Sole trader or limited company 2026 — which should you choose?
A sole trader (toiminimi) and a limited company (osakeyhtiö, Oy) differ in three things: taxation, liability and administrative work. The income of a toiminimi is taxed directly as the owner personal income, whereas an Oy is a separate taxpayer that pays 20 per cent corporate tax on its profit. The owner draws money from an Oy as salary or dividend.
As a rule of thumb, a toiminimi is light and cheap at a modest income, and a limited company starts to gain on tax once profit is left in the company or income grows. The real threshold depends on the result, how money is drawn and whether you leave profit in the company. Below are the differences in tax, liability and cost.
- €0
- sole trader setup (electronic)
- €240
- limited company setup (electronic)
- 20 %
- corporate tax on Oy profit
- progressive
- tax on sole trader income
How does taxation differ?
A sole trader business income is added to the owner other income and taxed progressively as earned income. Part of it can be taxed more lightly as capital income: by default 20 per cent of the annual return on the business net assets is capital income, and the owner may elect 10 or 0 per cent instead. The rest is earned income.
A limited company is a separate taxpayer. It pays 20 per cent corporate tax on its profit. When the owner draws money, they pay a further personal tax: on salary progressively, or on a dividend under the dividend tax rules. The advantage of an Oy appears when profit is left to grow in the company rather than drawn out all at once.
| Sole trader | Limited company | |
|---|---|---|
| Taxpayer | the owner personally | the company separately |
| Tax on profit | progressive earned + capital income | 20 % corporate tax |
| Drawing money | private drawings freely | salary or dividend |
| Leaving profit in the company | no separate benefit | grows at the 20 % rate |
Liability and risk
In a sole trader business the owner is liable for the business debts with all their personal property. The business and the owner are legally the same. In a limited company liability is in principle limited to the invested capital, but in practice banks and landlords often ask for a personal guarantee, which narrows this difference early on.
Setup and administration
Setting up a sole trader business is free electronically in the YTJ service, and bookkeeping may be single-entry in small activity. Electronic setup of a limited company costs 240 euros and requires double-entry bookkeeping, financial statements and a general meeting. Share capital is no longer required — zero euros is enough since 2019.
- Sole trader: free electronic setup, lighter bookkeeping, no mandatory financial statements for the smallest.
- Limited company: 240 euro setup fee, double-entry bookkeeping, financial statements and a general meeting yearly.
- In both: YEL insurance is mandatory once earned income exceeds the lower limit and the activity lasts over 4 months.
- A sole trader business can be converted into a limited company later as it grows — the choice is not irreversible.
When does each make sense?
A sole trader business suits a starting or part-time entrepreneur with modest income who draws all of it for themselves. A limited company starts to gain when the result grows, when profit is to be left in the company, or when limited liability matters. The threshold is not a fixed euro figure, because it depends on how money is drawn and on net assets.
Calculators for this topic
FAQ
Which is cheaper, a sole trader or a limited company?
At a small income a sole trader business is usually cheaper and simpler. The tax advantages of a limited company appear once the result grows or profit is left in the company. The threshold depends on the result and on how much you draw for yourself.
How much tax does a limited company pay on its profit?
20 per cent corporate tax. After that the owner pays a further personal tax on the salary or dividend they draw.
Is share capital required for a limited company?
No longer. The share capital requirement was removed in 2019, so a limited company can be set up with zero share capital. Electronic setup costs 240 euros.
Can a sole trader business be converted into a limited company?
Yes. As the business grows a sole trader can convert it into a limited company. The choice is not final — the form can be changed later.
Is a sole trader personally liable for debts?
Yes. In a sole trader business the owner is liable for the business debts with all their personal property. In a limited company liability is in principle limited to the invested capital.