Selection of the Legal Form of Business in 2026

Deciding on the legal form of business is one of the first and most important steps when starting a business. It is not merely a formal issue – the chosen form directly affects the tax and contribution burden, the level of administration, as well as the entrepreneur’s personal risk.

In practice, the decision is most often between operating as a sole proprietorship and establishing a limited liability company (LLC). Each of these forms has its advantages and limitations, and there is no universal solution suitable for every entrepreneur.

A sole proprietor operates as a natural person and is liable for obligations with their entire personal assets. This means that in the event of business failure, personal property may also be at risk. In contrast, an LLC is a separate legal entity liable for obligations with its own assets. A shareholder is generally not liable for the company’s obligations (after the capital contribution is paid), which in practice represents significant protection of private assets.

However, it should be emphasized that the company’s managing director is responsible for the proper performance of their duties. In case of breach of obligations, they may be liable for damages incurred. Therefore, the level of business risk also plays an important role in practice – for riskier activities, an LLC is often the safer option.

Article Summary

Choosing between a sole proprietorship and a limited liability company (LLC) is one of the key decisions when starting a business in 2026. Each legal form entails different tax and contribution burdens, administrative obligations, and levels of personal risk. A sole proprietorship is easier to establish and manage, but the entrepreneur is liable with their entire personal assets and contributions are mandatory. An LLC provides greater protection of private assets and may be more tax-efficient at certain income levels; however, it requires double-entry accounting, higher initial costs, and more complex administration. The optimal choice depends mainly on income level, business risk, planned growth, and the entrepreneur’s social security preferences.

Administrative Complexity

Sole Proprietorship

Establishing a sole proprietorship is fast, simple, and, in the case of online registration of non-regulated trades, usually free of charge. Termination is equally simple.

From a record-keeping perspective, a sole proprietor has a significantly simpler regime:

• may keep tax records of income, expenses, receivables, liabilities, and inventory, while in this type of records there is no obligation to comply with the Accounting Act or accounting procedures. These records for income tax purposes serve to calculate the tax base
• may keep single-entry accounting, in which case they are obliged to follow the Accounting Act and accounting procedures. At the same time, they may face penalties for non-compliance with these legal regulations
• may apply flat-rate expenses, if they are not a VAT payer
• are not required to maintain double-entry accounting, although they may do so voluntarily

In practice, this represents significant savings in time and accounting costs, especially where the entrepreneur applies flat-rate expenses.

Limited Liability Company (LLC)

Establishing an LLC is more demanding both administratively and in terms of time and is associated with higher initial costs. Likewise, its dissolution or liquidation is a process that takes several months.

The company is required to maintain double-entry accounting.

Tax Burden

Sole Proprietorship

The tax base is the difference between income and expenses – a sole proprietor may use either actual expenses or flat-rate expenses amounting to 60% of income, up to a maximum of EUR 20,000. Flat-rate expenses do not require documentation. However, they cannot be used by VAT payers. In addition to expenses, the sole proprietor may also deduct demonstrably paid health and social insurance contributions.

A sole proprietor may also reduce their tax base by non-taxable allowances – for themselves, for a spouse, or for contributions to the third pension pillar. After calculating the tax liability, the following income tax rates apply:

• 15% for income up to EUR 100,000
• progressive rates from 19% to 35% for higher income

A sole proprietor does not pay a tax license and is, as of 2026, exempt from financial transaction tax.

In the case of a sole proprietorship, if the entrepreneur applies actual expenses, they have the option to optimize the amount of tax by paying expenses at the end of the tax period or asking clients to pay invoices only in the new year. Since a sole proprietor applying actual expenses taxes their income and includes expenses on a cash basis, tax optimization can be carried out quite simply in this way.

At lower and medium income levels, a sole proprietorship may be more efficient from the perspective of the overall tax burden. However, it should be kept in mind that what the sole proprietor saves on taxes may catch up with them in contributions.

Another, rather social, advantage is that a sole proprietor may allocate 2% of their paid tax to their parents, provided that the parents are pension recipients and have reached retirement age. Unlike a sole proprietorship, this is not possible in an LLC.

Limited Liability Company (LLC)

A company cannot apply non-taxable parts of the tax base or tax bonuses. The tax base is determined as the difference between revenues and expenses, while expenses must be properly recorded and demonstrable. The financial result is subject to corporate income tax at the following rates:

• 10% up to EUR 100,000
• 21% for income up to EUR 5,000,000
• 24% above this amount

The company is also bound by a minimum tax license, ranging from EUR 340 for income up to EUR 50,000 to EUR 11,520 for income above EUR 5 million. Financial transactions are subject to financial transaction tax. When profits are distributed to a shareholder, a 7% withholding tax applies, which means that, in addition to taxation at the company level, it is also necessary to account for taxation at the individual level when profit shares are paid out.

Establishing an LLC can also be a very interesting and tax-efficient solution. In 2026, with the increase in health and social insurance contributions, even smaller sole proprietors should reconsider establishing an LLC, because even if they were to lose the possibility of flat-rate expenses from sole proprietorship, the 10% tax burden on income up to EUR 100,000 is still more favorable than the 15% tax burden in the case of a sole proprietorship at the same income threshold increased by contribution burden. However, it is also necessary to consider other costs that an LLC will have to bear, such as accounting services. Still, this may be more advantageous than paying high contributions to the health insurance company and the Social Insurance Agency.

