{"id":16054,"date":"2026-08-25T16:28:14","date_gmt":"2026-08-25T08:28:14","guid":{"rendered":"https:\/\/www.qicaiying.cn\/?p=16054"},"modified":"2026-08-25T16:28:19","modified_gmt":"2026-08-25T08:28:19","slug":"%e4%b8%aa%e4%bd%93%e5%b7%a5%e5%95%86%e6%88%b7%e5%b9%b4%e6%b5%81%e6%b0%b4500%e4%b8%87%ef%bc%8c%e8%a6%81%e4%b8%8d%e8%a6%81%e8%bd%ac%e6%9c%89%e9%99%90%e5%85%ac%e5%8f%b8%ef%bc%9f%e5%88%ab%e5%8f%aa","status":"publish","type":"post","link":"https:\/\/www.qicaiying.cn\/en\/archives\/16054","title":{"rendered":"Should a sole proprietorship with annual revenue of 5 million convert to a limited liability company? Don\u2019t just look at the tax rate."},"content":{"rendered":"
For a sole proprietorship, reaching an annual turnover of 5 million is a delicate tipping point. Many people\u2019s first reaction is, \u201dConvert to a limited liability company\u2014the corporate income tax rate is only 25%, which is lower than the 35% rate for sole proprietorships.\u201d But the decision to convert shouldn\u2019t be based solely on tax rates\u2014getting this step wrong could result in paying an extra tax or missing a potential pitfall.<\/p>\n\n\n\n
I. First, Let\u2019s Examine the Tax Burden Logic for the Two Types of Entities<\/h2>\n\n\n\n
comparison term<\/th>
Self-Employed Individuals (Business Income)<\/th>
corporation<\/th><\/tr>
Tax Base<\/td>
Profit (Revenue - Cost)<\/td>
Profit (Revenue - Cost)<\/td><\/tr>
Major Tax Categories<\/td>
Business Income 5%\u201335%: Excessive Progressive Taxation<\/td>
Corporate Income Tax 25% + Individual Income Tax on Dividends 20%<\/td><\/tr>
One serving or two?<\/td>
Pay only once upon receipt<\/td>
Pay one portion to the company, then pay another portion from the boss's dividends<\/td><\/tr>
Common Methods of Tax Collection<\/td>
More options for assessed taxation; lower overall tax burden<\/td>
Primarily based on audit-based taxation<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
II. Why \u201dDon\u2019t Just Look at the Tax Rate\u201d<\/h2>\n\n\n\n
The highest tax rate for sole proprietorships is 35%, while the corporate income tax rate for limited liability companies is 25%\u2014on the surface, the corporate rate appears lower. However, sole proprietorships are not subject to corporate income tax or dividend tax, and in many regions, they are taxed under a fixed-rate assessment system, resulting in an effective tax rate that is often as low as 1%\u20133%. When you compare the two after factoring in both taxes, a limited liability company actually ends up with less take-home pay.<\/p>\n\n\n\n
In addition to tax rates, there are four other things to consider:<\/p>\n\n\n\n
- Responsibility<\/strong>: A sole proprietor isUnlimited liability<\/strong>, business debts can affect personal and family assets; a limited liability company islimited liability<\/strong>, limited to the amount of the capital contribution. \u00b7 Admission<\/strong>: Many platforms explicitly require this for onboarding, bidding, partnerships with brands, and eligibility to issue special invoices.Limited Liability Companies and even general taxpayers<\/strong>\u3002\u00b7 Funding<\/strong>: Limited liability companies can raise equity capital and have easier access to loans; sole proprietorships can generally only secure loans through collateral. \u00b7 Exit<\/strong>: Limited liability companies can transfer shares or exit at a premium; sole proprietorships can only be dissolved and liquidated.<\/p>\n\n\n\n
III. The \u201cAccounting Bomb\u201d: Who Ends Up with More When Profits Are the Same?<\/h2>\n\n\n\n
Assuming annual revenue of 5 million and a profit margin of approximately 20% (annual profit of 1 million):<\/p>\n\n\n\n
Main Body<\/th>
Tax burden measurement<\/th>
The Boss Is Ours<\/th><\/tr>
Self-employed individual (fixed-rate taxation; total approximately 2%)<\/td>
About 20,000<\/td>
About 980,000<\/strong><\/td><\/tr>
Self-employed individual (audited accounts, profit of 1 million)<\/td>
Business income tax of approximately 280,000<\/td>
About 600,000<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
For the same profit, a limited liability company takes home less than a sole proprietor. 120,000\u2013380,000<\/strong>.\u201dThe idea that \u201dconverting to a corporate structure lowers taxes' is an illusion.\"<\/p>\n\n\n\n
IV. The 3 Most Common Pitfalls<\/h2>\n\n\n\n
- Looking Only at Nominal Tax Rates<\/strong>: I forgot that limited liability companies also have to deal with the 20% dividend tax. \u00b7 Excluding business licensing requirements<\/strong>: Only when I wanted to take on large orders from the platform or bid on projects did I realize that my sole proprietorship didn\u2019t meet the eligibility requirements. \u00b7 Disregarding Unlimited Liability<\/strong>: Once a business has high cash flow, significant assets, and employees, the unlimited liability of a sole proprietorship becomes a real risk.<\/p>\n\n\n\n
V. A 4-Step Approach: How to Decide Whether to Switch<\/h2>\n\n\n\n
\u2460 View Liability Exposure<\/strong>: Large asset base, significant external debt, and employees \u2192 Tend to opt for a limited liability company to isolate risks. \u2461 Check the admission requirements<\/strong>: Determine what type of entity the target customers\/platform require, and align on that before making a decision. \u2462 Net take-home pay<\/strong>: Take into account tax assessments, dividend distributions, and corporate taxes\u2014not just the nominal tax rate. \u2463 Compliance Conversion<\/strong>: Settle tax obligations, deregister your sole proprietorship, establish a new company, and ensure a seamless transition for social security and tax forms\u2014don\u2019t leave any gaps.<\/p>\n\n\n\n
Remember this: Whether or not to proceed depends on responsibility, eligibility, and take-home pay\u2014not on the nominal tax rate.<\/strong><\/p>\n\n\n\n\n<\/figure>\n<\/figure>","protected":false},"excerpt":{"rendered":"
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