Setting up or growing a business in Italy means facing a fundamental decision: Is it better to operate as a sole proprietorship or as a Limited liability business (S.r.l.)? The choice of legal form has a direct impact on costs, personal liability, taxation, administrative management, and prospects for future development.

This article explains sole proprietorships and S.r.l.s, including their main differences regarding liability, costs, and tax obligations. We also provide the pros and cons of each option for Italian businesses that sell goods or services.

In addition, we explain how to convert a sole proprietorship into an S.r.l. We can help you assess when the transition could be beneficial and what tax aspects to consider.

What’s in this article?

• Sole proprietorship and Limited liability business (S.r.l.): What are they?
  
• Costs and regulations for sole proprietorships and S.r.l.s
  
• Differences in liability between sole proprietorships and S.r.l.s
  
• Tax obligations of sole proprietorships and S.r.l.s
  
• Pros and cons of sole proprietorships and S.r.l.s
  
• When to convert a sole proprietorship into an S.r.l.
  
• How Stripe can help entrepreneurs
  

Sole proprietorship and Limited liability business (S.r.l.): What are they?

When setting up a business in Italy, one of the first decisions to make concerns the legal form. The choice between a sole proprietorship and an S.r.l. is a formal matter, and it affects how the business operates, is taxed, and presents itself to customers, suppliers, and credit institutions. Sole proprietorships and S.r.l.s differ greatly in terms of legal structure, degree of business autonomy, and level of protection for the entrepreneur’s personal assets.

Sole proprietorship

A sole proprietorship is the simplest and most straightforward business entity in Italy. The entrepreneur acts in their own name, and there is no legal separation between the individual and the business. From legal and tax perspectives, the two entities are one and the same. This feature simplifies management and makes it less costly, but it has a significant impact in terms of liability.

The entrepreneur is liable without limitation for the obligations of the business and must cover debts and liabilities with their personal assets. This is because there is no distinction between business assets and private assets. For this reason, sole proprietorships are often chosen in the initial phase of a business project or by those who carry out low-risk business activities with limited volumes.

S.r.l.

An S.r.l. is a corporation with independent legal status. This means that the company is a separate entity from its shareholders, even in the case of a single-member S.r.l.The obligations assumed by the company remain with the S.r.l. itself, and the shareholders are liable within the limits of the capital contributed, except in specific cases provided for by law.

This model is designed for more structured or expanding businesses that require greater protection of personal assets and solid organizational structures. S.r.l.s are often a more beneficial business form as turnover, operational complexity, and operational and contractual liabilities increase.

Costs and regulations for sole proprietorships and S.r.l.s

When choosing between a sole proprietorship and an S.r.l., it is important to consider start-up and operating costs, as well as the regulations of each form.

Sole proprietorship

Setting up a sole proprietorship is relatively simple and inexpensive. In many cases, it is sufficient to submit the Single Business Communication (ComUnica) to the Chamber of Commerce, register for value-added tax (VAT), and register with the relevant social security institutions (e.g., Italian National Social Security Institute [INPS] and Italian National Institute for Insurance Against Accidents at Work [INAIL]). Minimum capital and notarized deeds are not required, except in special cases. Administrative management is also more efficient: simplified accounting, fewer formal requirements, and lower costs for accountants and advisory services.

S.r.l.

On the other hand, an S.r.l. involves higher initial costs. Requirements include a deed of incorporation drawn up by a notary with the resulting notary’s fee, payment of the share capital—which can be less than €10,000 for a simplified S.r.l. (S.r.l.s.)—registration in the Business Register, and a host of formal requirements.

Added to these are higher management costs, including ordinary accounting, annual financial statements, and auditing bodies. The law requires the appointment of an auditing body or statutory auditor for an S.r.l. They are responsible for supervising proper management and regular bookkeeping if the company meets the following criteria:

• Requires consolidated financial statements
  
• Controls a company subject to statutory audit
  
• Exceeds at least one of the following limits for two consecutive financial years: €4.4 million in total assets on the balance sheet, €8.8 million in revenue, or 50 workers employed on average during the financial year
  

The presence of auditing bodies or a statutory auditor entails additional formal requirements and recurring professional costs. However, it also helps to strengthen the company’s transparency and reliability with third parties.

Differences in liability between sole proprietorships and S.r.l.s

Debt liability is one of the most important criteria when choosing between a sole proprietorship and an S.r.l.

Sole proprietorship

In a sole proprietorship, the entrepreneur has unlimited liability for the obligations of the business. In the event of debts or financial difficulties, creditors can also claim the entrepreneur’s personal assets, such as their private bank accounts or real estate registered in their name. There is no legal separation between personal assets and company assets.

S.r.l.

By contrast, an S.r.l. is based on the principle of limited liability. Shareholders are liable for corporate obligations within the limits of the capital contributed. Under normal circumstances, personal assets are protected. This makes S.r.l.s particularly attractive for businesses with a certain level of risk and for companies that operate online or handle high transaction volumes.

Tax obligations of sole proprietorships and S.r.l.s

Sole proprietorships and S.r.l.s also differ in their tax obligations in terms of taxes payable.

Sole proprietorship

Sole proprietorships are subject to personal income tax, a progressive tax based on income brackets. Business income flows directly into the entrepreneur’s personal income and is taxed according to personal income tax rates, plus regional and municipal surtaxes. In addition, there are social security contributions, which can have a significant impact on the overall burden.

S.r.l.

