When does it pay off to change to a limited liability company?

Private trader is a good choice for small companies selling their own expertise. However, success and business growth may create a need to change the company form.

You should consider changing from a private trader to a limited liability company if:

  • Your business operations create profits that remain as savings
  • Your revenue grows
  • You want to expand your ownership base
  • You want to improve your company’s credibility and image
  • As a private trader, you have a lot of other income, too 

Being a private trader is fine as long as your income is moderate and you spend it on your daily living. As your income grows, a limited liability company is a better solution from the aspect of taxation. The owner is taxed on the basis of salary, dividends or both of the above. 

Limited liability company as a company form becomes necessary at the latest when you start hiring employees. The employer obligations incur a lower risk because a limited liability company is an independent legal person.

The owner of a limited liability company can withdraw money from the company both as salary and dividends. What’s more, the owner may also take advantage of fringe benefits, such as a company car or phone. It will also become easier to get financing because a limited liability company enables the involvement of new shareholders and investors. 

Limited liability company as a company form may also be beneficial if giving up the business becomes a current issue. For example, the change-of-generation reliefs applicable to inheritance or capital transfer tax require a company form.

In any case, the change includes many factors affecting profitability and taxation. This is why you should discuss changing the company form first with your accountant.

What you need to remember when changing the company form?

The change always includes specific practical issues that must be taken into account. 

Although you can found and own a limited liability company alone, the Board of Directors must include one deputy member in addition to yourself. In addition, limited liability companies are required to use double-entry bookkeeping. It should always be left to an accounting firm.

You will receive a new Business ID when changing the company form. Remember to update it to all of the necessary documents and forms as well as to your contact information.

When the business operations are transferred to a new limited liability company, the private trader’s tax year will end in the limited liability company’s entry in the Trade Register. Financial statements must be drawn up and a tax return filed for the tax year that ended.

How does the change take place in practice?

The change of company form is simply implemented by founding a new company. 

If you want to keep your company’s old name, you must either change it in the Trade Register or end it entirely in connection with the foundation of the limited liability company. In the future, the name of the new limited liability company will include as identifier either Plc or Ltd.

Firstly, you must subscribe for all of the new company’s shares. Potential other owners will be included later.

What can we do to help?

Every company is different, and the change is affected by many factors. If you are thinking of changing the form of your company, our experts are ready to help. 

Get in touch and book an appointment to find out more.