Limited Company and Sole Proprietorship: Differences, Advantages and Disadvantages

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What is a Limited Company?

A Limited Company (LTD) is a type of capital company established by one or more individuals or legal entities. Compared to joint-stock companies, limited companies require less capital, making them advantageous for small and medium-sized enterprises. With Law No. 7099, published in the Official Gazette on March 10, 2018, the establishment process of limited companies was centralized, making it more streamlined. Previously, the establishment of a limited company required notary approval, but with recent changes, the company agreement can now be signed directly at the Trade Registry Office, making the process faster and more practical.

In terms of management, a limited company must have at least one manager. The manager can be one of the shareholders or an external professional. From a taxation perspective, limited companies are subject to corporate tax, which creates a different tax burden compared to income tax.

What Are the Characteristics of a Limited Company?

Limited companies are a common type of capital company, often compared to joint-stock companies. They have unique capital and partnership conditions that must be structured within a legal framework for commercial activities.

The main characteristics of limited companies are:

A limited company can be established by a single individual or multiple partners, who can be either legal entities or individuals. An external manager can be appointed. Shares are equally distributed among partners, with a minimum share value of 25 TL or its multiples.

The company is established under a trade name that aligns with its business activities and has the nature of a capital company. The liability of partners is limited to their committed capital. Decisions in the company are generally made by majority vote, with consensus among partners being common.

Limited companies can operate in various sectors but cannot be established in fields like insurance and banking. The company is subject to corporate tax and must fulfill its tax obligations. Partners are not personally liable for company debts. Limited companies cannot issue bonds or shares.

They gain legal personality upon registration with the trade registry. The company’s capital is predetermined and consists of the sum of the partners’ contributions. A limited company can have a minimum of one and a maximum of 50 partners. If the number of partners exceeds 20, an auditor must be appointed. Unlike joint-stock companies, limited companies cannot go public.

They can be established with a minimum capital of 10,000 TL. Partners are responsible for tax debts in proportion to their committed capital. A limited company must have two mandatory bodies: the General Assembly and the Management. The General Assembly is the decision-making body, while the Management is responsible for running and representing the company.

Advantages of a Limited Company

Before establishing a limited company, it is important to understand its advantages. The key benefits include:

Flexible number of partners: A limited company can be founded by a single individual and later expanded to include up to 50 partners, facilitating growth without requiring large capital.

Legal protection: The structured nature of a limited company ensures security for partnership shares and individual assets.

Tax benefits: Limited companies are subject to a fixed tax system, avoiding unexpected additional tax burdens.

No obligation to hire a lawyer: Unlike some other company types, limited companies are not required to retain a legal advisor.

Low capital requirement: The ability to establish a company with a capital of 10,000 TL makes it attractive for new entrepreneurs.

Can be established with at least one partner: A single individual can start the business, simplifying the establishment process.

Protection of personal assets: The personal assets of partners are protected from company debts.

Cost-sharing: Increasing the number of partners helps distribute financial burdens, reducing the overall cost impact on each partner. With their flexible structure and low capital requirements, limited companies offer an appealing option for entrepreneurs. Their limited liability and compliance with specific legal regulations make them a favorable business model.

Disadvantages of a Limited Company

Capital Limitations: Compared to joint-stock companies, limited companies can be established with lower capital, which may create difficulties in capital increases and attracting investors during the growth phase.

Difficulty in Share Transfer: In limited companies, the transfer of shares is more complex than in joint-stock companies. Notary approval is required for share transfers, and additional conditions such as restrictions in the company's articles of association may apply.

Liability of Partners: Partners are liable for company debts up to the amount of their invested capital. However, in the case of tax debts, both partners and managers may be held personally liable with their assets.

Preparation of Inspection Report: Tax office officials conduct an inspection to verify the company's registered business address.

Obtaining Tax Certificate and Other Documents: Documents such as the tax certificate, cash register certificate, expense receipts, waybills, and invoices must be acquired.

Chamber of Commerce and Trade Registry Registration: The company must be registered with the relevant chamber of commerce by publishing an announcement in the trade registry gazette.

Business License: A workplace opening and operation permit must be obtained with municipal approval.

Social Security and Pension Fund Registration: Registration with social security institutions must be completed.

How to Establish a Limited Company?

Limited companies are generally preferred for larger businesses and have a more complex setup than sole proprietorships. The establishment process involves the following steps:

Gathering necessary documents: Identity documents, residence details, and signature declarations of company partners must be prepared.

Drafting the company’s articles of association: The company’s articles of association must comply with the Turkish Commercial Code.

Trade registry registration: The company is registered in the trade registry and officially recognized.

Tax and banking procedures: The company must be registered with the tax office, and a corporate bank account must be opened.

Agreement with an accountant: A financial advisor must be appointed, and a power of attorney may be issued if necessary.

Chamber of commerce and municipal registration: The company must be registered with the chamber of commerce and obtain necessary municipal permits.

What is a Sole Proprietorship?

A sole proprietorship is a business structure usually established by a single person but can also have multiple partners. In this type of company, all partners are personally liable for the company's debts with their entire assets. Sole proprietorships are often preferred by small businesses due to their quick setup process and low costs.

Share transfers in sole proprietorships are difficult and require the approval of all partners. Additionally, since partners are considered real persons, they are personally liable for all company debts. This means financial risks are directly linked to the entrepreneur’s personal wealth.

From a taxation perspective, sole proprietorships are subject to income tax. The amount of tax paid depends on the company’s earnings, and the tax brackets vary annually. Therefore, tax planning is crucial for sole proprietorship owners.

Characteristics of a Sole Proprietorship

It is easier and cheaper to establish compared to capital companies. Its dissolution process is also quick and straightforward. Partners are taxed under the income tax system. No predetermined capital investment is required for establishment. Partners have unlimited personal liability for company debts.

Advantages of Establishing a Sole Proprietorship

• The setup process is quick and practical. If all required documents are complete, the business can be operational within a day.

• It has lower establishment costs compared to other types of companies.

• Since all partners have a say in management, decisions can be made flexibly and quickly.

• It can sustain its operations without investor support.

• Just like its establishment, closing a sole proprietorship can also be completed in a short time.

Disadvantages of Establishing a Sole Proprietorship

• As a small-scale business type, it may have lower commercial credibility. For example, a sole proprietorship may have lower priority compared to a limited company when applying for a POS device from banks.

• Taxation depends on income. While it may seem advantageous initially, as income increases, the tax rate can go up to 40%.

• Due to its small scale, the process of obtaining bank loans can be complex and challenging.

How to Establish a Sole Proprietorship

Entrepreneurs who want to establish a sole proprietorship should follow these basic steps:

Collecting Required Documents: Necessary documents such as proof of residence, a copy of the founder’s ID card, signature circular, and signature declaration must be prepared.

Company Registration: The sole proprietorship is registered with the tax office.

Obtaining a Tax Identification Number: A tax identification number is acquired by applying to the tax office.

Book Certification: Required accounting books are certified at a notary.

Conclusion

Limited companies and sole proprietorships offer different advantages and disadvantages based on business owners' needs. While limited companies have a corporate structure that limits partners' liability and is more suitable for long-term growth, sole proprietorships are cost-effective, quick to establish, and have a flexible management structure. Business owners should consider factors such as tax obligations, capital structure, and management flexibility when choosing the most suitable type of company for their business model. Entrepreneurs with long-term growth and investment plans may find a limited company more appropriate, whereas a sole proprietorship is a better option for small-scale and individual businesses.