Starting a business in Cyprus means choosing between working as a sole trader (self-employed) or setting up a company. Each choice comes with its own legal and financial responsibilities, so it’s important to understand the differences before deciding which is right for you.

 

What Does It entail to Be a Sole Trader?

A sole trader is an individual who runs a business under their own name without a formal company structure. This means all profits, losses, and liabilities are directly tied to the individual.

If you operate as a sole trader in Cyprus, you must:

• Register for VAT (if required by law)
• VAT registration is compulsory for business with: turnover in excess of EUR 15,600 during the 12 preceding months or. an expected turnover in excess of EUR 15,600 within the next 30 days.
• Register for income tax
• Make social insurance contributions
• Handle all business responsibilities on your own

While this setup is straightforward, many entrepreneurs choose not to work as sole traders due to two key reasons:

• Personal Liability – The individual is fully responsible for any debts or legal issues.
• Tax Considerations – Personal income tax rates can be higher than corporate tax rates, depending on earnings.

 

What Does It Mean to Run a Company?

Unlike a sole trader, a company is considered a separate legal entity. This means that in legal and financial matters, the company itself—not its owners—is responsible.

A company in Cyprus must adhere to:

• VAT regulations
• Corporate income tax rules
• Registrar of Companies requirements
• Social insurance obligations for employees
• Various trade and legal regulations

 

Advantages of Forming a Company

• Limited Liability: Owners are not personally responsible for the company’s debts. This means that if the company is bankrupt, the creditors go after your own personal wealth.
• Tax Benefits: Corporate tax rates may be lower depending on profit levels. Company owners can show business expenses and reduce the taxable profits amount.
• Investment Opportunities: A company can raise funds by adding shareholders.
• Business Growth Potential: Some industries require a company structure for licensing or partnerships.

 

Tax Differences Between Sole Traders and Companies

Both business types are taxed on their profits, but the rates differ significantly:

• Corporate Tax Rate: Companies in Cyprus are taxed at a flat 12.5% rate.
• Personal Income Tax (for Sole Traders):
  • €0 – €19,500: 0%
  • €19,501 – €28,000: 20%
  • €28,001 – €36,300: 25%
  • €36,301 – €60,000: 30%
  • Above €60,000: 35%

If a business earns between €30,000 and €60,000, the corporate tax structure is generally more favorable.

 

Key Differences Between a Sole Trader and a Company

1. Legal Responsibility

• Sole Trader: The individual is personally responsible for any debts or legal matters.
• Company: The company itself is liable, protecting the owner’s personal assets (except in cases of fraud or misconduct).

 

2. Filing and Compliance Requirements

• Sole Trader: If annual turnover exceeds €70,000, audited financial statements are required.
• Company: All companies must submit audited financial statements and comply with corporate filing rules.

 

3. Social Insurance Contributions

• Sole Trader: Pays social insurance quarterly at predetermined rates. Social Insurance Contributions rate for individuals is16.6% of the estimated earnings (not actual earnings).

• Company: Pays 11.5% in employer social insurance contributions on top of employee deductions.

 

4. Ownership and Business Growth

• Sole Trader: Cannot add new owners unless forming a partnership or company.
• Company: Can issue shares and bring in investors or partners easily.

 

Which Business Structure Is Right for You?

Choosing between a sole trader and a company depends on factors like liability protection, tax efficiency, business growth potential, and compliance requirements. While operating as a sole trader is simpler, forming a company offers more security and financial flexibility—making it a better choice for long-term business success.

It is always advised to receive professional guidance from an experienced accountant on whether it is financially efficient to change from being a Sole Trader to forming a company. This change is usually applicable when the business turnover and profits exceed a specific amount.

Making the right choice is not a straight-forward, and a lot of factors must be taken into account. Informed decisions are always the best. How to make an informed decision though? Filter, prioritize, analyze and synthesize data or information to support or refute a decision.