Sole Trader or Company: the Profit at Which Incorporating Starts to Pay

The formula, and why it produces a threshold

Two systems are being compared and they differ in one structural way. A sole trader is taxed on the profit as it arises, at personal rates, whether the money is taken out or left in the business — the business has no separate existence, so there is nothing to leave it in. A company is a separate taxpayer: it pays its own rate on the profit, and a second charge only falls when the money is distributed to you. Everything else about the two forms is administrative. That one difference is the whole economics.

It follows immediately that the saving only exists on profit you do not consume. If you draw the whole profit to live on, both systems tax it fully and the company adds a layer of cost for nothing. If you leave a slice in, that slice is taxed once at the corporate rate instead of once at your marginal personal rate, and the saving is the spread between them. Set that saving against the fixed annual cost of running a company and you have the threshold: the retained profit at which the spread pays for the accountant, the filings and the minimum contributions. Written out, the retained profit needed is the fixed cost divided by the spread, and the total profit needed is that plus what you draw to live on.

The numbers are less dramatic than the rhetoric around them. At a fixed annual cost of 2,500 euros and a marginal rate of 45 %, the retained profit that justifies a company is 8,333 euros against a 15 % corporate rate, 12,500 against 25 % and 16,480 against a German combined rate near 30 %. Lower the marginal rate to 35 % and the same fixed cost demands 12,500, 25,000 and 48,356 respectively. Raise it to 60 % and it falls to 5,556, 7,143 and 8,286. Those are ordinary amounts, which is the real finding: incorporating is not an advanced manoeuvre, it is a decision with a break-even like any other.

France 2026: the widest spread, and a flat tax that is no longer 30 %

France gives the comparison its widest gap. Corporation tax under article 219 of the tax code, in the version in force in 2026, is 25 % with a reduced rate of 15 % on the first 42,500 euros of taxable profit per twelve-month period — available where turnover is at most 10 million euros and the capital is fully paid up and held continuously as to at least 75 % by individuals. Against that sits the income tax scale of article 197 for 2026, applied to 2025 income: nothing to 11,600 euros per share, then 11 % to 29,579, 30 % to 84,577, 41 % to 181,917 and 45 % above. On income tax alone the reduced corporate rate goes below the personal rate the moment taxable income per share passes 29,579 euros, and social contributions on the sole trader's side only widen the gap.

One figure in this area is widely quoted wrong for 2026 and it matters here, because it prices the second layer. The flat tax on dividends is not 30 %. Its income tax component is still 12.8 % under article 200 A, but the social levies rose: the social security financing act for 2026 lifted the general social contribution on investment income from 9.2 % to 10.6 %, which with the 0.5 % debt levy and the 7.5 % solidarity levy makes 18.6 % — a total of 31.4 %. A euro of company profit earned at the 15 % corporate rate and then distributed therefore bears 41.69 % in all, and at the 25 % rate 48.55 %. Note also that the finance act for 2026 removed the irrevocability of the option to be taxed on the progressive scale instead, which is worth knowing before locking anything in.

Two French details close the loop. A sole trader does not actually have to form a company to be taxed like one: article 1655 sexies of the tax code lets an entrepreneur individuel elect to be treated as a single-member limited company and taxed at corporation tax, an option that is irrevocable and unavailable to anyone in the micro regimes. And the escape route of paying yourself in dividends instead of remuneration is capped: the part of dividends exceeding 10 % of a reference amount built from capital, share premiums and partners' current accounts is treated as professional income for social contributions. That rule now lives in article L. 136-3 of the social security code rather than the article people still cite for it.

Germany 2026: the country that mostly removes the reason to incorporate

Germany is the interesting case because it attacks the premise. Corporation tax is 15 % under paragraph 23 of the corporation tax act for assessment periods up to 2027, falling in steps to 10 % from 2032, and the solidarity surcharge of 5.5 % on it brings that to 15.825 %. On top sits trade tax: an assessment rate of 3.5 % multiplied by a local multiplier each municipality sets, with a statutory floor of 200 % for 2026 that rises to 280 % from 2027. At a common multiplier of 400 % that is 14 %, so a company retains profit at about 29.83 % — and at the 200 % floor at about 22.83 %, which is a genuinely large geographical spread for what is meant to be one national system.

