The Fundamental Difference Between the Two
Sole proprietorship: a natural person doing business — no corporate income tax, only personal business income tax plus VAT.
Limited company: a separate legal person paying VAT + surtaxes + corporate income tax + dividend tax — the "double taxation" problem.
Comparing Income Brackets
| Annual Invoicing | Sole Prop. Tax | Company Tax | Recommended |
|---|---|---|---|
| CNY 500K | 5–15K | 25–40K | Sole proprietorship |
| CNY 1M | 10–30K | 50–80K | Sole proprietorship |
| CNY 3M | 50–100K | 120–180K | Sole proprietorship |
| CNY 5M | 100–200K | 250–400K | Depends on clients |
| CNY 10M | — | 600K–1M | Company |
Sole proprietors invoicing ≤ CNY 5M/year qualify as small-scale taxpayers; monthly invoicing ≤ CNY 100K (quarterly ≤ 300K) is VAT-exempt.
The 3 Downsides of a Sole Proprietorship
1. No 13% special VAT invoices — some major clients won't cooperate.
2. No social insurance subsidies — employee coverage is paid in full out of pocket.
3. Unlimited liability — business risks reach personal assets; a company caps liability.
So sole proprietorships suit small, asset-light, personal operations — not high-risk or fundraising-hungry ventures.
Special Case: Assessed Levy
Some industrial parks offer sole proprietors an assessed levy:
- No audit — income tax assessed at 0.5%–3% of invoicing
- Suits high-margin services with incomplete cost documentation
- Tightened in many regions since 2024 — consult the local tax bureau first