Sole proprietorship: everything you need to know

Sole proprietorship: everything you need to know

A sole proprietorship (enkeltmandsvirksomhed) is one of the most popular business forms in Denmark, especially among entrepreneurs and the self-employed. In this article, we cover everything you need to know about sole proprietorships, including setting up, requirements, tax rules, and advantages and disadvantages.

What is a sole proprietorship?

A sole proprietorship is a business form in which one person owns and runs the business. The owner is personally liable for the business's debts and obligations, which means 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 fully liable for the business's obligations. If the business incurs debt, it is your personal assets that are at stake. This includes assets such as your car, your home and your 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 business on Virk.dk.
2. CVR number: On registration, your business is assigned a CVR number (company registration number).
3. Industry code: You must choose an industry code that describes the business's activity.
4. NemKonto and Digital Post: You must set up a NemKonto (the account for payments from public authorities) and sign up for Digital Post.

Requirements for a sole proprietorship

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

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 profit from the business is treated as part of the owner's personal income and taxed accordingly.
2. How does it work?
   The business's profit is added to the owner's other income (e.g. salary from a job), and tax is calculated on the total income.
3. Tax rates:
   Tax rates depend on the income level and can be up to 55.8% for the highest income bracket (including state tax, municipal tax and labour market contribution).

The business tax scheme (virksomhedsordningen)

1. What is it?
   The business tax scheme is a special tax arrangement that allows sole proprietorships to retain the business's profits at a lower tax rate. It gives the owner a tax advantage, as the business pays only 22% in corporation tax on the profits instead of the profits being taxed as personal income.
2. How does it work?
   With the business tax scheme, you can choose to leave the profits in the business instead of taking them out as personal income. This makes it possible to reinvest the profits in the business or use them to fund investments at a lower tax rate.
   The scheme also means that, as the owner, you can deduct the business's operating expenses and have part of the business's profits taxed as capital income, meaning you pay a lower tax rate on the profits that remain in the business.
3. Tax rate:
   Profits retained in the business tax scheme are taxed at a corporation tax rate of 22%, which is significantly lower than personal income tax.

B-tax

1. What is it?
   B-tax is the provisional tax that self-employed people must pay, as tax is not deducted automatically from their income (as it is for employees). B-tax is calculated on the basis of expected income and 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 (Skattestyrelsen) will calculate how much B-tax you need to pay based on your expected income, and you can have an annual tax calculation sent to you to help you keep track of what you owe. You pay B-tax on an ongoing basis, typically four times a year (quarterly), and you can adjust the payments yourself if your income changes during the year.
3. Reporting and payment:
   B-tax is paid via the Danish Tax Agency's TastSelv self-service system, and it is your responsibility to report and pay the correct B-tax. If you do not pay B-tax on time, you may be charged interest and fees.

VAT and duties

• VAT registration: If your business has an annual turnover above DKK 50,000, it must register for VAT.
• VAT reporting: VAT must typically be reported quarterly.
• Duties: Depending on the industry, additional duties may apply, such as environmental duties.

Accounting and bookkeeping requirements

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

If you need help with your bookkeeping or preparing your annual accounts, you can contact us right away.

A PMV instead of a sole proprietorship?

If you are considering starting a business with limited activity and an annual turnover below DKK 50,000, a small personally owned business (personligt ejet mindre virksomhed, PMV) may be an option. A PMV is a simplified business form with no VAT registration requirement, but with limits 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 business's decisions.
• Tax advantages: Access to the business tax scheme.

Disadvantages of a sole proprietorship

• Personal liability: The owner is personally liable for all debts.
• No separation between private and business 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 an ApS may be more appropriate.

Need help getting started or with bookkeeping? Contact Summ for professional advice and get your sole proprietorship in order from day one.