CIT 15% - sole proprietorship or limited liability company - what is profitable?

At the beginning of 2017, entrepreneurs starting their business or being small taxpayers (revenues lower than EUR 1.2 million) decide to run a company in the form of a limited liability company. they can choose a lower CIT rate of 15%. Does it pay off? What is better after the changes in the almost sole proprietorship or a limited liability company?

A sole proprietorship or a limited liability company - 15% CIT but double taxation!

Many entrepreneurs, hearing about the reduction of the CIT rate to 15%, are wondering whether to give up the current form of business in favor of establishing a limited liability company. When considering the issue of a sole proprietorship or a limited liability company you should know that:

• 15% CIT - this is the corporate income tax, i.e. on the company's profits, colloquially speaking, a

• when paying the profit to the owners, they will be obliged to pay the tax again, but as little as 18% or 19% depending on the form of payment.

That is why it is said that in a limited liability company there is the so-called double taxation. Therefore, at the outset, you can see the difference where in a sole proprietorship we have taxation once and in a company twice.

Form of business	A sole proprietorship	Private Limited company.
Taxation of operating income	18% / 32% tax scale or 19% linear or lump sum on recorded revenues	15% CIT
		18% / 32% tax scale (full-time salary) or 19% (dividend)

In a sole proprietorship, the owner is never treated as an employee, so he does not receive a "fixed salary" - his profit is the profits obtained from the activity immediately. Importantly, he does not have to settle accounts for withdrawing cash from the company account. So he pays one tax on the earned income (income less costs).

In a limited liability company it is different. The owner cannot directly use the profits in the company's account. The company's income, i.e. revenues reduced by costs, are taxed with CIT, e.g. 15% (if the conditions are met). However, if he wants to pay himself out, he must be employed in the company as an employee - then, when receiving the payment, he pays 18% / 32% (according to the scale) or he can pay himself a dividend to himself as a partner, which will be taxed at the 19% flat-rate tax rate. Therefore, no matter what option the owner chooses, the tax is paid twice - once for the company and once for the payout collected from the company.

Accounting and reporting obligations - sole proprietorship or limited liability company?

Differences between a sole proprietorship and a limited liability company they also manifest themselves in the form of the registration process and bookkeeping itself.

Registration costs

Establishing a sole proprietorship requires free registration with the CEIDG-1 city or commune office. In the case of a limited liability company registration is made in the National Court Register. Its cost in the traditional form is PLN 600 (with a mandatory entry to the MSiG) and in electronic form PLN 350 (with a mandatory entry to the MSiG). Updating changes to entries in CEIDG are free of charge and will be payable in the National Court Register (about PLN 350).

Form and costs of accounting

When deciding on a limited liability company it will be necessary to keep full books of accounts. This has its advantages and disadvantages. The disadvantage is the higher cost of accounting and the need to use the services of an accounting office or a qualified accountant. The advantage, however, is the detailed and transparent records.

In the case of a sole proprietorship of an entrepreneur who is a small taxpayer, the provisions of the Accounting Act do not apply, therefore the accounting is based on the Personal Income Tax Act or a registered lump sum. Instead of accounting books, there must be a book of revenues and expenses (commonly known as KPiR), a register of revenues (for lump sums) or a tax card. The entries are so simple that it is possible for the entrepreneur to keep the accounts independently, and in the case of a decision to use an accounting office, the cost of keeping them is lower than in the case of full accounting books.

Cash turnover records

The limited liability company is obliged to keep detailed cash records. Importantly, the money that you receive for the sale with a documented invoice is the company's money, not its owner. Therefore, he cannot use them freely as it is in the case of a sole proprietorship where the received invoice payment is immediately at the disposal of the owner. In the company, it is only when the full-time salary or dividend is paid (the payment is additionally taxed) that the owner may dispose of the money as his own. Start a free 30-day trial period with no strings attached!

The owner's responsibility for the operation of the company

In the case of sole proprietorship, there is no doubt that the owner is responsible for the company's operations with all his property (and in the case of joint property, also the spouse) and this liability cannot be limited, as a rule. In the case of a limited liability company the company is liable up to the amount of its assets (risk limited to the amount of the owner's contribution), but not always. The limitation of liability does not apply to situations in which it is proven that the owner / manager contributed to the company's exposure to loss. At that time, even a partner in a limited liability company will be held responsible with all his assets.

A sole proprietorship or a limited liability company - selected advantages and disadvantages

A sole proprietorship		Private Limited company.
defects	benefits	defects	benefits
- property liability entirely with the owner	- one taxation	- double taxation	- limited property liability
	- the ability to conduct independent accounting - lower costs	- relatively higher accounting costs	- detailed accounting records that provide important and reliable information
	- no need for detailed cash records - the profit generated is immediately the profit of an entrepreneur who can have it at his disposal	- receivables due to issued invoices constitute company money - the owner cannot dispose of them for private purposes
	- free registration and update of data in CEIGD	- paid registration and each update of data in the National Court Register