For many entrepreneurs choosing the right structure such as a sole proprietorship or limited liability company (LLC) is essential for optimising taxes and operational flexibility. Entrepreneurs usually consider the tax implications when considering the difference between LLC and sole proprietorship. In this blog we will understand the tax difference between sole proprietorship and LLC in terms of taxation which will help you make an informed decision for your business setup in UAE.
Back to topWhat is an LLC?
An LLC is a legal structure of the business in which the business owners are liable only for the amount invested in the business. It separates the assets and liabilities of the company from that of the owners. This separation protects the assets of the individual owners in case of bankruptcy. An LLC formation in Dubai also provides full foreign ownership and tax incentives.
Back to topWhat is a Sole proprietorship?
A sole proprietorship is owned and operated by one person with no legal distinction between the owner and the business. The owner is personally liable for all debts and liabilities. This business structure is popular amongst consultants, doctors, designers, freelancers, lawyers, and accountants. With a sole proprietorship in Dubai you can completely control your business operations.
Back to topWhat is the Tax Difference between Sole proprietorship and LLC?
Understanding the tax rules for sole proprietorship and LLC is crucial to spot the tax difference. As per the Ministry of Finance in UAE, the corporate tax is same for both the business structures, which is mentioned below:
- 0 percent for taxable income up to AED 375,000
- 9 percent for taxable income above AED 375,000
Also, if your sole proprietorship or LLC in the UAE is involved in the sale of goods and services, you will have to pay Value Added Tax (VAT). The VAT is also same for both the business structures which is 5 percent, subject to the following conditions:
- Taxable supplies and imports of a UAE-based business exceed AED 375,000 per annum
- Taxable supplies of a non UAE-based business with no minimum cap
- Optional for businesses whose supplies and imports exceed AED 187,500 per annum
The only key difference between LLC and sole proprietorship in terms of taxation is how it affects the personal assets and liabilities of the business owners. As per the LLC tax rules, the separation between personal and business finances makes tax filing cleaner and provides added legal protections. However, the sole proprietor might have to pay taxes from his personal income.
Back to topWhy Choose Commitbiz?
Understanding the difference between LLC and sole proprietorship can significantly impact your tax obligations and long-term financial strategy. Make sure to consult expert tax consultants from Commitbiz to fully understand both the LLC tax rules and the tax rules for sole proprietorship. Contact us and book a free consultation TODAY!!
Back to topAre business expenses treated differently between LLC and a sole proprietorship?
No, both LLCs and sole proprietorships can deduct business expenses on their tax returns.
Do LLCs or sole proprietorships offer better protection from tax audits?
Neither LLC nor sole proprietorships are immune to tax audits. However, LLCs have stronger governance and documentation practices, which can help in showing compliance during audits.
Can a sole proprietorship employ staff?
Yes, sole proprietors can hire employees. However, they must comply with labour laws, visa sponsorship, and payroll management.
