One question that is both important and topical for all types of entrepreneurs and entrepreneurs is whether you should choose a limited liability company or a sole proprietorship when you start your business. There are a variety of factors that affect which type of company form suits you best. Examples include the types of income you have, both as a private individual and in your company, and how you want your finances to be structured. Before you make your choice, it is important that you understand what applies and how the business should be conducted in the different options. In this article, we will go through what a limited liability company and what a sole proprietorship is and what the disadvantages and advantages of each company form are.
Starting a single business is probably the easiest and fastest way to start a business. To get started, all you have to do is go to the Swedish Tax Agency and apply for an F or FA tax slip. You don't need any start-up capital to start the company.
An important thing that you should know about before starting a sole proprietorship is that your company's finances are seen as an extension of your private finances, so the Swedish Tax Agency considers what you earn in your company as income from service.
A sole proprietorship is not considered to be its own legal entity. This means that it is your own social security number that will act as the corporate identity number for your company. You are thus personally responsible for the company.
As mentioned earlier, it is quick to register the company and it is free of charge. You do not need to prepare an annual report. Other advantages are that it only takes one person to start a sole proprietorship, so no board of directors is required.
The main disadvantage of a sole proprietorship is that it is you as an owner who has total responsibility for all obligations related to your company. If your individual firm goes badly, you risk your private assets to cover any losses and liabilities. Since everything is taxed as income from service, the tax can be very high. Another aspect to keep in mind is that the name of a sole proprietorship is only protected in the Swedish county with which it is registered. This means that another entrepreneur, in another part of Sweden, is allowed to start a business with exactly the same name as yours.
By far the most common form of company in Sweden is limited liability companies. It is used by both small business owners and large listed companies. A limited liability company and its owners are separate legal entities. When you start a limited liability company, you need to have at least SEK 25,000 in start-up capital. A limited liability company may have one or more owners.
The main advantage of a limited company is that you minimise the risk of going into personal bankruptcy if your business doesn't do well. You therefore have greater personal protection against the risks you take in running your business (although it should be stressed that this does not mean that the owners of a limited company can be reckless in their business dealings, as this can carry legal penalties). There are also favourable tax rules for a limited company, for example on profits, on the sale of the company and on dividends. In addition, many businesses, suppliers and public authorities prefer to work with limited companies rather than, for example, sole proprietorships.
It costs more to set up a limited company than to start a sole proprietorship. A limited company cannot lend money to an owner of the company. There is more administrative work with a limited company, for example an annual report must be drawn up for each financial year. This must then be submitted to and approved by the Companies Registration Office. The annual report also becomes available to the public. You cannot run a limited company by yourself (even if you are the sole owner), you need a responsible board of directors to start a limited company.
There is more to consider when choosing a company form than what we mentioned in this article. Contact us and we will tell you more.