Choosing a company form – what is the best option for your business?
One of the most important decisions you are going to make in the early stages of starting a business is choosing your company form. Company form affects many things, including the entrepreneur’s liability, taxation, social security, financing options and the company’s growth prospects. What the best option is for you depends on your business idea, your goals and the scope of your operations.
In Finland, the most common company forms are private entrepreneur, limited liability company, general partnership and limited partnership. In some situations, it may be worth considering starting a cooperative or becoming a light entrepreneur.
When choosing your company form, it is a good idea to ask yourself the following questions:
- Will you be running your business alone or together with others?
- How big are the financial risks associated with your business?
- Are you looking for growth and funding, or running a small-scale operation?
- Will significant investments be required?
- Are you planning to hire employees?
- How important is administrative simplicity to you?
- Do you have any future plans regarding the ownership or sale of your business?
- What kind of income level and tax rates can you expect?
– It is important to ensure that the company form aligns with both your current situation and your future goals, says Tommi Virkama, Director of Startia.
In what situations are the different company forms typically chosen?
What the most suitable company form is depends on the scope of operations, the level of risk, the objectives and the number of entrepreneurs involved.
- A private entrepreneur is a common choice for self-employed individuals who provide small-scale or expert services without significant investment or financial risk.
- A limited liability company (LLC) is the most common choice for companies seeking growth. It is suitable for situations where the business involves some risks, requires financing or has multiple owners. It also allows for salary and dividend planning.
- A general partnership, on the other hand, is suitable for a joint company between two or more entrepreneurs who all participate in the operations and have a strong mutual trust. The partners are personally liable for the company’s debts.
- A limited partnership (LP) is a good option when there are both active entrepreneurs and investors involved. General partners are responsible for the business operations, while silent partners provide capital.
- A cooperative is a good option for equal partnership, network-based operations, or situations where the members use the company’s services. Cooperatives are common, for example, in the creative industries, the service sector and in joint enterprises.
– Light entrepreneurship refers to entrepreneurial activities conducted through an invoicing service without having to establish a company. Light entrepreneurship is a good fit when you want to sell services, and it can be a great solution for testing a business idea, part-time entrepreneurship, or situations where your operations are still on a small scale. However, a light entrepreneur is not legally considered an entrepreneur, nor is it considered an actual company form, Virkama explains.
Company form affects taxation
The company form has an affect on how the company’s profits are taxed. In the case of private entrepreneurs, the company’s profits are taxed as the entrepreneur’s personal income (earned income and/or capital income). In a limited liability company, on the other hand, the company pays a 20% corporation tax on its profits. The owner may withdraw funds as salary and/or dividends. Taxation always depends on the entrepreneur’s specific circumstances, which is why it is best to make the calculations on a case-by-case basis.
–You can always change your company form later, and the form you choose at the beginning need not be your final decision. In Finland it is common to convert a private entrepreneurship into a limited liability company. If you are trying to choose a suitable company form or considering changing an existing one, our business advisory services can help you compare your options and assess the implications in your specific circumstances, says Virkama.
This kind of change often becomes necessary when revenue and profits grow, risks increase, new owners join the company, or additional financing is needed. It is usually possible to change company form without interrupting business operations. However, because this type of change involves tax and accounting issues, it is a good idea to plan ahead.
Self-employed persons’ employment pension insurance (YEL) and status
The company form determines when a person is considered an entrepreneur and when YEL insurance is mandatory.
A private entrepreneur is always considered an entrepreneur under the YEL system and partners in a general partnership and a limited partnership are entrepreneurs. But in a limited liability company, the owner is considered an entrepreneur if their ownership and work meet the YEL criteria.
YEL income affects an entrepreneur’s pension, sickness allowance, daily allowance for parents and unemployment benefits. That is why, when choosing a company form, it is important to consider social security as well, not just taxation.
