Your choice of business form and structure has a major impact on things like financing, risk, tax and future sales. However, be aware that you have the option to change your business form at a later date.
Here you'll get an overview of the pros and cons of some of the most common types of companies and businesses. Read about:
- What is a sole proprietorship?
What is a private limited company (ApS)?
What is a partnership (I/S)?
What is a limited liability company (A/S)?
When should I set up a holding company?
What is a sole proprietorship?
A sole proprietorship has only one owner, who owns all the company's assets and debts. There is no management or board of directors, but you can hire employees. You can set up a sole proprietorship without investing any money in the business.
You are personally and unlimitedly liable for all the company's obligations, and for tax purposes, you and the company are the same person. You are taxed on the company's profits as personal income, but on the other hand, you can also deduct the company's losses from your personal income.
As a sole trader, you are not required to prepare and submit an annual report to the Danish Business Authority according to the Danish Financial Statements Act, but you must post according to the Bookkeeping Act and prepare tax accounts.
The advantages of a sole proprietorship over a limited liability company include
Any losses in the business are deducted from your or your spouse's salary income.
Setting up your business is free and fast.
There are no legal requirements for management and publication of accounts.
Disadvantages of sole proprietorship compared to operating as a company:
You are personally liable for the company's losses.
You can't bring new owners into the business.
With a large profit, you'll pay top tax.
There can be significant costs associated with selling or generational change in the company.
What is a private limited company (ApS)?
A private limited company (ApS) is the most common form of company in Denmark. A private limited company can have one or more owners and must be established with a minimum capital contribution of DKK 40,000.
To set up a private limited company, you need an incorporation document and articles of association. You can choose whether you only want an executive board or whether you also want a board of directors. The company's assets are the company's and not the owners'. With a private limited company, you are only liable for the money you have chosen to put into the company in the form of share capital.
Taxation takes place in the company and not with the owners, and tax is calculated according to the corporate tax rules. The company must prepare an annual report, which must be approved at a general meeting and reported digitally to the Danish Business Authority. The company's annual report must generally be audited by an auditor.
The advantages of a private limited company compared to other types of companies:
You are not personally liable for any losses in the business.
With the fixed legislation for limited liability companies, you ensure the presence of capital and safer creditors than with a partnership, for example.
When you establish a private limited company, you can also choose to establish a holding company that owns the shares of the private limited company. With a holding company (see below) it is possible to gain some tax advantages.
The disadvantages of a private limited company:
Losses in the business cannot be deducted from your or your spouse's salary income.
The company's assets are those of the company and not the owners, and you cannot borrow money from the company.
When founding the company, a minimum of DKK 40,000 must be invested in the company.
A memorandum and articles of association must be drawn up.
What is a partnership (I/S)?
Like a sole proprietorship, a partnership is a personally owned business, but with at least two owners, and there is no requirement for a capital contribution. As owners of a partnership, you are personally, unlimitedly and jointly and severally liable for the company's obligations. You are jointly and severally liable with all your assets, including your private house, car, boat, etc.
The owners of a partnership can be both individuals and companies, and you are only required to register if the company's owners are limited liability companies or if the company needs to be registered for tax purposes.
A partnership must keep accounts in accordance with the Bookkeeping Act, but you only need to submit an annual report to the Danish Business Authority in accordance with the Annual Accounts Act if all the partners are companies. If one of the owners is a natural person, you are therefore not required to submit annual accounts to the Danish Business Authority, but you must prepare tax accounts for the company.
A partnership is taxed under one of three schemes of your choice:
Personal tax rules
The enterprise scheme
Return of capital scheme.
The advantages of a partnership compared to a limited liability company include
There are no audit requirements or formal incorporation requirements for an I/S.
Setting up your business is free and fast.
Losses can be deducted in personal income tax.
The disadvantages of a partnership compared to a limited liability company include
Personal, unlimited and joint and several liability
Lack of a fixed framework for collaboration because there is no requirement for incorporation papers.
What is a limited liability company (A/S)?
A public limited company (A/S) is the "largest" of the Danish company forms and requires a capital contribution of DKK 400,000. A public limited company can be founded by one or more owners and must have both an executive board and a board of directors. The owners can be natural persons or companies.
A limited liability company is regulated by the Danish Companies Act and is subject to more requirements than both the private limited company and the entrepreneurial company. There are also requirements for a memorandum and articles of association. Legally, there are many similarities between setting up a limited liability company and a private limited company.
In a limited liability company, taxation takes place in the company and not with you, and tax is calculated according to the corporate tax rules. You are only liable with the money you have invested in the company. You are therefore not personally liable. An annual report must be prepared, approved at a general meeting and then submitted digitally to the Danish Business Authority. The company's annual report must generally be audited by an auditor.
The advantages of a limited liability company include:
Marketing value to the outside world. With a capital contribution of DKK 400,000, you show that there are funds in the company, which can be an advantage for larger tenders or cooperation agreements.
You have limited liability for the company's obligations. If the company goes bankrupt, you only lose the DKK 400,000 you have contributed in share capital.
If the company is profitable, there may be tax advantages if the shares in the company are owned through a holding company.
The disadvantages of a limited liability company include:
A capital contribution of min. 400,000 kr.
Limited liability companies are subject to strict requirements and regulated by the Companies Act.
The company must have both an executive board and a board of directors or supervisory board and has the general meeting as the highest authority.
When should I set up a holding company?
When you start a business, you may consider whether you also want to establish a holding company. A holding company is not a form of company in itself, but can be a private limited company, a public limited company or something completely different. A holding company simply means that the purpose of the company is to own shares or shares in other companies.
If you own your business (operating company) through a holding company, the profits can be transferred tax-free to the holding company after paying corporation tax. The holding company can choose to use the profit to save or invest in other activities, such as shares or property, without having paid full tax beforehand.
The advantage of this structure is that the profits from your business (the operating company) can be saved in the holding company. Should the operating company run into financial difficulties, you do not risk losing the profits accumulated in previous years.
Want to know more?
Contact inforevision if you want advice, guidance and practical assistance in setting up a business and choosing a company form.
