When is a good time to change my company form?
It’s a good idea not just for anyone intending to become an entrepreneur, but also those who have been sole traders or entrepreneurs in a general partnership or limited partnership company for some time, to think about the best form for their company, taking its current activities into account. If they find that their current company form is not the most advantageous for their business, it can be changed. Not surprisingly, VASEK’s Business Advisors are often asked about the best time to change an enterprise’s company form.
“There is no answer to this question that holds true in all circumstances. We always consider any changes to company form case-specifically, but there are some approximate criteria that can help,“ says Kjell Nydahl, VASEK’s Business Development Manager.
Making a change in company form doesn’t necessarily mean changes in the company’s functional activities; it's the company’s legal form that changes.
Becoming a limited company
A limited company is usually the form enterprises choose when changing from other forms, and a limited company cannot be changed into another form. The most common change is to turn a sole trader's business into a limited company. A sole trader can also change their business, for example, into a general partnership if they take on a business partner. But the correct timing for the change puzzles many entrepreneurs.
“As long as the activities of a sole trader’s company are small-scale or part-time only and the entrepreneur doesn’t make a huge profit, running this kind of a company is fine. But they must bear the risks in mind, i.e. that the entrepreneur is personally and fully responsible for the company activities, with their own property at risk,” Nydahl says.
A limited company can also be established alone. This type of a company requires a little more paper work than a sole trader’s company. A limited company must have double-entry bookkeeping; a board with at least one deputy member in addition to the entrepreneur; articles of association in which the company’s activities are defined in at least four paragraphs, and an initial investment of 2,500 euros, which must always be available in the company. Nydahl states that these requirements are not difficult to fulfil and therefore they are nothing to be afraid of if you want to form a limited company.
“For example, a limited company’s board doesn’t need to have more than one meeting a year. This is no more often than an entrepreneur needs to see their bookkeeper to keep their paperwork up to speed,” he says and continues:
“Owning a limited company may be a safer bet for a small entrepreneur specifically because of the liability issues. An entrepreneur is always liable to pay damages when selling something to consumers – for example, when a small screw made by his company breaks a machine worth millions of euros.”
Business Advisors Mikael Hallbäck (on the left) and Kjell Nydahl on a coffee break.
Nydahl has some rules of thumb about when it makes sense to change company form into a limited company:
- The entrepreneur’s personal tax rate exceeds 30%
- The entrepreneur takes a partner and the company gets a new part-owner
- The company hires employees
- The company is making enough profit
- Risk management requires a change of company form
“Company form should not be changed on impulse. The benefits gained by the change must, of course, be greater than the work resulting from it. Many entrepreneurs are surprised, for example, by the fact that changing the company form of their sole trader business discontinues their old firm. However, their business ID remains in their personal data and can be reactivated again later. When a new limited company is established the company gets a new business ID. The Finnish Patent and Registration Office must be informed of the change, and the old business ID needs to be replaced with the new one in company material, such as brochures, letterheads and invoice templates,” Nydahl says, pointing out these small but time-consuming tasks.
He adds that if a general or limited partnership is changed into a limited company the business ID remains the same.
Nydahl urges entrepreneurs to discuss the issue with their bookkeepers to select the best time for the change and to learn about its effects on taxation, for example.
“There are things to take into account when becoming a limited company, but at the same time this shift will increase the company’s credibility,” Nydahl says.
Do you have more questions about this issue?
Please don’t hesitate to contact VASEK’s Business Advisors. We are happy to serve you!
See also other FAQ - Business Advisor Answers:
Should I buy a car for my business or use my own?
When can a company sell social services without adding value added tax to the price?
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