A sole proprietorship has – and can only have – one owner who must be a natural person.
However, the limitation in the ownership structure does not prevent the owner from employing employees who, to a greater or lesser extent, handle the operation of the company.
A sole proprietorship can subsequently be transformed into a public or private limited company following the rules for tax-free business transformation.
Management and authority to bind the company
The company’s proprietor has the exclusive right to make all decisions concerning the company.
The company is obligated toward third parties by the owner alone – or an employee given sufficient managerial authority either through the nature of the specific position or power of attorney.
Liability and risk
Financially, the sole proprietorship and the proprietors are one and the same, as far as the outside world is concerned.
The company’s creditors can thus direct their claims against both the company and the proprietor. In other words, both the corporate assets and the holder’s personal assets serve as security for a creditors’ possible claims.
As the company’s operation can thus have fatal, personal, financial consequences, the company form, and the risks should be carefully considered before starting up. Especially the type of business to be conducted and its inherent risks should be a focus point.
Contrary to, e.g. private limited companies and public limited companies, there is no legal requirement for company capital at start-up.
The company can thus be started up without funds being deposited at all. For the same reason and because of its inherent simplicity, the company form is also the most widespread in Denmark.
Please note that the lack of rules on initial capital is matched by the personal liability, cf. above.
Accounting and tax matters
When establishing a sole proprietorship, the holder can choose between 3 different forms of taxation:
- The personal tax rules, where the income is taxed as personal income.
- The business tax scheme, where interest expenses can be deducted from the personal income and the profit can be saved up in the company, in exchange for a preliminary tax being paid.
- The return on capital tax scheme, where some other options are made available. These alternatives provide several benefits to the corporate strategy, but in a more straightforward way.
In the event of a deficit in personally run companies, it is possible to utilize the deficit in other personal income or the spouse’s income. In this way, the taxation of other income can be reduced.
The sole proprietorship’s accounts is not be published through the Danish Business Authority, just as the sole proprietorship is not in any other way obliged to publish information about the company’s financial situation, operations, etc.
A sole proprietorship must most often – and, as a general rule – be registered for receival and payment of VAT and, in addition, may have to register matters relating to A-taxes (taxes on employees’ salary), import/export among other things. If you receive a salary from the company, you must pay both A-taxes and AM-contribution (a labour market contribution tax).
Sole proprietorships: Widely used in Denmark
The majority of the companies that are started in Denmark are, in fact, personal companies. This may be due to a unique and distinctive Danish entrepreneurial spirit, which materializes by the many entrepreneurial types throwing themselves into the dream and realizing the company they may have fantasized about for a long time. But it can also be because it is simply very straightforward to start a one-person business.
It is thus straightforward to register the company, and most people probably believe that there is no significant risk associated with running the business. If you want to start and register a sole proprietorship, then you need to:
- Go to www.virk.dk, where you must find and follow the instructions under “Start a business”
- Log in with NemID (requires a Danish social security number – CVR number)
- Choose a Sole proprietorship
- Answer the questions that appear on the page about information regarding, for example, name, address, VAT registration, payroll registration, industry code etc.
Once you have filled in the form correctly and clicked OK, you are the business owner and have made the entrepreneurial dream come true.
Most people can start their own business at short notice and without difficulty. However, there are certain exceptions. If you are unemployed and on unemployment support, you cannot. The same applies if you receive cash benefits from the municipality. Both the unemployment insurance fund and the municipality require that in order for you to receive financial support, you need to be available for the labour market. This is not the case if you use your time starting up a business. On the other hand, if you receive SU or no public support, you can, in turn, calmly set up your own business.
If you do, then, of course, you are also interested in getting paid for your hard work. You pay your salary from the company to yourself, and your profit in the company corresponds to your salary before tax. Approximately one-half of the company’s profits typically go to SKAT.
If you need help with your sole proprietorship, you are more than welcome to contact us.
Personally owned small business (PMV):
PMV status is an opportunity for small personally owned companies with a turnover of less than DKK 50,000.00 per year. These companies do not have a duty to register with the Danish Business Authority, but they can choose to do so and get a CVR number and thus a digital identity. It will be necessary for companies to have a CVR number in many contexts. E.g. when making certain reports to authorities or if the company needs a digital employee signature.
PMV is for the tiny businesses
A personally owned small company, PMV, must have a turnover of less than DKK 50,000.00 per year. It must be held by a person responsible for all decisions in the company and who is financially liable. The profits of a personally owned small business are taxed as personal income. The company must not have employees. It has to be a business – not a hobby business. Typically, a PMV can, e.g. be the small start-up designer, programmer, artist, craftsman, webshop or just a company in the start-up phase and maybe a little uncertain about the turnover and the concept.
PMV was born as a digital company
A PMV must be created digitally, just like a one-person company. All registrations must also be done digitally (which eventually also applies to the capital companies). The personally owned small company is set up on www.virk.dk just like all other business forms.
If the business grows into a sole proprietorship
If the turnover exceeds DKK 50,000.00 annually or just a singly employee is hired, the company can no longer remain registered as a PMV. If this happens, then the company must change status and register as a sole proprietorship, with the obligations that come with it. The company can still keep its CVR number in the event of such a change.
Characteristics of PMVs:
- They have only one owner (personally owned)
- They are not liable for VAT
- They have an annual turnover that would otherwise be VAT-liable of less than DKK 50,000.00
- They have no employees and as such pay no wages
- They have neither imports nor exports from/to countries outside the EU
- They must renew their registration as PMV every three years