What type of company you should choose
What type of company you should choose (sole proprietorship or limited liability company)
While choosing the type of business to set up in Denmark, the first thing you should wonder about is what you prefer - running a business in which you’re personally responsible, or putting the responsibility in a limited liability structure. First of all, you should think about your company’s details and the risks that might be involved. Will there be any potential liabilities? What your company will do and who your customers are? Are you 100% sure you want to make a full commitment to the business, or maybe it would be better to test the business idea and concept first?
ADVANTAGES AND DISADVANTAGES OF A SOLE PROPRIETORSHIP
ADVANTAGE: EASE OF ESTABLISHMENT
The easiest company to set up in Denmark is a sole proprietorship, in Danish it’s called "enkeltmandsvirksomhed". While making a decision between types of company you need to consider the amount of money you own and what kind of customers you will want to attract. If you don't have a lot of money and your startup doesn't involve a lot of responsibility, then running a sole proprietorship may be the best option, as getting started is very easy. Registration is free and it takes only a couple of days. It might be necessary to pay an auditor to help with the whole process, but other than that it's quick, cheap and easy. There are also no initial capital requirements; no deposit of money is necessary to a bank account, which is usually required in the case of most limited liability companies.
ADVANTAGE: OFFSETTING THE COMPANY'S DEFICIT
One more benefit that comes from choosing a sole proprietorship is the ability to use another income to offset the inevitable deficit associated with starting a business. It is possible to make money right from the start, but most companies face a deficit for 1 to 3 years or longer; in the case of a sole proprietorship and having a full-time job, you can use the deficit created by the business as a tax deduction for employee income. That way, the amount of tax refund you will receive in the first year of operation will be higher.
Here’s the example that illustrates this benefit: Danish tax is usually 35-45%, but for simplicity we round up to 50%. Imagine you have a first-year deficit of DKK 100,000, and in addition to running your company you have a job earning DKK 200,000. In this situation, you have a DKK 200,000 salary, and you have lost DKK 100,000 in your own business because of all the start-up costs. During the calculation of the tax when the year ends, you will have a salary of DKK 200,000, and from this number you can make up the deficit using your own business. When your income is calculated by the tax office, it is DKK 200,000 minus DKK 100,000 from the deficit, so then, you only have to pay the tax on DKK 100,000. When the tax is about 50%, then the tax amount would be DKK 50,000. That way, you can use the deficit to your advantage.
DISADVANTAGE: PERSONAL LIABILITY
One of the disadvantages of sole proprietorships is that, as a business owner, you are liable for anything that may happen during the period of your business. In other words, you could get a lawsuit from a customer, for example. If you end up losing the case, you will face personal liability. In the worst possible outcome, you may find yourself forced to sell your home to pay off some liability. So owning a small sole proprietorship is in many ways easier than a limited liability company, but be aware of the risks involved.
When is sole proprietorship a worthy option in risk terms?
Take note of the following example: When your business consists of article writing for family, friends and close acquaintances, you probably don't expect numerous lawsuits. Because your costs would be mostly just limited to computers, pens, paper, etc. your general risk there would be reduced. But if you later expand your company by adding 2 or 3 full-time workers, you would have a salary obligation to them. Furthermore, in case you acquire any large business that, for example, brings in sales of DKK 1 million per month, but you choose to source labor and pay your outsourcing partners DKK 900,000, in this situation your margin wouldn’t be large, but you would then provide customer service for DKK 1 million, which would result in a large liability.
To avoid such large liabilities, the way is to draw up a proper contract. The reality is that you can't sign a contract with zero liability; some kind of obligation - an amount or percentage - will always have to be included. In this regard, it is worth looking at your competitors to see exactly what they are negotiating in their agreements, or consult a lawyer in order to remain competitive.
TO SUM UP
If you are starting a business with a small amount of money and no liability, a sole proprietorship might be the most beneficial choice. Of course, it is possible to create a limited liability company relatively cheaply with regard to equity but you should remember about the possibility of a deficit.
ADVANTAGES AND DISADVANTAGES OF LIMITED LIABILITY COMPANIES
When we compare limited liability companies with sole proprietorships, the first thing to ask yourself is whether the work that you do involves any liability. Look at the worst-case scenarios that could occur. If you have a dispute with a customer - for example, you performed the work improperly and he lost money as a result - you need to ask yourself if it’s possible to limit your liability with an agreement that potentially will be upheld in court. If it is possible and your liability can be limited, a sole proprietorship is the easiest and quickest option to get started. If you can't, you should consider a limited liability company.
ADVANTAGE: APS PROVIDES PEACE OF MIND TO CUSTOMERS
If things go wrong, the only thing you'll lose is your business. All of your private property is protected.
DISADVANTAGE: APS REQUIRES 20,000 DKK TO GET STARTED
You need to have DKK 20,000 in equity to start your business.
DISADVANTAGE: APS CANNOT COMPENSATE THE COMPANY'S DEFICIT WITH YOUR PERSONAL INCOME
A limited liability company operates differently than a sole proprietorship. Although there may be a deficit, it is ring-fenced in the limited liability company, so you can't reduce that deficit the way you would in a sole proprietorship. If you get wages from the limited liability company that you own to pay the bills, then the company will owe you a pay stub. Once the pay stub is produced, the company has to hold back taxes and pay the government. Therefore, if you are in deficit and at the same time you need a salary because, for example, you need to pay your bills, thennot you just lost your money over the deficit, but you also have to pay taxes on your personal income.
TO SUM UP
If you don't have a large deficit but you have liabilities, a few customers and you can notice from the first day that you are going to come out ahead or make a profit, you should for sure start with a limited liability company.