An S.r.l. is subject to different taxation. Profits are taxed at the company level with Italian corporate income tax (IRES) and Italian regional tax on productive activities (IRAP). If profits are distributed to shareholders at a later stage, they are also subject to further taxation. This mechanism allows for greater tax planning, especially when part of the profits are reinvested in the business.

When comparing sole proprietorships and S.r.l.s, it’s important to know that S.r.l.s can be more tax efficient above certain income thresholds, even though they require more structured accounting management. It is important to assess each case individually in relation to what the business sells and the possible application of specific VAT regimes, such as reverse charge for certain services.

Pros and cons of sole proprietorships and S.r.l.s

When deciding to operate a sole proprietorship or S.r.l., it is useful to compare their advantages and disadvantages. This can help you assess which legal form is consistent with your business model, level of risk, and growth prospects.

Is it better to set up a sole proprietorship or an S.r.l.?

It depends on the scale and characteristics of your business. In general, setting up a sole proprietorship is suitable if you are just starting out, have low costs, anticipate limited risk, and want simple management. On the other hand, setting up an S.r.l. is advisable when the business grows, and turnover or operational risk increases. It can also be important to set up an S.r.l. to separate personal assets from those of the company and better plan taxation and future growth.

When to convert a sole proprietorship into an S.r.l.

The conversion from sole proprietorship to S.r.l. is not a mandatory step. However, it can be an important choice that becomes relevant when the business grows and the entrepreneur’s needs change. In practice, it is advisable to consider switching from a sole proprietorship to an S.r.l. when the business model evolves beyond a personal scale, and turnover, risks, and operational complexity begin to increase. Below, we discuss the main signs that it could be time to convert from a sole proprietorship to an S.r.l.

Increased economic and asset risk

In a sole proprietorship, the lack of separation between personal and business assets exposes the entrepreneur directly. When the business involves significant contracts, corporate clients, high transaction volumes, or potential litigation, converting a sole proprietorship into an S.r.l. allows you to limit liability and better protect your personal assets.

Higher taxation

As income increases, progressive personal income tax and contributions can have a significant impact on the overall tax burden. An S.r.l. allows for more flexible management of profits, especially if a portion is reinvested in the business rather than distributed.

Operational and commercial perspectives

From an operational and commercial perspective, the transition from a sole proprietorship to an S.r.l. can also be appropriate when the following occur:

• You work with structured or international clients that require a corporation.
  
• You need to hire staff or collaborators on a permanent basis.
  
• You want easier access to financing or lines of credit.
  
• You consider bringing in partners or investors.
  

How to transition from a sole proprietorship to an S.r.l.

In practice, the most common way to transition from a sole proprietorship to an S.r.l. is to transfer the sole proprietorship to a newly formed S.r.l. This allows the company to take over business operations while maintaining operational continuity. This requires attention to taxes, corporate evaluation, and formal requirements, which must be handled with the support of qualified professionals.

It is important to clarify that, in most cases, the business does not retain the same VAT identification number (VAT ID). The sole proprietorship is closed, and the S.r.l. establishes a new tax position. For this reason, the conversion from a sole proprietorship to an S.r.l. must be carefully planned to avoid operational disruptions and properly manage contracts, invoicing, and relationships with customers and suppliers.

How much does it cost to convert a sole proprietorship into an S.r.l.?

Converting a sole proprietorship into an S.r.l. involves variable costs that depend on the method chosen and the complexity of the company. On average, the total cost can range from approximately €2,000–€5,000.

Expenditure generally includes the following:

• Notarial deed of incorporation of the S.r.l.
  
• Professional fees (e.g., accountant and, if necessary, expert appraisal for contribution)
  
• Taxes and administration fees
  
• Share capital (even minimal, if applicable)
  

Costs can increase if the company has significant assets to contribute, employees, or a complex accounting structure.

How Stripe can help entrepreneurs

For sole proprietorships and S.r.l.s, managing payments and tax obligations is central for growth. This is where solutions—such as Stripe Payments and Stripe Tax—can make a difference.

Stripe Payments allows you to accept online and in-person payments easily and securely, supporting several payment methods and currencies. Whether you are a sole proprietorship or a structured S.r.l., you can offer your customers a simplified payment experience that reduces friction and improves conversion rates.

On the other hand, Stripe Tax is an important tool for dealing with tax complexity, especially for those who sell digital services or operate in multiple countries. It automates tax calculations—including VAT—helping you comply with local regulations without overburdening internal processes.

When the choice between an S.r.l. and a sole proprietorship affects various aspects of the business, relying on tools designed to grow with you in a compliant and sustainable manner can greatly simplify your entrepreneurial journey.

For sole proprietorships and S.r.l.s, managing payments and tax obligations is central for growth. This is where solutions—such as Stripe Payments and Stripe Tax—can make a difference.

Stripe Payments allows you to accept online and in-person payments easily and securely, supporting several payment methods and currencies. Whether you are a sole proprietorship or a structured S.r.l., you can offer your customers a simplified payment experience that reduces friction and improves conversion rates.

On the other hand, Stripe Tax is an important tool for dealing with tax complexity, especially for those who sell digital services or operate in multiple countries. It automates tax calculations—including VAT—helping you comply with local regulations without overburdening internal processes.

When the choice between an S.r.l. and a sole proprietorship affects various aspects of the business, relying on tools designed to grow with you in a compliant and sustainable manner can greatly simplify your entrepreneurial journey.