ŞAHIS ŞİRKETİ İLE LİMİTED ŞİRKET ARASINDAKİ FARKLAR

DIFFERENCES BETWEEN A SOLE COMPANY AND A LIMITED COMPANY

Characteristics of a Sole Proprietorship

Sole proprietorships are commercial enterprises established and operated by real persons. This type of company is preferred for small-scale businesses due to its flexibility and simple structure. The basic characteristics and operation of sole proprietorships can be detailed as follows:

• Trade Name: It is mandatory to obtain a trade name that includes the name and surname of the company owner. According to Article 46 of the Turkish Commercial Code, appropriate additions can be added to this title that specify the characteristics of the business.
• Capital Structure: There is no minimum capital limit for the establishment. This feature provides an advantage for entrepreneurs with low budgets.
• Liability: The company owner or partners are solely responsible for the company's debts and liabilities. This situation creates a risk that includes the personal assets of the company owners.
• Transformation Opportunity: Individual companies can be converted into limited companies or joint stock companies in line with the growth of business volume or strategic decisions.
• Breadth of Field of Activity: They have the authority to operate in various areas such as opening branches and insurance agency.
• Registration and Registration Procedures: In order to register and record with the Chamber of Commerce, books must be kept according to the balance sheet method. For these transactions, it is mandatory to declare the working capital as at least 100 TL.
• Activity Restrictions: Individuals operating in some service sectors (e.g. hairdressing, barbering, marketeering) cannot register with the Chamber of Commerce since these businesses are considered as tradesmen.
• Accounting Obligations: There are different bookkeeping obligations depending on the size of the company and the taxation method. Those subject to the balance sheet principle must keep a journal, general ledger and inventory book; those subject to the business principle must keep a business book.
• Taxation: There is no bookkeeping obligation for sole proprietorships taxed in a simple manner. This provides significant convenience for small-scale businesses.
• Company Closing: A natural person who wants to close a sole proprietorship can easily liquidate the company by initiating a trade termination process. This process is simpler and faster than other types of companies.

These features show that sole proprietorships are a suitable option especially for small businesses and new entrepreneurs. However, factors such as unlimited liability and growth restrictions should also be taken into consideration.

Features of Limited Liability Companies

A limited liability company is a capital company that can be established for any purpose and subject that is not prohibited by law, with a fixed capital and company name. This type of company offers an attractive option for entrepreneurs with its flexibility and limited liability. The basic features and operation of a limited liability company can be detailed as follows:

• Capital Structure: The minimum capital required to establish a limited company is 50,000 TL. This capital must be paid in full within 24 months following the company's registration. This regulation provides entrepreneurs with the flexibility to complete the initial capital over time.
• Partnership Structure: Limited companies can be established by real or legal persons. Being able to be established with a minimum of 1 and a maximum of 50 partners, it offers a suitable structure for both small family businesses and larger businesses.
• Trade Name: The company's trade name must include at least one of the business subjects and cannot be abbreviated. This rule clearly states the company's field of activity and provides transparency for potential business partners or customers.
• Management Structure: There are two basic bodies in limited companies:
• General Assembly of Partners: As the highest decision-making authority, it has the authority to change and terminate the company contract.
• Board of Directors: It assumes the responsibility of managing and representing the company. The requirement that at least one director be a partner ensures that the partners take an active role in the company's management.
• Liability: Partners are responsible to the company for the amount of their capital shares they have committed. This limited liability protects entrepreneurs from risking their personal assets and allows them to take bolder steps in establishing a business.
• Accounting Obligations: Limited companies are obliged to keep a journal, inventory book, general ledger, share book and general assembly meeting and discussion book. This detailed recording system ensures that the financial status of the company is followed transparently.
• Business Development Opportunities: Limited companies have the authority to open branches and can merge with other capital companies or cooperatives. They can also be divided into capital companies or cooperatives. This flexibility offers significant advantages in terms of the company's growth and strategic decision-making.
• Liquidation Process: Voluntary liquidation can be initiated by the occurrence of the termination reasons specified in the Turkish Commercial Code or by a general assembly decision. The liquidation process is carried out by the liquidators and results in the deletion of the business name from the register. This orderly process ensures that the company can be closed properly if necessary.

