Sole proprietorship or limited company (private limited liability company). Which form of organization is most suitable for your business? Read our comparison and make the right choice.
In this article, I will put the spotlight on private limited liability companies (LLC) and sole proprietorships (SP). These are still the most chosen forms of organization among most establishers. Almost all (more than 9 out of 10) choose one of these forms.
Which form of organization is the best specifically for you? There are more to choose from, but the choice of form of organization isn’t necessarily the most important.
- The most important part is to create profitability in the business.
- Still, what should be the deciding factor when choosing between a sole proprietorship and a limited company should be the extent of risk and responsibility.
In short: If you’re taking high financial risks, betting on having (multiple) employees, and picturing extensive investments, going for a limited company would be reasonable.
Sole proprietorship or private limited liability company – short introduction
- Private limited liability company (LLC): One or more owners (shareholders), that adhere for deposited capital. Potentially employees.
- Sole proprietorship (SP): One owner/proprietor. Tradesperson. May also have employees.
If you are planning on starting something with others, and want a different option from a limited company, a cooperative could be a suitable alternative.
No matter what you choose, there are four basic requirements for being able to call what you’re doing a business:
- You are running for your own bills and risks.
- That the business lasts a certain time and has a certain extent.
- That the business is suitable to give a financial surplus.
- That there is activity (your own or via employees).
The admission ticket for limited companies has become cheaper
More people choose a limited company as a form of organization now, after the demand for a share capital was reduced from 100 000 NOK to 30 000 NOK, and the duty of revision was suspended for the smallest limited companies.
There have been other simplifications in the law of shares, for example when it comes to the demand of board, leadership and execution of annual general meetings.
Simple in SPs and a bit more complicated in LLCs
A sole proprietorship is a simple, unbureaucratic and flexible way to run a business.
A private limited liability company is a more “stiff”, complicated and demanding form of company because it has its own law, the law of shares, among other things.
However, the main reason to choose one or the other is the grade of risks. If your SP goes to pot, your private finances also gets a burn. Possible creditors can come for both your private home and other private properties to cover their demands.
For this reason: If you have a business without significant investments and personal risks, and that you have plans to have as your bread and butter, an SP is a good option. If you are faced with high investments, taking great risks and have plans to grow, you should consider an LLC as your form of organization.
But where are the main differences? Here are some of the most important:
Sole proprietorship or private limited liability company – before establishing
→ LLC: One or more owners (shareholders). A company with limited responsibility. As a shareholder, you don’t adhere for more than what you have deposited as a share capital. The minimum requirement for a share capital: 30 000 NOK.
NB! You can spend of the 30 000 NOK when covering the expenses of the establishing of the limited company. If the costs are limited to the fee of registering in the Register of Business Enterprises, this means that you have about 24 000 NOK left in actual share capital.
NB!NB! The law of shares still demands that the equity in the company is reasonable based on extent and risks. It is also a requirement that the liquidity is reasonable.
In my comparison of the two forms of company, you own all the shares and are the only employee.
→ SP: You are personally responsible to make sure that all debts and commitments are paid. No requirement for capital deposit.
Sole proprietorship vs private limited liability company – taking up loans
NB! If you are running a sole proprietorship and are facing significant investments, you can consider changing to a limited company.
Notice that as the only owner of an LLC, you may be personally responsible for possible loan takeups (endorser). That means that you get the responsibility to take on the loan if your limited company were to go bankrupt.
The interests on loans in the business market are often much higher than in the private market, and a small limited company may have low security to refer to.
Because of this, it may be more favourable for you to take up a private loan if you can put fixed property as security, and you have a good margin here. You can then privately lend the money to your limited company.
This could be relevant in periods where you need a bigger working capital, and if the liquidity pressure gets too big.
The prerequisite needs to be that this is temporary and that you, over time, can pay it back.
Form of company and sick pay
This is an entangled area. Be aware that there are own rules, for instance if you have combined incomes (both business income and a salary).
Another crucial point is that if you are employed in your own limited company, it doesn’t automatically secure you better. The sick-pay depends on whether the company has actually paid you a salary.
The rights for sick pay in sole proprietorships have become better
→ SP: If you get sick, you have the right for 80% of the sick-pay base from day 17 (changed from 65% to 75% from October 1st 2017, and further to 80% from October 1st 2019). This means that if you have had a pension-giving income of on average 300.000 NOK per year for the last three years, you will get a sick-pay equivalent to an annual income of about 240.000 NOK.
This is an unmistakable improvement from when the rights were 65% of the base.
Three alternatives to add-on insurance via Nav:
- 80% from first sick day.
- 100% from day 17 (which is a good alternative in the case of long-lasting illness.)
- 100% from day 1.
NB! You will get a deduction for the insurance bonus in your tax return.
→ LLC: You have rights to 100% of the sick-pay base from the first day, as an employee in your own limited company, however:
NB! If you are running a limited company, you (or your LLC) have to pay for the first 16 days yourself, just like in a sole proprietorship. Since you’re employed, Nav will cover 100% of the sick-pay base from day 17.
Notice that the calculation model for sick-pay in LLCs has been modified from 2020. The main rule is now that the average income of the last three months is the main focus.
