What Are the Types of Companies? What Are Their Differences?

One of the most important steps when starting a new business is choosing the right type of company. This decision not only affects your tax obligations but also directly impacts your responsibilities, investment opportunities, and growth potential. To find out which company type suits you best, let’s explore the differences between company structures in Turkey!

What are the types of companies?

When starting a company, you should choose the most suitable type by considering your responsibilities, capital, number of partners, tax burden, and growth goals. Each type of company has different advantages and risks, and making the wrong choice can bring disadvantages. When making your decision, it may be helpful to get legal support from a financial advisor or lawyer. According to the Turkish Commercial Code, the main types of companies in Turkey are as follows:

Joint stock company (A.Ş.)

Joint stock companies fall under the category of capital companies, and their capital is divided into shares. The liability of shareholders is limited only to the capital they have committed, and their assets are protected. Although the minimum capital requirement can be higher in some cases, it is generally around 250,000 TL. This type of company, which can also be established with a single shareholder, is suitable for large-scale, institutionalized companies.

Limited company (Ltd. Şti.)

Limited companies are another type of capital company. These companies are established based on capital, and the partners are liable only to the extent of their capital shares. The minimum capital requirement for limited companies is approximately 50,000 TL, and the number of partners can range from 1 to 50. Since this type of company is somewhat easier to establish and manage than others, it is ideal for SMEs and small to medium-sized enterprises.

Sole proprietorship

Sole proprietorships have a single real person as the owner and do not have a legal personality. The owner or partners of this type of company are directly responsible for all loans and debts. This type of company is subject to income tax, and due to its easy and low-cost establishment, it is preferred by small businesses, tradespeople, and professionals.

Cooperative

Cooperatives are democratic structures established to meet the everyday economic/social needs of their members. In this type of company, members are generally liable up to the amount of their capital shares. Cooperatives, which have a legal personality distinct from commercial companies, are frequently seen in fields such as agriculture, housing, and consumption.

What are the differences between company types?

There are significant differences between the main types of companies in Turkey in terms of tax, investment, and liability. These differences can be summarized as follows:

Tax differences

Sole proprietorships are subject to income tax, and the tax is paid at rates ranging from 15% to 44% based on income brackets. The profit earned in this company is declared directly by the real person. Sole proprietorships have simpler accounting and declarations, and their operating costs are low. Limited and joint stock companies, on the other hand, are subject to corporate tax and pay tax on profits. When profits are distributed in these companies, a withholding tax is also applied as personal income tax, resulting in double taxation. Joint stock companies have special tax advantages. In this type of company, a real person who holds the share certificate for at least 2 years may be exempt from income tax, while a legal entity can benefit from a 75% corporate tax exemption. There is no such exception in limited companies, and share transfers are always taxed.

Investment & capital differences

In sole proprietorships, which have limited investment attraction and growth potential, it is difficult to raise capital externally. The unlimited liability of the founder with all their assets may deter investors. In limited companies, whose minimum capital is between approximately 10,000 and 50,000 TL, there can be up to 50 partners. In this type of company, share transfer is limited by formalities such as notary approval, making it complex to attract investors. In joint stock companies, the minimum capital is 250,000 TL, and in non-public registered capital companies, it can rise to 500,000 TL. Joint stock companies, which have no limit on the number of shareholders, become subject to Capital Markets Board (SPK) regulations if the number of shareholders exceeds 500. Joint stock companies, where share transfers are more flexible and easier, can issue share certificates, bonds, and achieve significant investment opportunities through public offerings.

Liability differences

In sole proprietorships, the founder is personally and unlimitedly liable for all company debts. In limited and joint stock companies, shareholders’ liability is limited to the capital they have committed. However, in limited companies, shareholders may be directly liable in proportion to their capital shares for unpaid public debts such as taxes and social security premiums. In joint stock companies, shareholders are not affected by public debts; their liability regarding company debts is limited to their committed capital.

Advantages and disadvantages of company types

Just as each company has its advantages, there are also situations where they may be disadvantageous. These advantages and disadvantages can be listed as follows:

Advantages and disadvantages of sole proprietorship

Advantages
•    Can be established quickly and at low cost, and can be easily closed.
•    Low setup and operating costs, with straightforward accounting procedures.
•    The progressive income tax system means lower taxes at lower income levels; expenses can be included in the personal declaration.
•    Since one person makes all decisions, bureaucracy is minimal and the owner has complete control.

Disadvantages
•    As company income increases, severe tax burdens may arise due to progressive tax brackets (20–40%).
•    Unlimited liability poses a risk to the owner’s assets.
•    Financing, investment, and growth potential are limited, and bank credibility is low.

Advantages and disadvantages of a limited company

Advantages
•    Shareholders’ liability is limited to the capital they have committed.
•    Corporate structure makes it easier to obtain bank loans and engage in business relations.
•    The corporate tax rate is fixed (around 20%), which is advantageous in some sectors.
•    Share transfers are possible, and the company continues to exist even if ownership changes.

Disadvantages
•    Setup and operating costs are high.
•    Share transfers require notary approval and registry procedures, making it less flexible in attracting investors.
•    Cannot issue bonds; financial instruments are not as extensive as in joint stock companies.

Advantages and disadvantages of a joint stock company

Advantages
•    Shareholders’ liability is limited only to the capital they have committed; they are not affected by public debts.
•    Has strong capital-raising and investment potential due to the ability to go public, issue share certificates, and bonds.
•    Share transfers are easy.

Disadvantages
•    Startup costs are high.
•    Management bodies and accounting processes are complex, and the regulatory burden is high.
•    Capital increases may require mandatory general meetings and contract amendments, which can be costly.

Which company type should be preferred in which situation?

Sole proprietorships may be more suitable for those who want to start a small-scale business due to their ease of establishment and low costs. In comparison, limited companies are an ideal choice for medium-sized businesses, as they offer a balance between investment, liability, and taxation among shareholders. Joint stock companies, on the other hand, are the most suitable option for ventures seeking a broad partnership structure, investment opportunities, flexible transfer, and a corporate setup.

 

Sources: 1.

 

This blog post contains general information, not legal, financial, or investment advice. The content is prepared for informational purposes only, and you are advised to seek professional advice for your specific circumstances. The expressions in this article do not carry any binding nature or responsibility and reflect only the author’s evaluation. All your decisions are your responsibility, and Papel Electronic Money and Payment Services Inc. accepts no liability for any consequences arising from them.