Sole Proprietorship or Limited Company? The Two Numbers That Changed the 2026 Equation for New Entrepreneurs

Regulatory note: This article reflects the position as of 12 June 2026, based on Income Tax Code No. 193 (Art. 103, rep. 20, Art. 22, Art. 94), Corporate Tax Code No. 5520 (Art. 32), Law No. 5510, Income Tax General Communiqué No. 332 (Official Gazette 31.12.2025) and Presidential Decree No. 9286 (Official Gazette 22.12.2024). Thresholds and rates may change with revaluation and new regulation.

The oldest question on a first-time founder’s desk is still the same: “Should I register as a sole proprietor or a limited company?” But in 2026 the answer is not what it was five years ago — because two numbers changed: for young entrepreneurs the Bağ-Kur premium support was abolished on 1 January 2026, and the income-tax brackets rose with revaluation. Together, these two shifts moved the break-even point of the “which structure pays less tax” calculation.

60-Second Summary: For a new entrepreneur the decision is not a single “profit threshold”. The deciding question is: will you distribute the profit you earn to yourself, or leave it in the company? At typical profit levels (annual TRY 300,000–1,500,000), a sole proprietorship’s effective tax burden stays below that of a limited company distributing its profit. The young-entrepreneur earnings exemption is TRY 400,000 and valid for three years in 2026; this clearly favours the sole proprietor in the early years. A limited company’s real rationale is not tax: it is limited liability, the ability to take on partners/investors and corporate growth. The right decision means seeing tax and liability on the same page.

First, Definitions: What Do the Two Structures Actually Change?

A sole proprietorship (commercial or professional income) is legally you. The business’s earnings are subject directly to your income tax; and for the business’s debts you are liable with all your personal assets, without limit. Set-up is fast and cheap, and bookkeeping is mostly on the business-account basis.

A limited company is a separate legal entity. Its earnings first face corporate tax in the company; you only put the money in your pocket through profit distribution (dividend), and that distribution triggers a second layer of tax. In return, a partner’s liability is, as a rule, limited to the capital share contributed. There is an important exception to that sentence; I will open it shortly. Bookkeeping is on the balance-sheet basis, and formation and upkeep costs are higher.

Let us correct a misconception up front: “no social security in a limited company” is not true. Both the sole-proprietorship owner and the limited company’s managing partner fall under 4/1-b (Bağ-Kur). So the Bağ-Kur premium exists in both structures; it is not a difference item but a common cost. In 2026 the minimum 4/b monthly premium is roughly TRY 11,808 (≈ TRY 141,700/year) and is a deductible expense in both scenarios.

On the cost side the real difference shows up in upkeep. A sole proprietorship is set up in a few days, at low cost; books are kept on the business-account basis, the accounting load is light, and closing it is as easy as opening it. A limited company is more expensive to form — notary, trade registry, signature circular, capital — and brings balance-sheet bookkeeping, more extensive filings and corporate formalities such as general/partners’ meetings. Its closure (liquidation) is an official process that takes months. So a limited company carries an upkeep cost that runs not at formation but every month. For a new entrepreneur this fixed load can erode the on-paper tax advantage at low turnover; be sure to add this item to the table when you build the numbers.

The Core Calculation: Effective Tax Burden with 2026 Numbers

The 2026 income-tax tariff (non-wage earnings) has five brackets: up to TRY 190,000 at 15%; 190,000–400,000 at 20%; 400,000–1,000,000 at 27%; 1,000,000–5,300,000 at 35%; above that 40%. The general corporate tax rate is a flat 25%. The second, more painful layer in a limited company: withholding on distributed dividends was raised from 10% to 15% by Presidential Decree No. 9286.

Combine them. If a limited company distributes its entire profit to the partner, the combined burden in the simplest form is: 25% + (remaining 75% × 15%) = 36.25%. Now compare the same earnings in a sole proprietorship, both without and with the young-entrepreneur exemption:

Annual tax base	Sole proprietor (no exemption)	Sole proprietor (young-entrepreneur exemption)	Limited (full distribution, simple)
TRY 300,000	50,500 (16.8%)	0 (0%)	108,750 (36.25%)
TRY 750,000	165,000 (22.0%)	60,500 (8.1%)	271,875 (36.25%)
TRY 1,500,000	407,500 (27.2%)	267,500 (17.8%)	543,750 (36.25%)

Note: The table keeps the Bağ-Kur premium out as a separate fixed item (≈ TRY 141,700/year, deductible in both structures). The limited column is the simple view that applies if all profit is distributed and the withholding is treated as final.

The table’s message is clear: in the typical new-entrepreneur profit bands, the sole proprietor’s effective burden stays clearly below a profit-distributing limited company. Add the exemption and the gap widens. At TRY 300,000 of earnings the sole proprietor walks away with zero income tax (because the TRY 400,000 exemption fully covers the earnings), while the limited company pays 108,750.