Deduction in the LLC – not in the SP
The difference between an SP and an LLC is that you will get a deduction for the payments in the LLC, while in the SP you need to cover the sick period yourself.
Also, remember that the sick-pay base is calculated based on the income you have had. If the economy in the business has been poor, and you have extracted minimal salary from the limited company, this will also affect the sick-pay.
But it’s worth it to notice that the sick-pay base for employees is now calculated based on the average of the last three months. Previously, it was calculated based on the last month (or the last four weeks before sick-leave).
Disagreed to the previous rules
An LLC-owner then wrote this in the Facebook-group “Selvstendige Arbeidere krever like rettigheter” (“Independent Workers demand the same rights”):
“Be aware that once you are employed in your own LLC, you need to pay yourself every single month to ensure getting sick-pay. The income of the last four weeks before sick-leave is what the sick-pay is based on. I’m ending my LLC this new year because I have unstable income in the business and therefore I am safer as an independent tradesperson. The sick-pay will then be calculated not based on whether I have extracted a salary lately, but based on an average of the last three years. This year NAV has denied me sick-pay because I didn’t extract a salary before a sick-leave. I can document that I was at full work, but NAV isn’t interested in that. An LLC is suitable for businesses with stable commissions and a good liquidity.”
Form of company – taxes and fees
→ SP: You need to contact The Norwegian Tax Administration to establish the preliminary tax. You are to pay it four times a year:
- March 15th.
- May 15th.
- September 15th.
- December 15th.
The preliminary taxes can, to many people, be harsh on the liquidity (the money you have at disposal).
Roughly put, this is how the taxes are calculated: 22% tax on the surplus in the income plus 11,2% social security fee on calculated personal income (which put together is usually a bit lower than the surplus). Sole proprietorships within fishing and gathering get away with 8,2% social security fees.
NB! Bracket taxes come in addition to this.
If you want to avoid interests and remaining unpaid taxes, you need to pay possible supplementary tax prepayment by May 31st the following year.
Can allocate with spouse
NB! Remember that you can allocate some of the surplus on a potential spouse after a work effort in the sole proprietorship. You can not do the same in a limited company. It will then count as income, and employer’s national insurance contributions and vacation money need to be calculated.
→ LLC: As an employee in your own limited company, you pay taxes on your income following the same rules as any other employee. Personal income is only calculated from salary. The limited company itself is taxed with 22% of the surplus. These taxes are also paid in four annual terms, but the year after the earnings. NB! Possible distribution to a shareholder is also taxed.
Your limited company also has to pay employer’s national insurance contributions on 14,1% (standard rate) for each NOK you extract in salary, as well as make sure to take care of preliminary taxes. This money has to be put into an account specifically for tax deductions.
Sole proprietorship or private limited liability company – deduction
You generally have the same deduction possibilities in a sole proprietorship as in a limited company. All fees that can be tied to the business can mainly be used as accounting documents and give deduction in the accounting.
However, there are some areas where the difference becomes clear:
As an employee in your own LLC, you have the rights to the minimum standard deduction in salary income, just like the other salaried employees. You don’t have this possibility in a sole proprietorship, where you have to document mostly all fees. Several people have suggested a kind of business deduction, or basic deduction, also for independent tradespeople, but this is, for now, far from being realized.
Travelling deductions differ
Another area where the difference is evident is when it comes to travelling. As an employee in your own limited company, you can use the government’s rates for diet and lodging. That means that you can spend the night at your relatives’ when you’re travelling, and get the standard deduction for undocumented lodging. You can’t do that in a sole proprietorship. You need receipts for everything.
Form of company and revision
→ LLC: You can opt-out the revision if you are within these criteria:
- Annual business income being less than 6 million NOK (previously 5 million NOK).
- Balance sheet total being less than 23 million NOK.
- Average amount of employees that doesn’t exceed ten year-long assignments.
NB! The investment /holding company can now opt-out the auditor if the corporation as a whole is within the threshold values above.
→ SP: Only if the business income is over 6 million NOK, is there an audit obligation.
Form of company and unemployment
→ SP: As a runner of a sole proprietorship (with only business income and no salary) you don’t have a right to unemployment benefits if your market were to disappear and you become unemployed. Business income does not give a basis for unemployment benefits.
Previously you could apply for unemployment benefits based on earlier business income if you were over 64 years old. This rule was removed in connection with the pension reform.
→ LLC: As an employee in your own company, you, as other employees, have the right to unemployment benefits if your work hours are reduced by at least 50%.
NB! Runners of SP’s don’t have the rights for income from the state income guarantee fund or preferential rights in the bankruptcy estate at a potential bankruptcy, like employees do.
NB! You also don’t as an active shareholder in an LLC with ownership of a minimum of 20% in the business. The exception is if you can make it seem probable that you have not had important influence over the business.
Conclusion – sole proprietorship vs private limited liability company
There is no set answer to what’s the right choice between a sole proprietorship and a private limited liability company.
If you have ambitions to live entirely off of the company, it can be a good idea to choose a limited company directly.
If you think that it will be something you will do in addition to a different job, a sole proprietorship could be the first choice. A sole proprietorship is easy to register, and it is also possible to, tax-free, change it into a limited company later.
Good luck whether you choose a sole proprietorship or a limited company!