Sole Trader

A sole trader, also known as sole proprietorship, is a popular business structure where an individual referred to as a sole trader runs and is responsible for the business. Starting a sole trader business is simple and requires no capital investment. To get started, you apply for F-tax or FA-tax with the Swedish Tax Agency.

A sole trader differs from most other business structures in that it is not a legal entity. Instead, the business owner's personal identification number is used as the business registration number. This means that as a sole trader you are personally responsible for all business obligations such as contracts and debts. It is you as an individual, not the business, that engages in business transactions such as renting premises. Consequently, you are also personally responsible for covering the business's debts if its assets are insufficient. However you can reduce personal risk by taking out business insurance.

In a sole trader business, profits are taxed as part of your personal income. The business's income is considered an extension of your personal finances, meaning the profit generated is counted as income from employment and taxed according to applicable tax rates.

Limited Company

A limited company is a business structure where the owners, known as shareholders, create a legal entity through the company. In this case the limited company itself becomes a separate legal entity from its owners. This means that shareholders are not personally liable for the company's debts and obligations, apart from the capital they have invested in the company.

To start a limited company, a capital investment of at least 25,000 SEK is required. This amount represents the share capital, consisting of shares that the owners hold as proof of ownership in the company.

A limited company must have a board of directors. In small limited companies, the business owner is often both a shareholder and a member of the board. As the limited company grows and reaches a certain size, the requirement to have an auditor may quickly become relevant.

An owner actively working in the company and wanting to withdraw money regularly is considered an employee and receives a salary taxed in the same way as other employees without share ownership. The corporate tax rate is 20.6%, which is the tax the limited company pays on its profit.

Every year the limited company must hold a general meeting (annual meeting), where decisions are made about profit or loss allocation. The annual report must then be submitted to the Swedish Companies Registration Office (Bolagsverket) each fiscal year.

Advantages and Disadvantages of Sole Trader

One advantage of a sole trader business is how simple it is to start. The application for F-tax or FA-tax is made with the Swedish Tax Agency and after approval you are ready to go.

You do not need start-up capital like in a limited company, where the minimum investment is 25,000 SEK. This creates a lower barrier to starting the business.

In a sole trader business there is less administration at the start and during the operation of the business. No general meetings need to be held and no annual report needs to be submitted.

With less administration you save more time or money, depending on whether you do the accounting yourself or have someone else do it.

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The disadvantages of a sole trader business are that the owner is personally responsible for the business's obligations. The owner can be personally liable for the business's debts and is not as protected as in a limited company.

If you already have a job on the side, it will be harder for you to plan taxes since all profit in a sole trader business is counted as income from employment (salary).

There are no opportunities to have multiple owners.

Advantages and Disadvantages of Limited Company

The advantages of a limited company are that the owner is more protected from the business's obligations, where the risk is usually limited to the invested share capital. However, owners who act intentionally or with gross negligence can be personally liable for the company's debts.

There are significant growth opportunities. A limited company can have multiple owners, making it easier to open doors for new investors.

Another advantage is the ability for tax planning, where dividends can be made and taxed as capital income.

If you are employed in the company, there are many opportunities for benefits.

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The disadvantages of a limited company are that it requires more administration at the start and during the operation of the business. To get started, some documents need to be prepared and a bank certificate must be obtained from the bank. During the operation, general meetings must be held and an annual report must be prepared.

You need start-up capital of at least 25,000 SEK. This capital must not be completely consumed.

Another disadvantage is that it can be more expensive with a limited company. It requires more accounting work where an annual report must be prepared and submitted each year, and it may become necessary to have an auditor as the company grows.

Summary of the different Business Structures

The choice between a sole trader and a limited company depends on the entrepreneur's situation and needs. A sole trader offers an easy start without requiring substantial capital and is suitable for smaller businesses with limited risk since the owner is personally responsible for debts and obligations. On the other hand, a limited company provides a more comprehensive business structure and growth opportunities through capital acquisition via the sale of shares, while protecting the owners from personal liability for the company's debts.

Tax planning and income management also vary between the two business structures. A limited company can be advantageous for tax planning through dividends as capital income, while a sole trader offers straightforward and transparent taxation where the profit is taxed as income from employment.

Finally, it is important to carefully consider the advantages and disadvantages to choose the best business structure. If in doubt, it may be wise to contact us for advice and practical help to get started.