But the Table Is Unfair to the Limited Company: Half-Exemption and Offset

The 36.25% above is deliberately the worst case. In reality there are two softeners on the dividend the individual partner receives. First, under ITC Art. 22, half of the dividend received from a fully-liable company is exempt from income tax. Second, if the remaining half exceeds the declaration threshold (TRY 400,000 in 2026 — the top of the tariff’s second bracket) and enters a return, the withholding the company deducted is offset against the personal tax computed; in low brackets this can even turn into a partial refund. So at small and mid-size dividends the limited company’s real combined burden is below 36.25%.

More importantly: if the limited company does not distribute its profit, the second layer never arises. For an entrepreneur who leaves the money in the company and reinvests it, the limited company’s burden is only 25% — and that is lower than the 35–40% of a sole proprietor in the upper brackets. This is exactly why the break-even is not a single number: the answer hides in “what will you do with the profit?”

The Third Way to Take Money Out of a Limited Company: The Director’s Fee

Profit distribution is not the only way a partner takes money out of the company — and it is often the most expensive. The third, frequently overlooked way: the director’s fee (huzur hakkı). In a limited company, a partner who holds the title of director can be granted a regular (e.g. monthly) director’s fee in return for managing the company. For income-tax purposes this payment counts as wages (ITC Art. 61) and gives the partner a regular, legal cash flow each month.

The advantage is twofold. First, the director’s fee is booked as an expense for the company — i.e. it reduces the corporate tax base. A dividend, by contrast, is distributed from after-tax profit and is not an expense; with a director’s fee this corporate layer disappears to the extent of the amount paid. At 25%, every TRY 100 of expensed director’s fee means roughly TRY 25 of corporate tax saved for the company. Second, because the partner draws the money on the books and regularly, a “swollen cash account” is prevented. Cash piling up in the company’s till without justification opens the door, in a tax audit, to imputed (disguised) interest and penalised assessment; a regular director’s fee closes that risk.

There is a powerful lever here that most entrepreneurs miss: because the director’s fee counts as wages, it benefits from the minimum-wage exemption granted to wages (ITC Art. 23/18). In 2026 the gross minimum wage is TRY 33,030 per month — so on director’s fees paid up to roughly TRY 396,360 per year the effective income tax is almost zero. On top of that, no separate social-security premium is deducted from a director’s fee paid to a managing partner under 4/1-b (Bağ-Kur) (since they are already a Bağ-Kur member). The result: the partner can draw a regular and almost tax-free cash flow from the company each month — a possibility that does not exist in a sole proprietorship, because the sole owner cannot pay themselves a “wage.”

There is a cost too: the portion above the minimum wage is subject, in the partner’s hands, to wage income-tax withholding and stamp tax. But the wage tariff’s brackets are wider than for commercial income; when the amount is kept proportionate to the role and based on a management decision, the total burden in most scenarios stays lower than distributing the same money as a dividend. An excessive director’s fee disproportionate to the role, however, may be treated as disguised profit distribution — striking the balance with an accountant is essential. This shows that a limited company is too flexible a tool to be squeezed into a “single effective rate” table.

Let us draw the critical distinction in bold: a limited company is not the partner’s wallet. A very common and expensive fallacy is “the company is mine, I take money from the till whenever I like.” Money the partner draws without a legal basis (director’s fee, wages or a proper dividend) accumulates in the books as the partners’ current account — a receivable of the company from the partner; and cash that does not actually exist appears in the till. In a tax audit, imputed interest is run on this amount and a three-layer bill emerges: the arm’s-length interest is added to corporate income (ITC Art. 13 disguised profit distribution → penalised corporate tax); 20% VAT arises on this financing service; and under CTC Art. 13/6 the difference is treated as a distributed dividend at period-end, subject to 15% withholding. Worse still, unwinding this accumulated current account is very hard: the partner must either actually repay the money to the company or correct prior periods with penalties — both painful. So unless the disciplined route for drawing money (director’s fee, salary, planned dividend) is set up from the start, the limited company’s limited-liability advantage melts away in the tax risk created by uncontrolled use of the till.

Decision Matrix: Which Structure, When?

Tax is only half the decision. The other half is liability and growth. Look at yourself along these axes:

Will you distribute the profit? If you will regularly draw the earnings to yourself, the sole proprietor is advantageous in the mid band. If you will accumulate and grow it in the company, the limited company’s 25% pulls ahead.
What is your liability risk? In businesses carrying balance-sheet risk — stock trading, imports, contracting, high supplier debt — the limited company’s limited liability is valuable. In a single-person low-risk service, the sole proprietor’s simplicity is enough.
Will you take on a partner/investor? If there is a plan for share transfer, a new partner or an angel investor, a limited company (or even a joint-stock company) becomes mandatory; in a sole proprietorship there is no such thing as a share transfer.
Tender/prestige/corporate clients? Large corporate buyers and public tenders usually expect a legal entity.
Your exit plan? If you are thinking of selling the business later, a transferable legal entity changes hands far more easily.

