A limited company or a sole trader? Taxes, risks and costs side by side

In summary: As a sole trader (ENI), profits are subject to personal income tax (IRS) at the rate applicable to your tax bracket, which can be as high as 48%, and your personal assets are liable for the business’s debts. In a limited liability company (Lda), profits are subject to corporation tax (IRC) at 15% on the first €50,000 (19% above that threshold from 2026), the risk is limited to the capital, and you only pay tax on what you take home: salary or dividends at 28%. The company has higher fixed costs and more obligations. As a general rule, it starts to pay off when profits are stable and exceed €30,000 to €40,000 per year, but the final figure depends on how much you need to withdraw.

The main differences

Liability: what is at stake

Under the ENI, there is no distinction between the company and the individual. A debt owed to a supplier, a bank or the State may be recovered from the home, the individual’s personal bank account or their spouse’s salary, depending on the matrimonial property regime. In a limited liability company (Lda), as a general rule, creditors can only claim against the company’s assets.

There are some important exceptions: banks often require personal guarantees from the partners, and tax and social security debts may be recovered from a manager who has mismanaged the business (Article 24 of the General Tax Law). Limited liability offers protection, but it does not protect against everything.

Example: A sole trader is left with an outstanding debt of €30,000 to a supplier after a major client goes bankrupt. The supplier can attach the sole trader’s personal bank account, car or part of their home. In the case of a limited liability company (Lda) in the same situation, the supplier can only claim against the company, unless a partner has provided a personal guarantee.

Taxes: two levels in a company

In the ENI, there is only one tax, the IRS, but it is progressive: the higher the profit, the higher the marginal rate, which reaches 48% in the top bracket.

In a limited liability company (Lda), there are two levels. Firstly, the company pays corporation tax (IRC) on its profits. Secondly, the shareholder pays tax on whatever they withdraw: personal income tax (IRS) and social security contributions on their salary as a director, or 28% on dividends. Any funds retained by the company (for investment, debt repayment or to build up reserves) are subject only to corporation tax. This is where the company usually benefits: when not all the profit is needed to cover living expenses.

Example of a limited liability company (Lda.) Taxable profit of €50,000, in a municipality with a local tax rate of 1.5%, all distributed as dividends:

Total tax: around 40% of the profit, if all of it is distributed. If half remains with the company, the tax on that half is around 16.5%. In practice, a manager’s salary – which is a cost to the company – is combined with dividends. The right combination depends on the individual case.

Example: manager’s salary and dividends

The same company with a profit of 70 000 € before paying the managing partner. We have compared two ways of withdrawing the money:

Income is still subject to income tax, depending on the tax bracket and household income, which brings the two figures closer together. But income offers something that dividends do not: a pension contribution record, sickness benefit and parental leave. The right combination is calculated on a case-by-case basis.

Example: retaining part of the profit within the company

Taxable profit of €50,000. After corporation tax and the supplementary levy (€8,250), the remaining amount is €41,750. The partner withdraws only €20,000 in dividends and pays €5,600 in withholding tax. The others 21 750 € remain within the company, either for investment or as a reserve, and up to that point they have only paid 16.5% in tax. Under the ENI scheme, all profits are subject to income tax for that year, whether they are spent or remain in the business account.

As far as ENI is concerned, for the same profit, the accounts are dealt with under either the simplified scheme or the organised accounting system, and are subject to the income tax brackets. Do it at the simplified tax regime simulator or organised accounting. For the manager’s salary, use the net pay calculator.

Social Security

ENI pays 25.2% on the relevant income: 70% from services or 20% from sales. Self-employed people without a business structure pay 21.4%.

In a limited liability company (Lda), a manager who receives a salary pays social security contributions as a member of a statutory body: 23.75% paid by the company and 11% paid by the manager. A manager who does not receive remuneration does not, as a rule, pay social security contributions. Dividends are not subject to social security contributions.

Costs and obligations

A company is more expensive to run: mandatory organised accounting, Form 22 and IES, approval of accounts at general meetings, minutes, registration of changes with the Commercial Register, and RCBE. A limited liability company (Lda) that generates no turnover still has these obligations, and an Lda making a loss continues to pay its separate tax liabilities. Under the simplified ENI scheme, the obligations are essentially limited to issuing receipts, the quarterly Social Security return and personal income tax (IRS).

When each one makes sense

• ENI or ‘recibos verdes’: start-up phase, uncertain or low turnover, low risk to third parties (for example, services that do not involve stock or employees), and when all the profit is needed to make ends meet.
• Ltd: a stable profit of between €30,000 and €40,000 per year; an intention to reinvest; a business involving risk (suppliers, employees, credit, major contracts); more than one partner; or clients who prefer to contract with companies.

It is possible to transfer an ENI to a company at any time. The transfer of the business to the company may be carried out without immediate taxation of capital gains, provided the conditions set out in Article 38 of the Personal Income Tax Code are met.

Frequently asked questions

Is a single-member company different from an Lda?

It operates in the same way, but with just one partner, and offers the same limited liability. The company name ends with ‘Unipessoal, Lda’.

What about the EIRL?

A sole trader with limited liability sets aside separate assets for the business, but this form is rarely used: it carries almost the same obligations as a company without the tax advantages of corporation tax.

Can I run a limited liability company (Lda) and issue self-employed invoices?

Yes, for different types of work. However, invoicing your own company using ‘recibos verdes’ is subject to specific rules: the coefficient may rise to 1 (Article 31 of the Personal Income Tax Code).

The role of Serro & Andrade

We run the figures for you (expected profit, how much you need to withdraw, business risk) before making a decision. If the venture is viable, we’ll handle the incorporation, the transfer of the business and the bookkeeping. See how it works set up a business with us or book a meeting.

Figures for 2026: Corporate Income Tax Code (rates under Law No. 64/2025), Personal Income Tax Code and Social Security Contributions Code.