Sole Trader or Limited Liability Company

Good news for all the sole traders ( Tmi ) and new entrepreneurs. In the beginning of July, the parliament have approved that the 2500 Eur starting capital is not a compulsory requirement for establishing a limited liability company ( Oy ).

The reform minimizes the start-up cost and consultation services for establishing the company. According to PRH-Patentti Rekisterihallitus, the cost of registering a limited liability company online is 275 Eur without VAT and 380 EUR without VAT on paper form.

Why you should change your Sole Trading Company to a Limited Liability Company?

Risk Management

The sole trader is personally responsible of all liabilities, contracts, and debts related to the business. If your business flops, you will lose your personal assets, which could refer to your real estate properties, vehicles, jewellery, and any items of value. The responsibilities of the limited liability company are limited to the company, which means that you're not personally responsible if your company fails. On the other hand, a loan guarantee given to the company will be lost if the company goes to bankruptcy.

Business Income

The sole trader´s business income is taxed directly as the entrepreneurs' income. The sole trader can draw money for the business account as a private withdrawal (yksityisnosto). The tax is progressive which means that the greater the income is, the greater the tax burden will be.

An entrepreneur of a limited company can distribute the business income either by dividends from the shares or through salary, which can be reduced from the company income. In addition, it's possible to use different benefits such as cars and communication support. The taxation of shareholders dividends is likely lighter which is why most limited company entrepreneurs pay themselves a moderate salary that they can live by and withdraw dividends on a later stage.

Scaling

A limited liability company is usually perceived as a more attractive partner than a sole trading company. It's also easier to expand the business when new shareholders and investors can be involved immediately. If the sole trader has employees, there are more employer obligations that must be taken into account which makes it safer to bear the risks as a Limited Liability Company. Besides, it's more practical to offer shares or option schemes in order to commit the employees to the business.

Accounting Obligations

The limited liability company is required to do double-entry bookkeeping. Transactions are recorded in terms of debit and credit. The sum of debits must be equal to the sum of credits. This way, it's easier to detect errors and prepare for accurate financial statements. It also means that it's better to hire a professional accountant who also has the expertise of the Finnish taxation system. A sole trader is required to do a single-entry bookkeeping, which is much more simple because transactions are recorded whenever a bill is paid or a client is invoiced. Even though a single entry bookkeeping is easier, it's still recommended to outsource accounting to an expert, because Finland has very strict tax laws.

The Board

A limited liability company should have a board of directors with one to five members. The board of directors are responsible for the administration and making sure that the finance and accounts of the company are properly formulated.

If the board of directors only has one member (varsinaisjäsen), then there should be a deputy member (varajäsen). The deputy member doesn't have any obligations or responsibilities towards the company unless the deputy member is asked to participate in board work situations to replace an acting member temporarily or permanently . This means that you can establish and own exclusively the Limited Liability Company.

How to change from a Sole Trader to a Limited Liability Company?

It's recommended to talk to your accountant before changing from a Sole Trader to a Limited Liability Company. A swifter change is when you change the Sole Trade company (Tmi) identically to the Limited Liability Company ( Oy). This means that your business name will stay the same but you will get a new Business ID number. Taxation and Accounting must match and follow the same principals from the previous company to the new one. Additionally, the ownership of the company must stay consistent.

Source in Finnish: Suomen Yrittäjät, PRH