Corporate Tax vs Income Tax: The ultimate showdown
You know how everyone says picking the right legal structure is crucial when starting a business? Well, they’re right—it directly dictates how the government will tax you. The whole "profit vs. income" debate literally decides how much cash stays in your pocket at the end of the day.
Income Tax (The Freelancer/Trade route)
If you run a standard trade, you’re paying income tax. This basically means the business’s money is your personal money. Once you cover your taxes and social contributions, whatever is left is yours to spend freely. The catch? If your business takes off, those progressive income tax rates can get uncomfortably high.
Corporate Tax (The LLC / d.o.o. life)
Companies pay corporate tax on the profit they make over the year. Here is the golden rule: the company’s money is NOT your personal money. To buy your groceries with it, you either have to pay yourself a salary or take a dividend. The upside is that corporate tax rates are usually flat and much friendlier.
When is it time to upgrade to an LLC?
It all comes down to the math. Making the switch usually makes sense when your revenue hits a sweet spot (often over €40k). At that level, the taxes on a trade become huge, whereas an LLC lets you keep the money inside the company and reinvest it at a lower tax rate.