What form of business should you choose for your company?

Are you going to start your own business? It is something that many Swedes dream of, but making the dream a reality requires a lot of preparation. It is necessary to have a well-formulated business idea and the knowledge and skills needed to make the idea a reality. In order for your company to have the best possible chance of success from the start, it is also important that you have a good knowledge of all the laws and regulations that can affect your company start.

One of the most important pieces of the puzzle that you must have a good understanding of before starting a new company is the different company forms that exist and what distinguishes them. There is a lot of help available in matters of business start-ups and company formation. For those who want to start a small company, it is often possible to get all the help you need via the Swedish Companies Registration Office’s website verksamt.se and various local business organizations. For those who want personal service, you can get a head start by using external help. An expert in company formation and business consulting can be of great help to you who are starting a more complex company and want to avoid costly mistakes.

So what forms of business are there and what should you think about?

We will look at the most common forms of business :

  • Individual Company
  • Limited company
  • Trading companies and limited partnerships

In addition to these, there are also other forms of business such as economic associations and non-profit associations, but these forms of business are usually not relevant for those who are going to start a new company for profit. It is important to compare the different company forms and what they mean for your planned business so that you know which company form is best for the business you want to start. Choosing an unfavorable form of company can involve large costs in the form of having to reorganize with a new form of company at a later time. Which company form you choose also has a big impact on how your company, and yourself, taxes for profits.

 

Starting a Private Company

A sole proprietorship or sole proprietorship as it is also called is the absolute simplest form of business to get started with. To start an individual company, you only need to register with the Swedish Tax Agency and in some cases also with the Swedish Companies Registration Office.

An individual company is not a legal entity, but as a sole proprietorship you conduct business activities connected to you as a person. This means that your organization number will be the same as your social security number. Significantly more important than this, however, is that you understand what this means from an economic perspective.

Because you and your business belong together, you have unlimited financial responsibility for your company’s costs and liabilities. This means that you may be required to pay your company’s debts with your own money and assets. On the other hand, the advantage is that your individual company does not need to have any assets of its own at all.

This means that an individual company is a perfect choice for those who, for example, are to engage in freelance or consulting work or the like, where the company’s assets largely consist of one’s own know-how. In figures from 2019, over 70% of Sweden’s registered companies are sole proprietorships and many of these are run as sole proprietorships.

If you are a sole proprietor, you are not counted as an employee in your company. But an individual company does not have to be a one-man company, but it is also possible to hire staff. To be able to do this, however, you need to register as an employer, which you do with the Swedish Tax Agency.

For those who want to start a business that requires more capital, assets and investments and has the ambition to grow, it can be very risky to run the company as a sole proprietorship. Should it end in bankruptcy, it not only means losing your business but it can also be catastrophic for your personal finances.

Individual company: Accounting and tax on own withdrawal

When you have to pay tax for your individual business, you pay tax on your profit or your surplus of capital.

Start a limited company

A limited company differs from an individual company in that the company becomes a legal entity . This means that the company’s assets, liabilities and commitments are separate from you as a person. When you start a limited company, you must therefore contribute share capital to the company. This does not necessarily have to be money but can also be various forms of property to be used in the company, for example a warehouse or office equipment. The minimum amount you need to start a limited company is SEK 25,000 and if it is property, this must be valued by an auditor. This money and property then becomes the company’s share capital.

When the limited company is started, you must also appoint a board. This consists of at least two members (members and / or deputies), possibly also appointing a CEO (CEO). The Board shall then hold general meetings which take place at least once a year.

However, there are no requirements that a limited company needs to have more employees. It is perfectly possible to run a one-man company as a limited company and the majority of limited companies in Sweden are just one-man companies.

The advantages of running your company as a limited company instead of as a sole proprietorship are that since the company is a legal entity, you are not normally personally liable for the company’s debts. However, there are cases where you can become liable even though you have a limited company, for example in the event of a tax offense.

A limited company also provides significantly greater flexibility as your business grows. You can raise extra capital from other investors in exchange for shares (this is what happens during an IPO).

Finally, a limited company provides much greater flexibility when it comes to tax planning. In an individual company, your personal finances and your company’s finances are the same, in a limited company you are counted as an employee in your own limited company. Your limited company pays corporation tax on its profit while you pay tax on the money you withdraw from the company in the form of salary and any share dividend. This allows you to plan your income to minimize the tax you have to pay. It is important that you take the help of a financial advisor to maximize these benefits, especially if you run a limited company that has very variable turnover from year to year.

Guide: Dividends in limited companies

Start a Trading Company or Limited Liability Company

Partnerships and Limited Partnerships are two types of companies that are suitable for those who want to start a business with one or more partners. A trading company is started together by two or more legal entities called cold partners. These can be individuals or companies.

The trading company itself becomes its own legal entity that can enter into agreements, but the persons who started the company have financial responsibility in the event that the company is unable to pay its debts.

Basically, all partners have equal responsibility, but it is common to write a partnership agreement where you determine the obligations and rights of the various members in the company in advance. There are no legal requirements as to what should be in a partnership agreement or even that there must be one. But it is still important that you write down what applies and this is something many who start trading companies take the help of a lawyer or other advisor to do.

Trading companies can also employ people in addition to those who run the trading company.

The advantage of a trading company is that you do not need to have any capital in the company when you start it. This makes trading companies suitable for, for example, two people who want to start a small consulting company.

The disadvantage of trading companies is that everyone who runs the company has shared financial responsibility. This makes it important that you agree and that you have a complete partnership agreement that dictates what should happen when disputes arise about how the company should be run or if someone wants to leave the company.

The trading company’s profits are divided equally to its partners unless otherwise stated in the partnership agreement. Thereafter, the individual partners tax their share of the surplus in the same way as for an individual company.

A limited partnership is a special form of a trading company where, in addition to at least one ordinary partner, there may also be partners with limited liability. These are not responsible for more than what they have invested in the company. This makes limited partnerships a suitable form of company when you have one or more partners who want a limited role in the company. These limited partners usually have no right to decide in the company, but you can sign a partnership agreement that regulates their rights just as you do with a trading company.

In these forms of business, it is very important that you know what to do when things do not go as planned. If the activity you are to engage in also involves a financial risk, you should strongly consider instead forming a limited company where all partners enter with share capital.

What does it cost to start your own business?

In addition to the minimum requirement of SEK 25,000 required to start a limited company, there are certain other costs that may arise when you register your company, protect your company name and brand and much more. You will find a price list at the Swedish Companies Registration Office for their various services for sole traders, limited companies and trading companies.

Can I change company form?

It is important to choose the right company form from the beginning. If you want to “change” company form at a later time, you must namely liquidate your old company, start a new company and transfer any assets to the new company.

 

Depending on what assets you have in the company, this can be a complicated process that can take time and cost money. Although it usually feels easier to start an individual company, this is a strong reason why you should consider starting a limited company from the beginning if you have plans to grow and invest heavily in your company.

Do I have to start my own business?

Basically, it is the case that everyone who runs some form of businesswith a profit motive must start a business of some kind. For those who only conduct limited activities, for example handicraft work for acquaintances that only results in a couple of invoices a year, there is an alternative. There are so-called invoicing or self-employment companies. This company handles all invoicing and acts as a kind of “temporary” employer for you. This means that you can invoice your customers with the help of the self-employment company and avoid having your own company. You then do not have to worry about accounting and other business issues. The disadvantage is, of course, that the company in turn charges a fee in the form of one percent on each invoice you send out. This means that, for those who conduct fairly regular business activities, it is much more favorable to have their own company.

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