Top fiveSetting up as a sole trader is one of the most popular way to start a business in Italy, and it’s still quite common because it’s easy and cheap. Sole trader registration is straightforward, accountancy is simpler than a limited company, and you can use part of the money in the bank account for your personal expenses. At the end of the year, you will keep all the profits after tax.

Disadvantage of setting up the business as a sole trader

Now you have read the advantages of a sole trader, but there are also disadvantages; if your business fails, you will have to pay for that failure out of your own pocket, and the creditors can take advantage of your personal wealth even outside Italy in your own country, although this usually happens only for important debts. This is the main reason why many entrepreneurs prefer a limited company.

The other disadvantage is the prestige. A limited company sounds more official and in general more respected. However, because a limited company has limited liability while the sole trader has not, it’s sometimes easier for a newly incorporated sole trader to find an office or get a loan. The landlord or the bank knows that – if the business goes bad – they can still tackle the personal wealth of the owner, so they are more open to take the risk.

Open or Close an Italian sole trader

A sole trading company is incorporated directly at the Chamber of Commerce and doesn’t require a notary public, who is mandatory instead to open an Italian limited company (S.R.L.) and an Italian joint stock company (S.P.A.). Thus the company formation is extremely cheaper.

Because a sole trader is deeply connected to the (sole) owner, the business usually ceases on the owner’s retirement or death. Before that, it can be dissolved with an application at the Chamber of Commerce.

Can a Sole Trader become a Limited Company

Starting small by sole trading is a way to test a market – many companies are born this way. If this is your case, and you plan to grow later, can you upgrade your sole trader company in a real limited company later?

The answer is “yes and no”. The answer is (in part) no, because you can’t simply upgrade your company. A Limited company requires a different procedure and in Italy the company formation should be done in front of a notary public. However you can achieve the same result dissolving the sole trader and moving all the asset to the new company, including the name, the logo and equipments. If your timing is correct, you will dissolve the sole trader, setup a new limited company and move the asset in the same very moment, like if the company has been upgraded.

Be careful because there can be some tax involved. In fact, moving the asset from a company to another can be taxed as a sale.

How to chose the name of your Italian sole trader company

The name of a sole trader should be the sum of two elements:
i) a fantasy name chosen by the owner
ii) at the end of the chosen name, the name of the owner himself.
For instance, if I decide to trade as “Ferrari” my company should be named “Ferrari di Stefano Tresca”, that it could be amusing because the same words in Italian mean also “Stefano Tresca has a Ferrari (the car)”.
Before choosing the name of a famous company – and be sued by them – read the post How to Choose the Name of a Company in Italy.

Business card and other stationery for sole trader

The name of the owner should be always shown in business card, letterhead and any other commercial document, or the company can be fined.

The reason is simple. If a sole trader company fail, the owner has to pay all the debts from his own pocket. He can’t just go bankrupt, in fact there is no limited liability. The law requires to show to your clients and providers who’s the person behind the company.

This is the reason why so many of our clients prefer to setup a more expensive Italian Limited Company (S.R.L.) and get a limited liability.

Sole trader vs. Limited liability company in Italy

So what’s the best choice, a sole trader or a limited liability? Our bigger clients have no doubt, they enter in the Italian market with all the firepower of a limited company (S.R.L.) and the bravest of them start from the beginning with a bigger and more prestigious Italian joint stock company (S.P.A.).

But what about the smaller entrepreneur, that want to test the market? Sole trader vs Limited company is one of the most asked question of my smaller clients, and – like any other common question – has no common answer.

Personally I would suggest a limited liability company all the time. I like to separate the business from my personal life and sleep well at night. If the business is not so good as expected, you can dissolve the company and lose just a few thousands euros.

However, a limited company can be very expensive (for a small business) to open and to dissolve. So you can go for the Sole trader if you can live with the idea that creditors can tackle your personal wealth, or if you have a business model that don’t allow loss, for instance you ship the goods only after you are paid (but be careful, because perfect business model are never so perfect as we think).
Whatever is your choice, do it. Italy is a bureaucratic nightmare, but it’s also one of the richest and most populated country of the European Union, definitively a market where any foreigner can make a profit.

Image source: s_falkow at Flickr.com

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