in practice the structure chosen more often.

Fictional tax comparison with the 2026 schedule

The table below roughly compares the tax burden of the two structures at different profit levels. The calculation is fictional and simplified: it assumes one individual with no other income and ignores deductions, Bağ-Kur premiums, offsetting of advance tax and incentives. If the limited company shareholder becomes liable to file an annual return, the final amount may change.

Two conclusions emerge from the table. First, as long as profit stays in the company, the limited company’s advantage begins after a profit level of approximately 1,175,000 TL; below this point, the personal income tax schedule is lighter. Second, if all profit is distributed to the shareholder each year, the total burden remains above that of a sole proprietorship at the levels in the table.

That is why the real question is not “which pays less tax?” but “how much of the profit will I leave in the company?” For a business that reinvests most of its profit, a limited company may provide meaningful savings. For a business owner who withdraws all profit for personal spending, the difference may turn out smaller than expected.

Comparison table of the two structures

When does opening a sole proprietorship make more sense?

Opening a sole proprietorship is generally a more practical start for businesses with relatively low profit and limited risk run by one person. A newly started consultant, a small e-commerce venture or a craftsperson opening their own workshop may fit this profile. Formation is quick, accounting is simple and costs are low.

Still, a few points should be weighed when deciding to set up a sole proprietorship:

• Does your activity carry high-value contract, lease or staff risk?
• Is profit expected to approach the 1 million TL range within the first two or three years?
• Are you considering taking on a partner or investor in the near future?
• Do your customers require the entity issuing invoices to be a capital company?

If you answer “yes” to even one of these questions, considering a limited company from the outset may save you the cost of a later switch. If the answers are “no,” starting with a sole proprietorship and reviewing again as the business grows is a reasonable path.

When does switching from a sole proprietorship to a limited company come up?

Switching from a sole proprietorship to a limited company generally comes up when three signals appear together: profit has started to enter the 35% bracket of the personal income tax schedule; the business has taken on significant debt or contract risks; or a partner, investor or large corporate customer is at the door. Profit growth alone may be a sufficient reason, but the decision should not be made without calculating how much of the profit will stay in the business.

There are two main routes for the switch. The first is to close the sole proprietorship and set up a new limited company; on this route, inventory, fixtures and customer contracts are transferred to the new company one by one. The second is to contribute the business, together with its assets and liabilities, as capital to a newly established company. The tax consequences of both routes vary depending on the form of the transfer and whether the conditions are met.

A common mistake we see in practice is making the switch mid-year, before the books and inventory records are settled. In this case, the same goods appear in two sets of books, and VAT and depreciation records become mixed up. Planning the switch for the start of an accounting period and preparing the closing inventory in advance is the safest part of the process.

The calculation to make before deciding

To answer the question “sole proprietorship or limited company?” with your own figures, first write down your estimated profit for the next three years. Then determine how much of this profit you will withdraw for personal spending and how much you will leave in the business. Finally, put tax, Bağ-Kur premiums and accounting costs side by side for the two structures; the calculation in the table is only the starting point of this work.

You can find the detailed rules on personal income tax liability on the Revenue Administration’s Tax Guide for Taxpayers Earning Commercial Income page. According to GİB, those earning commercial income taxed under the actual method pay advance (provisional) tax at 15% on their quarterly profit. For our other articles on company types, Company Formation in Turkey category.

Whichever structure you choose, in our company formation service, we handle the process end to end, from the notification of commencement of business to trade registry registration and the initial accounting setup.

Last updated: 17.10.2026