These features show that limited companies are a suitable option for both small-scale businesses and startups with growth potential. Limited liability, flexible management structure and various business development opportunities make limited companies attractive to entrepreneurs.

Advantages of Establishing a Sole Proprietorship

Establishing a sole proprietorship offers various advantages, especially for small and medium-sized businesses. These advantages allow business owners to enter the business world quickly and flexibly. The benefits offered by establishing a sole proprietorship can be detailed as follows:

• Simplified Establishment Process: The number of documents required for the establishment of sole proprietorships is quite low. This speeds up the establishment process and minimizes bureaucratic obstacles.
• Easy Closing Opportunity: Company closure (exit from business) procedures are short and simple. This feature provides a significant advantage for entrepreneurs who want to try out their business ideas or are afraid of future uncertainties.
• Low Capital Requirement: The fact that there is no minimum capital limit for establishment allows entrepreneurs to start their commercial activities with a minimal budget. This is an ideal option for those who want to take risks but do not have a lot of capital.
• Cost Effectiveness: The fees for establishment, branch opening and deregistration procedures are quite low. This eases the financial burden, especially for businesses in the early stages.
• Simplified Accounting: The number of books that sole proprietorships need to keep is less compared to other types of companies. In this way, accounting transactions are simpler and less costly, facilitating the financial management processes of business owners.
• Fast and Easy Administrative Transactions: Transactions such as address change, title change and capital increase can be easily carried out by obtaining a request number from MERSIS and then submitting a petition to the Regional Representative without an appointment. This flexibility allows business owners to adapt quickly to changing conditions.
• Growth and Transformation Potential: Sole proprietorships have the opportunity to transform into a joint stock company or a limited company when they grow by increasing their turnover. This transformation increases the prestige of the business and provides access to wider business opportunities and financing sources.
• Fast Liquidation Process: The process of leaving the trade can be completed in a short time by obtaining a request number from MERSIS and then submitting a petition containing the declaration of assets to the Regional Representative without an appointment. This fast liquidation process allows business owners to exit the business life quickly when necessary.

These advantages make sole proprietorships an attractive option, especially for new entrepreneurs, small businesses, and entrepreneurs looking for flexible business models. However, it is important to evaluate whether each business model is suitable for their own specific conditions and goals.

Advantages of Establishing a Limited Company

A limited company, as a capital company, offers various advantages for both large-scale businesses and small and medium-sized businesses. The benefits offered by this type of company make it an attractive option for entrepreneurs looking for flexibility and security in the business world. We can detail the advantages of establishing a limited company as follows:

• Wide Field of Activity: The ability to carry out all kinds of economic activities that are not explicitly prohibited by law offers limited companies a wide range of business. This flexibility allows entrepreneurs to choose the most appropriate business model in line with their own goals and visions, so they can quickly adapt to market conditions and economic changes.
• Professional Management Structure: The mandatory corporate structures of limited companies encourage the adoption of a professional management approach. This structure contributes to the optimization of business processes and increased efficiency by ensuring that the company is managed in a more systematic and organized manner.
• Tax Advantages: According to Article 123 of the Law on Fees No. 492, limited companies are exempt from paying fees for certain transactions. Transactions covered by this exemption include establishment, share transfer, capital increase, merger, transfer, division and changes in type. This advantage eases the company's financial burden while also allowing the necessary changes in the company structure to be made more easily and economically.
• Transformation and Growth Potential: Limited companies have the flexibility to transform into other capital companies, especially joint stock companies, as their business volume and capital increase. This feature allows the company to gain a more prestigious position during the growth process and to create the necessary infrastructure for larger investments. Thus, limited companies can implement long-term growth strategies more effectively.
• Easy Share Transfer Procedures: The share transfer process in limited companies is subject to a simpler and faster procedure compared to other types of companies. The steps required for the share transfer - signing the transfer agreement, obtaining the approval of the general assembly, and registering and announcing the transfer - can be completed in a relatively short time. This allows the company's partnership structure to be quickly adapted to changing conditions and needs, thus ensuring that the company has a dynamic structure.