Of course, the decision on the legal form of business depends not only on the economic or financial aspect, but also on preferences regarding social security. However, this can also be secured within an LLC.

Contribution Burden

Sole Proprietorship

A sole proprietor is required to pay health insurance contributions from the first day of carrying out their activity. From the first day of the sixth calendar month after the establishment of the sole proprietorship, they also become obliged to pay contributions to the Social Insurance Agency.

• health insurance is at a minimum amount of EUR 121.92 per month, or 16% of income
• social insurance contributions are EUR 131.34 per month for low-income self-employed persons and EUR 303.11 for those who exceed the annual income threshold of EUR 9,144
• if no exemption applies to the sole proprietor, they pay at least EUR 425.03 per month

In the case of health insurance contributions, there is an annual health insurance settlement. Therefore, one must be prepared for the possibility that, in the case of higher income, there may be an obligation to pay additional health insurance contributions. The situation is different with contributions to the Social Insurance Agency. The Social Insurance Agency does not carry out an annual settlement of social insurance, so the insurance paid for a given year is considered final, and no overpayment or underpayment arises.

Limited Liability Company (LLC)

A company without employees does not pay contributions. If it has employees, including a shareholder/managing director employed under an employment contract or a contract on the performance of the managing director’s function, the employer pays social and health insurance contributions.

In the case of an employment relationship of the managing director:

• employer’s social insurance contributions amount to 25.2% of gross wages
• health insurance contributions amount to 11% of gross wages
• minimum wage restrictions apply

In the case of a managing director who is not in an employment relationship but performs activities under a contract on the performance of the managing director’s function:

• social insurance contributions are lower under such a contract, because the employer is not obliged to pay accident insurance and guarantee insurance. Social insurance contributions therefore amount to 21.75%
• health insurance contributions do not change compared to an employment relationship
• there is no minimum wage restriction, so the remuneration may be set at a minimum level so that the managing director does not have to pay health insurance as a self-payer

Clear Summary

Area	Sole Proprietorship (Self-Employed Person)	LLC
Accounting	tax records • single-entry accounting • possibility of flat-rate expenses	double-entry accounting
Expenses	60% flat-rate expenses (max. EUR 20,000) or actual expenses	only demonstrable costs
Non-taxable allowances and tax bonuses	yes (for the taxpayer, spouse, third pillar, tax bonuses)	none
Income tax	15% up to EUR 100,000 income • otherwise progressive 19% to 35%	10% up to EUR 100,000 • 21% up to EUR 5 million • 24% above EUR 5 million
Minimum tax (tax license)	no	yes – from EUR 340 to EUR 11,520 depending on the amount of revenue
Profit taxation	only once (income tax)	double (corporate income tax + 7% dividends)
Financial transaction tax 2026	not applicable	applicable
Health insurance contributions	mandatory (min. EUR 121.92 monthly)	only if the managing director is employed or receives remuneration
Social insurance contributions	mandatory (min. EUR 303.11 or EUR 131.34 depending on income)	only if the managing director is employed or receives remuneration

FAQ – Frequently Asked Questions About Choosing Between a Sole Proprietorship and an LLC

What is more advantageous in 2026 – a sole proprietorship or an LLC?
It depends on the entrepreneur’s specific situation. With lower and medium income, a sole proprietorship is often simpler and cheaper to manage, while with higher income or higher business risk, an LLC may be more advantageous.

What is the main difference in liability for obligations?
A sole proprietor is liable for obligations with their entire personal assets. In the case of an LLC, the company is liable with its own assets, and the shareholder is generally not liable, which provides greater protection of private assets.

Which form has simpler administration?
A sole proprietorship is significantly less administratively demanding and may use tax records or flat-rate expenses. An LLC is obliged to maintain double-entry accounting and fulfill more legal obligations.

How does the tax burden differ?
A sole proprietor pays personal income tax (15% up to a certain income threshold) and contributions. An LLC pays corporate income tax (from 10%), but when profits are distributed, withholding tax on dividends also applies.

Are contributions paid in the case of an LLC?
A company without employees does not pay contributions. Contributions arise only when it has employees or the managing director receives remuneration. A sole proprietor must pay health and social insurance contributions mandatorily.

Is it possible to change the legal form of business later?
Yes. In practice, it is common for entrepreneurs to start as sole proprietors and, after income growth or increased risk, switch to an LLC, or combine both forms depending on business needs.

Conclusion

Choosing the legal form of business is not merely a formal decision at the beginning of doing business, but a strategic setup that influences the entrepreneur’s operations in the long term – from the perspective of taxes, contributions, and the degree of personal risk.

Practice shows that an incorrectly chosen business form may lead either to unnecessarily high tax and contribution burdens or, on the contrary, to an underestimation of business risks. At the same time, what is advantageous at the beginning of doing business may not be optimal a few years later – and therefore it is advisable to reassess this decision on an ongoing basis.

The Income Tax Act and related regulations offer several options for legally optimizing the tax and contribution burden. However, their proper setup requires not only knowledge of the legislation, but above all the ability to apply it to the entrepreneur’s specific situation.

That is precisely why it is advisable to turn to experts – tax advisors, who are able to comprehensively evaluate all relevant aspects of the business and recommend the optimal form with regard to your income, business risk, planned growth, and long-term goals.

 

 

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