Starting a business is a big decision and one of the most important decisions at the beginning of the process is choosing the right business form. The most popular business forms in Finland are the limited liability company and the limited liability company, both of which have their own strengths and weaknesses. In this blog post, we briefly review the main differences between the two forms of company and what to consider in the long term.
Business name – Simplicity attracts
Setting up a business name, i.e. a sole trader, is often the first step when starting a business. It is a simple and easy way to start a business, especially if your business is small-scale. One of the clearest advantages is the ease and affordability of setting up. Setting up a business is done by filing a business registration with the Trade Register (the registration fee in 2024 will be €70). After that the company will have its own business registration number. In addition, the registration must be notified to the tax administration. Anyone over 18 years of age who is a permanent resident of the EU economic territory, has a Finnish personal identity number and whose capacity to act is not restricted can register as a business entrepreneur.
The business name also allows for light administration: no financial statements are required, and taxation is handled through personal income tax, which can be convenient for smaller business models.
The benefits of the company:
- Easy and quick to set up (and, if necessary, to stop in due course)
- Simple accounting, especially for small-scale operations
- Taxation through personal taxation
However, there are a few aspects of the business name that may limit its long-term viability. For example, the entrepreneur themselves are personally liable for all debts and liabilities of the business, which can create risk if the business grows or faces financial challenges. There may also be limited tax flexibility compared to other forms of business once the turnover of the business starts to increase.
Limited company – Growth and security for the future
A limited company, or limited liability company, is a common choice for businesses seeking more long-term growth and security. In a limited company, the entrepreneur’s liability is limited only to the capital invested in the company (nowadays it is possible to set up a limited company without a minimum capital requirement!), which means that personal finances are separate from those of the company. This can be a significant advantage if the business expands and the risks increase.
A limited company also allows for more flexible taxation, for example, leaving profits to the company can be tax advantageous in certain situations: imagine a scenario where you are both “employed” and working as a part-time self-employed consultant in different companies. So you receive both earned income from “salaried work” and income to be invoiced to the company’s account. If you were self-employed (i.e. had a trading company), all your work would count as part of your own earned income because of the progressive tax system. In a limited company, your own earned income is separate from the company’s turnover and its profits, and only if you want to can you draw a salary or dividends from it.
A limited company also gives a better image to potential partners and financiers, as it is often perceived as a more solid and reliable form of business, regardless of whether the company has been running for a long time or is in its early stages. A limited company is also helpful with subcontractors and partners, especially in B2B business. As limited liability companies’ accounts and activities are often public, it is easy for partners to check the facts to see whether or not to enter into a partnership.
The advantages of a limited company:
- Limited personal liability of the entrepreneur
- More flexible tax options
- Possibility to raise capital and share ownership
- More credible and attractive to partners and donors
- A limited company provides a good framework for growth-oriented activities
Although setting up a limited company is more complex and requires more administrative obligations, such as preparing accounts and holding general meetings, this form of company gives the business a better chance of growth and long-term stability.
Which is the right choice?
A business name can be a good option for a sole trader running a small-scale business without major risks or expansion plans. However, if your aim is to grow the business, raise capital and perhaps employ others, a limited company can offer far greater benefits and security in the long term.
Clarifying the needs and objectives of the business is key to choosing the right form of business. If you are still considering which form of company would be best for you, we recommend you contact our expert accountancy firm. We can provide you with advice and services to help you make the best choice for your business.
