Limited liability company vs sole proprietorship in Denmark
When it comes to choosing the type of company you want to set up in Denmark, the first question you should ask yourself is whether you prefer to run a company in which you are personally liable, or whether you prefer to place the liability in a structure known as a limited liability company. Above all, you should consider the details of your future company and the risks involved. What will your company actually do and who are your customers? Will there be any potential liabilities? Are you 100% sure you want to go "all in" on this new business, or would it be a good idea to test the business idea/concept first?
How different limited liability company is from sole proprietorship?
A limited liability company works differently than a sole proprietorship, because even if there is a deficit, it is isolated in the limited liability company, so you can’t lose it for anything. If you receive wages from your Ltd in Denmark to pay your bills, then the company will be required to prepare a payslip for you. Once this payslip is prepared, the company must deduct taxes and pay them to the government. So if you have a deficit and need a payslip because you have bills to pay, not only have you lost money on the deficit, but you also have to pay taxes on that personal income. If you don’t have a huge deficit, if you have liability, if you already have a few customers, and you can see from day one that you’re going to break even or make money, you should definitely look at starting with a limited liability company. In the case of ApS if everything goes wrong, then you will only lose the company. All your personal assets are protected, however, ApS requires 20,000 DKK per star and cannot cover the company’s deficit with your personal income.
Deciding between sole proprietorship and a limited liability company
In Denmark, the easiest company to set up is a sole proprietorship, called „enkeltmandsvirksomhed” in Danish. When deciding between a sole proprietorship and a limited liability company, consider the amount of money you have and the type of customers you have. If you don’t have a lot of money and are in a situation where you don’t have a lot of responsibility to start a business, then a sole proprietorship may be the best option, as it is very easy to set up. You can register it for free within a few days. You may have to pay for an auditor to help you through the process, but other than that, it’s quick, easy and cheap. There are no equity requirements, and you don’t have to deposit any money into a bank account, as is required for most LLC in Denmark.
Another benefit of choosing a sole proprietorship is that it gives you the opportunity to use other income to offset the inevitable start-up deficit. Some people make money from the start, but most businesses have a deficit for 1-3 years or even more; so, with a sole proprietorship, if you have a job at the beginning, and you work full-time for six months while starting a business on the side, then the deficit produced by the business can be used as a tax deduction for the employee's income. In this way, you can gain a lot from tax refunds in the first year of business.
One of the disadvantages of a sole proprietorship is that you are more or less a business and are liable for anything that may happen during the life of the business. This means that you could, for example, get sued by a customer or end up in a lawsuit if you don't pay your bills. If you lose a lawsuit, then you will be personally liable. In a worst-case scenario, you may find yourself in a situation where you have to sell your home to pay off some liability. So having a small business, a sole proprietorship, is in many ways easier than a limited liability company, but you need to understand the risks involved.
However, if the company grows to two or three full-time employees, you will have obligations to them in terms of wages, as well as in case something goes wrong. Moreover, if you take over a large company that, for example, has a turnover of 1 million kroner per month, but decide to outsource the work and pay them 900,000 kroner, in that case your margin would not be high. Your profit would not be a million; it would be much less. But you would be providing services to a client for DKK 1 million, which would result in a large liability.
One way to avoid such large liabilities is to write a contract so that you can get out of them. In fact, you can't sign a contract with zero liability; some kind of liability - an amount or percentage - will always have to be included. It's a good idea to look at your competitors and see what they are negotiating in their contracts, or consult a lawyer to stay competitive.
When comparing limited liability companies with sole proprietorships, first ask yourself whether the work you do involves any liability. Look at worst-case scenarios. If you have a disagreement with a client - for example, you did a bad job and the client lost money - you need to ask yourself if you can write your way out of liability in a contract that will potentially hold up in court. If you can, then your liability will be limited, and a sole proprietorship is the quickest and easiest option to get started. If you can't, you really should consider a limited liability company.
If you are starting a business with little money and no liability, a sole proprietorship may be the best choice. Although a limited liability company can be quite inexpensive in terms of equity, you should be mindful of whether you have a deficit.