Sole Proprietorship Tax Rates

Sole proprietorships subject to real-world taxation are divided into two categories based on their accounting record keeping methods: those that keep books on a balance sheet basis and those that keep books on a business account basis. Both categories are subject to Income Tax. In addition to this tax liability, these businesses are also required to pay Value Added Tax (VAT). This tax structure ensures that businesses accurately report their financial activities and income to the state.

On the other hand, there is a different application for sole proprietorships taxed on a simple basis. Such businesses are exempt from income tax and VAT. This exemption aims to ease the tax burden on small businesses and facilitate the continued operations of these businesses.

The income tax brackets for sole proprietorships that keep books on a balance sheet basis or a business account basis for 2024 are determined as follows:

• For the income bracket up to 110,000 TL, the tax rate is 15%.
• For the first 110,000 TL of the income up to 230,000 TL, a flat tax of 16,500 TL is paid, and the remaining portion is taxed at a rate of 20%.
• For the first 230,000 TL of the income up to 580,000 TL, a flat tax of 40,500 TL is paid (this bracket is extended to 870,000 TL for wage income), and the remaining portion is taxed at a rate of 27%.
• For the first 580,000 TL of the income up to 3,000,000 TL, a flat tax of 40,500 TL is paid A flat tax of 135,000 TL is paid (this amount is 213,300 TL for wage income), and a tax rate of 35% is applied to the remaining portion.
• For incomes exceeding 3,000,000 TL, the first 3,000,000 TL is subject to a flat tax of 982,000 TL (this amount is 958,800 TL for wage income), and a tax rate of 44% is applied to the excess portion.

This tax bracket structure creates a progressive tax system. As the income of sole proprietorship owners increases, the tax rate they will pay gradually increases. This system aims to distribute the tax burden fairly according to the income level.

In addition, there is a provisional tax application for sole proprietorships that are subject to income tax. Within the scope of this application, companies pay a provisional tax of 15% in three-month periods. The provisional tax application spreads the tax collection throughout the year, ensuring both a regular flow of state revenues and preventing taxpayers from having to pay large amounts of tax at the end of the year.

Limited Company Tax Rates

Since a limited company is classified as a capital company, its primary tax obligation is to pay Corporate Tax. However, the company's tax responsibilities are not limited to this; it is also liable to pay other types of taxes such as Value Added Tax (VAT) and provisional tax. This multifaceted tax structure makes the financial management of limited companies more complex, while also aiming to provide a regular income flow to the state.

We can examine the taxes that limited companies are obliged to pay and the rates of these taxes in more detail:

• Corporate Tax: Limited companies are obliged to pay Corporate Tax on all profits they earn. This tax is calculated on the profits the company earns from its commercial activities and is generally applied at a rate of 25 percent. This rate is calculated on the company's annual net profit and directly affects the company's financial performance.
• Export Incentive: As part of Turkey's export incentive policy, a special tax advantage has been offered to limited companies that export. These companies can benefit from a 5-point discount on the corporate tax rate for the income they earn from exports. This discount aims to make companies more competitive in international markets and increase the country's foreign exchange revenues.
• Value Added Tax (VAT): Limited companies collect VAT from buyers to be paid to the state during the delivery of goods and services. This tax is then reported to the state through the VAT return and paid. VAT rates vary according to the types of goods and services; Three different rates are applied: 1 percent, 10 percent and 20 percent. These different rates are determined according to the economic and social importance of different categories of goods and services.
• Provisional Tax: Limited companies pay provisional tax on their quarterly earnings regularly during the year. The rate of this tax is the same as the current period's corporate tax rate. Provisional tax application allows the state to generate regular income during the year, while allowing companies to make more effective financial plans by spreading the tax burden throughout the year. Provisional taxes paid are offset from the corporate tax calculated at the end of the year.
• Other Taxes: Limited companies may also be subject to various types of taxes such as Special Consumption Tax (SCT) and Stamp Duty, depending on the sector in which they operate and the transactions they carry out. These taxes may be related to the production, sale or consumption of certain goods and services, or may be required to be paid for certain official transactions.
• Tax Liability of Partners: Income earned by limited company partners from company profits is considered as profit sharing and profit from participation shares in tax legislation. These incomes are included in the category of capital gains and are subject to Income Tax. Partners are required to declare and tax this income with an annual income tax return. This situation may also affect the individual tax liabilities of the partners in the event of distribution of company profits.

