Comparing Limited Liability Companies and Sole Proprietorships in Denmark
When deciding on the type of company to establish in Denmark, it's essential to ask yourself if you want to be personally liable or if you prefer to create a limited liability company structure. It's important to take into account the specific details of your business and the associated risks, such as the nature of your business, the target customers, and potential liabilities. You may also want to consider whether you want to fully commit to the new business or test your business idea/concept first.
How different limited liability company is from sole proprietorship?
Limited liability companies operate differently from sole proprietorships as any deficits are contained within the company, providing protection against losses. If you receive wages from a limited liability company to cover personal expenses, the company will need to generate a payslip and withhold taxes for payment to the government. However, if you have a deficit and require a payslip to cover your bills, you will not only lose money on the deficit but also be required to pay taxes on that personal income. It is advisable to start with a limited liability company if you have liability, a few customers, and can see that the business will break even or make money. In the event of business failure, only the company would be lost, and personal assets would be protected, although an ApS requires an initial investment of 40,000 DKK and cannot use personal income to cover the company's deficit.
Deciding between sole proprietorship and a limited liability company
The simplest type of company to establish in Denmark is a sole proprietorship, which is easy to set up and can be registered for free in just a few days. With no equity requirements or bank deposit obligations, a sole proprietorship is a good option if you don't have much money and aren't responsible for too many aspects of the business. Another advantage is that any start-up deficit can be used as a tax deduction for personal income, which can lead to tax refunds in the first year of business. However, the main disadvantage of a sole proprietorship is that the owner is personally liable for any legal or financial issues that may arise, potentially leading to loss of personal assets in extreme situations.
As the business grows and more employees are added, the risks associated with a sole proprietorship may increase, and liability for wages and potential legal issues may become more complex. In such cases, a limited liability company may be a better option, with the deficit contained within the company and personal assets protected. However, limited liability companies require an initial equity investment and may involve more complex legal and financial requirements.
When deciding between a sole proprietorship and a limited liability company, it's essential to consider the nature of the business and the potential liabilities involved. Writing contracts that limit liability may be an effective strategy, and consulting with a lawyer can help ensure legal compliance and competitiveness. Ultimately, if a business involves significant liability or high risk, a limited liability company may be the better option, while a sole proprietorship is a good choice for businesses with minimal liability and low start-up costs.