How do you choose the right company structure?
When you have to start a company, when you are planning a change of ownership, or when you are planning an optimization/cleanup in your company, it is relevant to consider whether you have the right company structure.
There are basically 2 ways to organize your business structure. Either you can run your business as a personal business, or the business can be run in one or more companies. There are different advantages and disadvantages and different options for both types of business.
It can be relevant both when you start the company, and later when you consider transformation or restructuring in connection with optimization or changes in the ownership group.
It is always recommended that you talk to an expert adviser about starting or changing your company structure. It is always relevant to consider the legal, financial and general business consequences in your specific situation.
- Personally owned companies
The classic personally owned company is also called a "sole proprietorship". If 2 or more people run a personally owned business together, it is called a "Associated business".
In addition, there is the possibility of running a "personally owned small business". Personally owned small business is similar to the sole proprietorship, but the annual turnover must not exceed DKK 50,000. On the other hand, there are relaxed VAT rules. Of course, a number of other rules also apply to Personally owned small business.
In personally owned businesses, your personal finances are very closely linked to the company's finances. When the company takes on debt, you are liable for the payment with your personal assets. This means that if the company does not pay its debts, the creditors can e.g. go after your personal savings, your car or your house.
The starting point is that profits in a personally owned business are taxed as part of your personal income, and losses give deductions in the same. If you register for the company tax scheme, you get the opportunity to use favorable rules on interest and tax on account. I very strongly recommend that you always discuss the finances and especially the taxation with a skilled accountant when you are considering a personal business and/or the company tax scheme.
It is also possible to convert a personally owned business into a company. In the vast majority of cases, however, this will trigger taxation, as well as financial and legal matters surrounding the transfer must be dealt with. It is therefore important to make the right choice from the start.
It is also relevant to consider conversion to a company in connection with the possible sale of all or parts of the company, among other things because there may be significant tax advantages. - Business in a company
A company is a separate legal entity. This means that in the eyes of the law you and the company you own are two different persons/entities. You each have your own separate finances as well as separate rights and obligations.
The most important consequences of this are that your assets are separate from the company's assets. You cannot therefore withdraw money from the company without restrictions. On the other hand, you are generally not liable for the company's affairs either. The company's creditors can go after values in the company, but not after your private wealth.
If you are an entrepreneur or do not have another company with many assets, you should expect that most financial institutions will require a personal guarantee before a company is granted an overdraft. If you have provided a personal guarantee for your company, you must expect to be liable for the company in accordance with what is stated in the guarantee. Therefore, always read the agreements thoroughly so that you are not surprised.
Businesses run as a company also have the tax advantage that the operating profit is taxed according to the company tax, which is lower than the income tax. In the event of a distribution from the company to the personal wealth, after-taxation takes place up to the ordinary tax level.
This means that you, as the owner of the company, can plan the distribution of dividends so that you only distribute up to the maximum tax limit each year. Additional savings are made in the company. There is thus the possibility – completely legally – to achieve a lower overall taxation by spreading the profit over a longer number of years, rather than distributing it all at once.
In addition, it is often simpler to transfer ownership shares in a company in connection with the entire or partial business transfer, seen in relation to transferring ideal shares in connection with a personal business. The Companies Act's rules on capital shares and the possibility of division into share classes also make it possible to prepare for a generational change in an efficient way.
The primary "disadvantage" of a company is that it costs money to set up. At the time of writing, the cheapest company is an Limited liability company (LLC), which costs DKK 40,000 to set up. In addition, there may be a fee for an adviser if you are not comfortable setting up the company yourself - which expense is, however, quite limited in most cases.
Among other disadvantages of running a business in company form can be mentioned that there is less access to deduct start-up costs from other personal income because the company's finances are separate from the owner's personal finances. There are thus some potential tax advantages which may be lost in connection with start-up.
This blog has been translated by Startup Central.