Sole proprietorship – Everything you need to know

Sole proprietorship – Everything you need to know

A sole proprietorship is one of the most popular business forms in Denmark, especially among entrepreneurs and self-employed people. In this blog post, we will go over everything you need to know about sole proprietorships, including formation, requirements, tax rules, and advantages and disadvantages.

What is a sole proprietorship?

A sole proprietorship is a business form where one person owns and operates the business. The owner is personally liable for the debts and obligations of the business, meaning that there is no legal separation between the owner’s private finances and the business’s finances.

Who is liable in a sole proprietorship?

As the owner of a sole proprietorship, you are personally and unlimitedly liable for the company’s obligations. If the company incurs debt, your personal assets are at stake. This includes assets such as a car, house and savings.

How do you set up a sole proprietorship?

Starting a sole proprietorship is relatively simple in Denmark. Here are the steps:

1. Registration with the Danish Business Authority: You must register your company on Virk.dk.
2. CVR number: Upon registration, your company will be assigned a CVR number.
3. Industry code: You must choose an industry code that describes the company’s activity.
4. NemKonto and Digital Post: You must create a NemKonto and sign up for Digital Post.

Requirements for a sole proprietorship

• Startup capital: There is no startup capital requirement to set up a sole proprietorship.
• Ownership structure: There can only be one owner, but it is possible to hire employees.
• Registration: The company must be registered on Virk.dk, and you must provide information such as name, address and whether the company must be registered for VAT.

Tax rules for sole proprietorships

Personal income taxation

1. What is it?
   Sole proprietorships are taxed as personal income, as there is no separation between the owner’s private finances and the business’s finances. This means that the profits from the business are considered part of the owner’s personal income and are taxed accordingly.
2. How does it work?
   The company’s profits are added to the owner’s other income (e.g. salary from a job), and the tax is calculated based on the total income.
3. Tax rates:
   Tax rates depend on income level and can be up to 55.8% for the highest income group (if you include both state, municipal and labor market contribution taxes).

The company scheme

1. What is it?
   The business scheme is a special tax scheme that allows sole proprietorships to save the company’s profits at a lower tax rate. This gives the owner a tax advantage, as the company only pays 22% in corporate tax on the profits, instead of these profits being taxed as personal income.
2. How does it work?
   With the company scheme, you can choose to keep the profit in the company instead of taking it out as personal income. This makes it possible to invest the profit in the company or use it to finance investments with lower tax.
   The scheme also means that you as the owner can deduct the company’s operating expenses from your tax and have part of the company’s profit taxed as capital income, which means that you pay a lower tax rate on the profit that stays in the company.
3. Tax rate:
   The company’s profits saved in the company scheme are taxed at a corporate tax rate of 22%, which is significantly lower than personal income tax.

B-tax

1. What is it?
   B-tax is the tax that self-employed persons must pay, as tax is not automatically deducted from their income (as is the case for employees). B-tax is calculated based on expected income and is paid on an ongoing basis.
2. How does it work?
   When you start a sole proprietorship, you must report and pay B-tax yourself. The Danish Tax Agency will calculate how much B-tax you must pay based on your expected income, and you can have an annual tax calculation form (SKAT) sent to you, which helps you get an overview of what you must pay. You must pay B-tax on an ongoing basis, typically four times a year (quarterly), and you can choose to adjust the ongoing payments yourself if your income changes during the year.
3. Reporting and payment:
   B-tax is paid via the Danish Tax Agency’s TastSelv , and it is your responsibility to report and pay the correct B-tax. If you do not pay B-tax on time, you may risk being charged interest and fees.

VAT and duties

• VAT registration: If your company has an annual turnover of more than DKK 50,000, it must be VAT registered.
• VAT reporting: VAT must typically be reported quarterly.
• Taxes: Depending on the industry, there may be additional taxes, such as environmental taxes.

Accounting and bookkeeping requirements

• Accounting obligation: Sole proprietorships must keep accounts of income and expenses.
• Annual statement: The owner must submit an annual statement to the Danish Tax Agency via TastSelv.
• Audit obligation: There is usually no audit obligation for sole proprietorships, unless they have very high turnover.

If you need help with your bookkeeping or preparation of annual accounts , you can contact us now.

Maybe a PMV instead of a sole proprietorship?

If you are considering starting a business with limited activity and a turnover of less than DKK 50,000 per year, a Personally Owned Small Business (PMV) may be an option. A PMV is a simplified business form without VAT registration requirements, but with restrictions on activities and growth.

Advantages of a sole proprietorship

• Easy start-up: Simple registration and fewer administrative requirements.
• Full control: The owner has full control over the company’s decisions.
• Tax benefits: Possibility of the corporate scheme.

Disadvantages of a sole proprietorship

• Personal liability: The owner is personally liable for all debts.
• No separation between personal finances and company finances.
• Limited growth potential: Difficult to attract investors.

Is a sole proprietorship the right choice for you?

A sole proprietorship is ideal for freelancers, independent consultants and small business owners who want a simple business structure. If you need to protect your private finances or want to attract investors, another company form such as ApS may be more appropriate.

Do you need help with start-up or bookkeeping? Contact Summ for professional advice and get your sole proprietorship under control from day one!