The move that changes the decision is paragraph 34a of the income tax act. It allows a sole trader or partner to have profit left in the business taxed at 28.25 % for assessment periods up to 2027 — stepping down to 27 %, then 26 %, then 25 % over the following years — with a further 25 % charge only when the retained amount is later withdrawn. Compare that with the roughly 29.83 % a company pays at a 400 % multiplier and the tax reason for incorporating largely disappears: a German sole trader can already retain profit at a rate a point and a half below the company's, without a company. Add the credit under paragraph 35, which sets four times the trade tax assessment amount against income tax and is capped at the trade tax actually paid, and the sole trader's position improves again.

Spain 2026: no way to retain, so the sharpest threshold of the four

Spain has no equivalent of the German retention regime. A self-employed person's whole profit enters the general income base in the year it accrues and is taxed on the progressive scales whether or not a euro of it is drawn — there is no provision allowing profit left in the business to be taxed at a lower rate, and the capitalisation and levelling reserves that do exist belong to the corporate tax act and not to the personal one. That absence is what makes the Spanish threshold the sharpest of the four: the only way to get profit taxed at a corporate rate is to have a company.

The corporate side rewards it more than the headline rate suggests, and the headline rate is the trap. Article 29 of the corporate tax act names 25 % as the general rate, but transitional provision forty-four, inserted by the 2024 reform, phases in reduced rates and it is the transitional figures that apply now. For periods beginning in 2026 a micro-enterprise — prior-year net turnover below one million euros — pays 19 % on the first 50,000 euros of base and 21 % on the rest, while a small enterprise under the ten-million turnover test pays 23 %. Newly created entities pay 15 % in their first period with a positive base and the one after. Quote article 29 alone for 2026 and you will print the end-state rates, which are not yet in force.

The self-employed contribution completes the picture, and it is the one part of the Spanish system with a hard ceiling. The 2026 contribution order sets a minimum monthly base of 653.59 euros and a maximum of 5,101.20, and the rates on that base total 31.50 % — common contingencies at 28.30 %, occupational at 1.30 %, the intergenerational equity mechanism at 0.90 %, cessation of activity at 0.90 % and vocational training at 0.10 %. That gives a minimum monthly contribution of about 205.88 euros and a maximum of about 1,606.88. Because it is capped, it stops being a reason to incorporate above a fairly modest income and the whole argument reverts to income tax.

Italy 2026: the threshold is a ceiling, not a profit

Italy inverts the question. Below 85,000 euros of prior-year receipts, a sole trader can use the flat-rate regime: a fixed percentage of receipts set per activity is treated as income and taxed at 15 %, or at 5 % for the year an activity starts and the four that follow, and that single charge replaces income tax, the regional and municipal surcharges and the regional business tax together. For a professional the coefficient is 78 %, so 85,000 euros of receipts give a base of 66,300 and a tax of 9,945 euros. The same base under the ordinary scale gives 20,709. Nothing a company can do competes with that, so below the ceiling the incorporation question does not arise.

Above the ceiling — and the regime ends immediately, in-year, if receipts pass 100,000 euros — the ordinary comparison begins, with two Italian specifics. The income tax scale for 2026 has three bands, and one of the rates moved: 23 % to 28,000 euros, 33 % from there to 50,000 and 43 % above, the middle rate having been cut from 35 % to 33 % by the 2026 budget law. And the regional business tax, at an ordinary rate of 3.9 % for commercial companies, has not applied to individual traders and professionals since 2022, so it lands only on the company side of the comparison. A company's profit therefore bears 24 % corporation tax, and a distribution to an individual shareholder a further 26 % withholding, for 43.76 % on a euro earned and paid out.

Two Italian traps are worth flagging because they catch careful readers. The reduced 20 % corporation tax introduced by the 2025 budget applies only to the tax period following the one running at 31 December 2024 — that is, to 2025 — and was not extended for 2026, so quoting it as current is wrong. And the consolidated text of the regional business tax article still displays rates cut in 2014 by a decree whose cut was repealed later the same year; the rate to use is the one in the tax authority's own filing instructions, not the one the consolidated database shows.

