Sole Proprietorship vs Company Tax Comparison 2026

Q: Which has the lower tax burden?

Small operators (annual invoicing ≤ CNY 5M) usually save tax as sole proprietors : no CIT, just personal business income tax plus VAT. Larger operators (> CNY 5M) should register a company.

Q: What are the downsides of a sole proprietorship?

No 13% special VAT invoices (limiting big clients) and no social insurance subsidies.

Q: Must a company always pay corporate income tax?

Yes — companies pay CIT at 25% (5%/10% for small firms), then dividends are taxed 20% personally: double taxation.

Q: CNY 1M annual invoicing — which to pick?

Choose a sole proprietorship : VAT-exempt under CNY 100K/month, personal tax at 5%–35%, annual burden CNY 10–30K — versus CNY 80–150K for a similar company.

This comparison weighs the true tax burden of a sole proprietorship versus a limited company. It factors VAT (small-scale exempt under CNY 100K/month), personal business income tax, and the corporate CIT + dividend double taxation. At CNY 1M annual invoicing, a sole proprietor typically pays CNY 10–30K in tax versus CNY 80–150K for a company. For freelancers, e-commerce sellers and founders choosing an entity.

Annual Financial Projection

Estimated Annual Revenue (CNY/yr)

Estimated Annual Costs (CNY/yr)

Tax Incentive Presets (2026)

Defaults to small-scale taxpayer treatment with SME relief policies.

VAT Levy Rate (%)

Small-Business CIT Rate (%)

How do companies and sole proprietors differ on tax?

I. VAT (identical for both)

For VAT, small-scale treatment is identical for sole proprietors and companies: monthly sales under CNY 100K exempt, the rest at 1% or 3%.

II. Income tax (the key difference)

1. Limited-liability company (double taxation):

When the company profits, it first pays corporate income tax (5% for qualifying small firms, 25% standard). To move what's left to a personal account, the owner pays another 20% in dividend tax.

2. Sole proprietorship (single taxation):

A sole proprietorship has no separate legal person — the profit is the owner's. So there's no corporate income tax, only individual income tax on business income at progressive rates of 5%–35%. And annual taxable income up to CNY 2M enjoys a 50% reduction.

III. How to choose?

Generally, at modest profits (up to a few hundred thousand yuan a year), sole proprietors pay clearly less tax. But once profits reach millions, the top 35% personal rate bites hard — a limited company with proper expense deductions wins instead.

Beyond tax, structure follows business needs: sole proprietors carry unlimited joint liability (personal assets repay business debts), can't transfer shares and struggle to raise funds; a limited company caps owners at limited liability — better for growth and investors.

Frequently Asked Questions

Which has the lower tax burden?

Small operators (annual invoicing ≤ CNY 5M) usually save tax as sole proprietors: no CIT, just personal business income tax plus VAT. Larger operators (> CNY 5M) should register a company.

What are the downsides of a sole proprietorship?

No 13% special VAT invoices (limiting big-client deals) and no social insurance subsidies.

Must a company always pay corporate income tax?

Yes — companies pay CIT at 25% (5%/10% for small firms), and dividends to individuals are taxed another 20%: double taxation.

CNY 1M annual invoicing — which to pick?

Choose a sole proprietorship: VAT-exempt under CNY 100K/month, personal tax at 5%–35%, annual burden CNY 10–30K — versus CNY 80–150K for a similar company.