Individual Company or Sole Trader? The Key Differences Between the Two Forms

Despite their similar names, "individual company" and "sole proprietorship" are two legally distinct forms — and many entrepreneurs only encounter the difference when they actually have to decide which one to choose.

What Is a Sole Proprietorship?

A sole proprietorship — a sole trader (egyéni vállalkozó, abbreviated EV) — is the simplest form: the individual is liable for the business's obligations in their own name, with their own assets. There's no separate legal entity — the business and the individual are legally one and the same. This is what gives it its simplicity — quick to start, little administration — but it's also its limitation: your personal assets are also liable for the business's obligations.

What Is an Individual Company (Eic.)?

An individual company (egyéni cég, abbreviated Eic.) is an intermediate form between a sole proprietorship and a partnership/company form (e.g. a limited liability company, Kft.). The individual company does not have its own separate legal personality, but it operates as a standalone business form registered in the company registry, and in certain cases with limited liability — if the founder chooses this and sets aside registered capital for the business.

The Key Differences in a Nutshell

Liability: unlimited for a sole trader, with your entire personal wealth; an individual company can opt for limited liability on a separated portion of assets.
Administration: setting up and maintaining an individual company typically involves more administration than a plain sole proprietorship.
Taxation: both forms can choose from similar tax methods (e.g. flat-rate tax under certain conditions, corporate tax in some cases) — but the exact rules differ, and this decision affects your entire tax burden.
Prestige and business relationships: some business partners, especially larger companies, prefer to contract with a registered company rather than a private individual sole trader — though this is heavily industry-dependent.

When Is It Worth Considering the Switch?

If your business handles risky transactions, and it matters to you that your personal wealth is separated from business risk.
If your revenue and the scale of your activity already exceed the level where a sole proprietorship's simplicity is justified.
If your business partners prefer or require a registered company form.

What to Consider Before Deciding

Don't decide based on tax burden alone — the liability question and the administrative burden are at least as important a factor.
Get individual advice from an accountant or lawyer — the specific financial and legal impact of switching is heavily dependent on your individual situation.
Consider your long-term plans — if your business is expected to grow (employees, larger deals), it's worth thinking ahead about changing your business form.

What Does Penzum Currently Focus On?

Penzum currently focuses primarily on the tax and financial obligations of sole traders (flat-rate tax, KATA, VSZJA). If you switch to an individual company or another partnership form, it's worth consulting an accountant about the detailed, form-specific rules.

Not sure about your own situation? You can find further background material on comparing business forms in the Penzum Help Center. (exact link pending verification and insertion)