Gökay GÜL’s Note: The mistake I see most often in the field is squeezing the decision into the tax table alone. A young entrepreneur starts with “the sole proprietor pays less tax,” and two years later finds their personal home at risk on the first large supplier debt. The second frequent mistake is missing the 2026 change: many people still think “Bağ-Kur is free for a year for young entrepreneurs” — that support ended on 1 January 2026. Now only the earnings exemption is on the table; the premium is paid in full from day one. When you decide, keep tax and liability on the same page.

Field Case: An Entrepreneur Who Started as a Sole Proprietor and Switched to a Limited Company in Year Two

Last period we worked with an Anatolia-origin e-learning entrepreneur. The first year they started solo, with annual earnings of ≈ TRY 280,000. They were within the young-entrepreneur exemption; we set up a sole proprietorship, income tax was effectively zeroed in the first year, and only the Bağ-Kur premium remained as an expense. Despite the “a limited company is more corporate” pressure, the numbers pointed to the sole proprietor and the liability risk was low.

In the second year the picture changed: turnover grew, two people were hired, earnings rose into the TRY 900,000 band, and the entrepreneur began discussing shares with an investor. Now the equation included “share transfer” and “accumulating profit in the company to grow.” We switched to a limited company; because they did not distribute profit but reinvested it, no second-layer withholding arose, the effective burden stayed at 25%, and granting shares to the investor became legally possible. Same person, same business; but the right structure changed over time according to what would be done with the profit and the growth plan.

Frequently Asked Questions

How much is the young-entrepreneur earnings exemption in 2026, and for how many years? For 2026 the exemption is TRY 400,000, and that figure is no coincidence: the exemption is set to equal the upper limit of the income-tax tariff’s second bracket (exactly TRY 400,000 in 2026) (ITC rep. Art. 20). It applies for three tax periods for entrepreneurs under 29 who become income-tax payers for the first time; adding a new activity does not extend the three-year window. (Figures circulating online such as TRY 414,000 are erroneous calculations applying revaluation to the old fixed amount.)

Was the young-entrepreneur Bağ-Kur premium support removed? Yes. The 4/1-b premium support, under which the Treasury covered the premium for one year, was removed as of 1 January 2026. The young entrepreneur now pays the full Bağ-Kur premium from day one; only the earnings exemption on the income-tax side remains on the table. (Those who established their taxpayer status by 31 December 2025 continue to receive the remaining support period as a vested right.)

What happens when you move from a sole proprietorship to a limited company? The sole proprietorship is closed and a new legal entity is formed; stock, fixtures and customer relations are carried over to the new company. Done in a planned way it is a smooth transition, but its timing (profit level, partner plan, VAT and transfer calculations) should be designed in advance with an accountant.

Can a partner draw money regularly from the limited company every month? Yes. A regular (e.g. monthly) payment can be made by granting a director’s fee to a partner holding the title of director. Because the director’s fee is booked as an expense for the company, it reduces the corporate tax base and prevents unjustified cash accumulation in the till (the swollen-cash and imputed-interest risk); in the partner’s hands it is subject to wage income-tax withholding. The amount must be proportionate to the role and based on a management decision; otherwise it may be treated as disguised profit distribution.

Is “limited liability in a limited company” valid in every case? No. For private debts a partner is liable limited to their capital share; but for public debts (tax and social security), legal representatives and partners can be pursued personally under Law No. 6183 and Tax Procedure Code Art. 10. “I formed a limited company, I’m not liable for anything” is a false sense of security.

At what profit level does a limited company start to make sense? There are two separate thresholds. In a limited company that fully distributes its profit, the fixed burden (≈ 36%) only overtakes the sole proprietor’s progressive burden once the sole proprietor is well into the top bracket — roughly at a profit level of TRY 9–10 million — so in the realistic new-entrepreneur band (≤ TRY 1.5M) a full-distribution limited company is almost always more expensive than the sole proprietor. By contrast, with director’s-fee optimisation (using the minimum-wage exemption and distributing the rest in a planned way) a limited company can overtake the sole proprietor in actively managed businesses whose profit exceeds ≈ TRY 1,000,000. While the young-entrepreneur exemption is in play (the first 3 years) no limited scenario pulls ahead; the break-even begins in practice in the fourth year, when the exemption ends.

What to Do? Action List

Clarify your profit plan: Will you distribute the earnings or accumulate them? The decision starts with this answer.
Measure your liability risk: Stock, debt, contracting, headcount — if your balance-sheet risk is high, the limited company’s protection prevails.
Check your young-entrepreneur right: If you are under 29 and a first-time taxpayer, the three-year TRY 400,000 exemption brings the sole proprietor forward in the early years.
Discuss the growth/partner scenario: If there is a chance of an investor or share transfer, set up a limited company from the start.
Date the transition: Sole proprietor today, limited company tomorrow; plan the right year of transition with an accountant.

The right structure is not a fixed “always this” answer; it is a decision made — and updated over time — according to the business’s profit profile, risk and growth plan. We build that decision together, with the numbers and the field.

Gökay GÜL Certified Public Accountant (SMMM) Sistem Global Danışmanlık — Director-Partner For structure choice and transition planning: gokaygul.com