What would change the verdict

The formula assumes the retained profit stays retained. If you build up reserves in a company and then take them out as dividends a few years later, you have deferred the second layer rather than avoided it, and the deferral is worth the time value of the tax, not the tax. On the 2026 rates that matters: a euro earned at the French reduced corporate rate and then distributed bears 41.69 % in total, at the standard rate 48.55 %, in Germany 48.33 % at a 400 % multiplier and 43.18 % at the 200 % floor, in Spain between 36.01 % and 40.75 % depending on which corporate rate applies, and in Italy 43.76 %. Those are not obviously better than a sole trader's position; the company wins on retention, not on distribution.

Three non-tax considerations can override the whole calculation, and two of them cut against incorporating. Contributions paid as a sole trader buy pension and sickness rights; profit left in a company and later drawn as a dividend buys none, so a tax saving can be a benefit cut in disguise. A company brings filing obligations, published accounts in most of these countries and a minimum contribution due whether or not the business trades. On the other side, limited liability is a real product with a real value — the reason many people should incorporate has nothing to do with the threshold in this article, and if separating business risk from your home is the point, the arithmetic is a secondary concern.

Finally, note what this article is not about. Crossing a turnover threshold that switches your value-added tax or reporting regime is a different question with a different answer, and it is treated separately on this site. The threshold here is about profit and legal form, and the two can move in opposite directions: you can be well below every turnover threshold and still past the profit at which a company pays, or well above them and still better off as a sole trader because you consume everything you earn.

Frequently asked questions

Is there a single profit figure above which I should incorporate?

No, and any article giving you one is guessing at your consumption. The threshold has two moving parts that are personal to you: what you draw to live on, which the company cannot shelter, and your marginal rate, which sets the spread. What is general is the shape — retained profit needed equals the company's fixed annual cost divided by the spread. Put your own three numbers in and the answer takes a minute. If a figure circulating in your country happens to fit you, it is because the person who wrote it assumed a consumption level and a marginal rate that resemble yours.

If I am going to distribute the profit anyway, does the company still help?

Much less, and sometimes not at all. Distribution triggers the second layer, and on 2026 rates the combined burden on a euro earned and paid out is 41.69 % or 48.55 % in France depending on the corporate rate, 43.18 % to 48.33 % in Germany depending on the local multiplier, 36.01 % to 40.75 % in Spain and 43.76 % in Italy. Compare that with a sole trader's marginal rate plus contributions and the company's advantage shrinks or reverses. The exception worth knowing is timing: distributing later rather than sooner is worth the time value of the deferred tax, which on a long horizon is real money even though the tax itself is unchanged.

Can I get the corporate rate without actually forming a company?

In two of these four countries, yes, and it changes the calculation completely. In Germany, paragraph 34a of the income tax act lets a sole trader or partner have retained profit taxed at 28.25 % for periods up to 2027, with a 25 % charge only on later withdrawal — a rate within a point and a half of what a company pays at a common local multiplier. In France, article 1655 sexies of the tax code lets an individual entrepreneur elect to be treated as a single-member company and taxed at corporation tax, though the election is irrevocable and closed to anyone in a micro regime. Spain and Italy offer no such route, which is exactly why their thresholds behave differently.

Can I just pay myself in dividends and skip social contributions?

Only partly, and the limits are written into the law rather than left to interpretation. In France the part of dividends received by a self-employed manager that exceeds 10 % of a reference amount built from the share capital, share premiums and partners' current accounts is treated as professional income and bears social contributions — a rule now found in article L. 136-3 of the social security code, not the article commonly cited for it. More importantly, contributions are not purely a cost: they buy pension entitlement, sickness cover and, in some systems, unemployment rights. Routing income around them lowers this year's bill and lowers a future entitlement, and a comparison that counts only the first half is not a comparison.

Is this the same thing as crossing a turnover threshold?

No, and confusing the two is expensive in both directions. A turnover threshold decides which value-added tax and reporting regime applies to you, and crossing it is generally not optional. The threshold in this article is about profit and legal form, and crossing it is entirely optional. The two are independent: a consultant billing 60,000 euros with almost no costs and modest living expenses can be past the profit threshold while comfortably inside every turnover limit, and a retailer billing 400,000 with thin margins who spends everything they earn can be far past every turnover limit and still have no reason to incorporate. Italy is the one place where the two genuinely interlock, because its flat-rate regime is defined by a receipts ceiling and dominates the comparison below it.