Sole Proprietorship or Limited Company?

The different characteristics of a sole proprietorship and a limited company can make each more advantageous in certain situations. The fundamental differences between these two types of companies allow entrepreneurs to make a choice based on their business goals and financial expectations:

• Legal Regulations and Capital Structure: Both types of companies are subject to different legal frameworks. Limited companies require a higher initial capital, but this structure is more suitable for growth and development. On the other hand, sole proprietorships can be an attractive option for entrepreneurs who want to start a business with a lower budget. This difference requires entrepreneurs to make decisions according to their financial resources and long-term growth plans.
• Limits of Liability: The liability of limited company partners is limited to the capital they invest. This protects the personal assets of the partners and limits financial risks. In sole proprietorships, the business owner or partners are responsible for the company's debts with all their assets. This unlimited liability can be considered a significant risk factor for some entrepreneurs and is a critical point to consider in the decision-making process.
• Partnership Structure and Flexibility: In sole proprietorships, the partnership structure is directly dependent on the individuals and changing partners is a more complicated process compared to other types of companies. This situation may limit the flexibility in the company's management and decision-making mechanisms. In limited companies, it is relatively easier to change the partnership structure and include new partners. This flexibility can provide significant advantages in terms of the company's future growth plans and relations with potential investors.
• Taxation Regime: Limited companies are subject to Corporate Tax and pay tax at a fixed rate (25%). This fixed rate facilitates the company's financial planning and can be advantageous for businesses with high income. On the other hand, sole proprietorships are subject to progressive Income Tax. As their income increases, they enter higher tax brackets, which may cause the tax burden to increase. This difference requires a choice to be made according to the expected income level of the business and tax optimization strategies.

Establishment and Operation Process: Sole proprietorships offer a faster and simpler process during the establishment phase. In addition, it is relatively easier to close the company in an adverse situation. Therefore, a sole proprietorship may be more suitable for entrepreneurs who anticipate a profit that will remain in the 15% or 20% tax brackets and want to make a quick start. This structure is ideal especially for small-scale businesses and self-employed individuals.

On the other hand, a limited company may be more advantageous for entrepreneurs who have high earning expectations, are considering a multi-partner structure, or want to benefit from the prestige and reliability provided by the legal entity status. Limited companies may be preferred especially for businesses with high growth potential, aiming to work with corporate customers, or planning to open up to international markets. In addition, a flat 25% Corporate Tax rate may be more financially advantageous for businesses with high income.

Is it possible to switch from a sole proprietorship to a limited company?

According to Article 134, paragraphs 8 and 9 of the Trade Registry Regulation and Articles 182 to 193 of the Turkish Commercial Code, it is possible to switch sole proprietorships to limited companies. These legal regulations provide flexibility to business owners, allowing them to adapt their business models and structures to changing conditions. The process of switching from a sole proprietorship to a limited company requires a systematic approach that includes certain steps:

1. MERSİS Application: As the first step of the transition process, an application must be made through the Central Registry System (MERSİS). At this stage, a unique request number is created by the system. This number is important for tracking the process and using it as a reference in the following stages.
2. Application to the Regional Representative: After the MERSİS application, the business owner or authorized representative must apply to the Regional Representative with the necessary documents. An important point to note at this stage is that there is no obligation to make an appointment. The applicant can start the process by going directly to the Regional Representative with the petition they have prepared and the necessary application documents.

This process facilitates the transition of sole proprietorships to a corporate structure, while also allowing businesses to improve their legal status and operational capacity. The transition process may require careful planning and professional support, but it can provide significant advantages in terms of business growth and sustainability in the long run.

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Mesut SENEL | Ifasturk CEO

Certified Public Accountant