Sole Proprietorship vs Company: Which One Should You Choose?

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Sole Proprietorship vs Company: Which One Should You Choose?

by | Thursday, 14 August 2025 | Corporate Income Tax, Investment, Personal Income Tax

sole proprietorship vs company

When starting a business in Portugal, one of the most critical decisions is choosing between operating as a sole proprietorship or forming a company. Both structures have distinct legal, tax, and operational implications. This guide compares sole proprietorship vs company in the Portuguese context. It highlights an important warning about the tax transparency regime, which can significantly impact certain types of businesses.

Sole Proprietorship (Empresário em Nome Individual)

Advantages

  • Simple Setup: Opening a sole proprietorship in Portugal is quick and involves minimal bureaucracy. You only need to file a declaration of business commencement with the Tax Authority, with automatic registration in Social Security.
  • Low Costs: No minimum share capital is required, and there are no high formation fees.Flexible Management: The owner can make business decisions quickly without formal deliberations.
  • Reduced Tax and Accounting Burden: Especially under the simplified regime, tax and bookkeeping requirements are lighter.

Disadvantages

  • Unlimited Liability: The owner is personally liable for all business debts, putting personal assets at risk.
  • Growth Limitations: Access to financing can be more difficult, and hiring staff may face practical restrictions.
  • Lower Business Credibility: Some clients and suppliers prefer to work with formally registered companies.

Company Formation (Sociedade Comercial)

Advantages

  • Limited Liability: In limited liability companies (Lda.) or public limited companies (SA), shareholders are only liable to the value of their shares, protecting personal assets.
  • Easier Access to Financing: Companies often have better access to bank loans and investor funding.
  • Scalability: Easier to hire employees, open branches, and expand internationally.
  • Higher Credibility: A formally registered company can inspire greater trust among clients, suppliers, and partners.

Disadvantages

  • More Complex Incorporation: Requires commercial registration, drafting of articles of association, appointment of company officers, and sometimes a minimum share capital.
  • Higher Costs: Includes registration fees, notary fees, accounting, and potential auditing expenses.
  • Increased Bureaucracy: Companies must maintain organised accounting records and file annual financial statements.

Important Warning: Tax Transparency Regime in Portugal

Be aware of the tax transparency regime if you choose the company route. This applies to specific business types such as professional partnerships, civil companies not incorporated as commercial companies, and companies solely managing assets.

Key Implications:

  • Direct Taxation of Shareholders: Profits are allocated to shareholders for tax purposes, even if no dividends are distributed.
  • Personal Income Tax (IRS) Impact: Profits are taxed as Category B income, potentially increasing your tax liability.
  • Purpose of the Regime: Prevents the use of companies solely to defer or avoid personal taxation.
  • Recommendation: Before forming a company, confirm whether your business falls under this regime and assess the potential tax and asset implications. Consult a lawyer or certified accountant for guidance.

Final Considerations

Choosing between a sole proprietorship vs company in Portugal should be based on your business model, growth ambitions, risk tolerance, and tax planning. While sole proprietorships offer simplicity and low costs, companies provide limited liability and greater growth potential, with more bureaucracy and possible exposure to the tax transparency regime.

For an informed decision, seek professional advice from a lawyer or accountant before committing to either structure.

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