Entrepreneur: Changing a trade name to a limited liability company can be profitable
A trade name is usually a good choice as a form of company, when the business is small and based mainly on one’s own work input. However, as the business grows or changes, it may be necessary to consider whether the trade name is no longer the most optimal company form or whether it is worthwhile to change to a limited company.
In this post, we will tell the differences between a business name and a limited liability company. In addition we will also tell you when it is worth changing the company form and how it happens in practice.
Which one should you choose: business name or limited liability company?
A limited liability company and a trade name are the most popular forms of business in Finland. At the beginning of 2020, there were about 266,000 limited liability companies and more than 218,000 trade names in Finland. Which company form should you choose then, a trade name or a limited liability company? Best way to find out is researching the differences between the types of companies carefully and then choosing the one that is best suited for your own use.
Differences between a trade name and a limited liability company
The trade name and the limited liability company differ from each other in many ways. A trade name may be more suitable for a small business and start-up, due to the ease of setting up a business name and the agility of the business form. The limited liability company, on the other hand, is more permanent in nature and suitable for wider business operations. That is why the limited company has in some cases been called the final form of company.
Over the years, the business may have expanded to such an extent that the entrepreneur can benefit significantly from changing the trade name into a limited liability company. In general, changing a business name to a limited liability company could be profitable from a tax point of view when the business result is around EUR 35,000 or more.
Responsibilities and obligations
The responsibilities and obligations of a trade name and a limited liability company differ significantly. The limited liability company is an independent legal entity and is thus responsible for its own obligations. A shareholder of a limited liability company is liable for the obligations of the limited liability company only up to the amount of capital invested. The owner of the trade name, on the other hand, is liable for the obligations of the trade name with all his personal property. In terms of risk management, a limited liability company is therefore a better option than a trade name.
Payroll and taxation
As the limited liability company is an independent legal entity, it can also pay its shareholder working in the company the amount of salary it wishes. A trade name entrepreneur cannot pay himself a salary, but the result of the trade name for the financial year is taxed in the entrepreneur’s personal taxation. Depending on the company’s result for the financial year and the company’s net assets, a limited liability company may also distribute dividends taxable as capital income to its shareholders. These are the reasons why the limited liability company provides better opportunities for tax planning for the company and its owners than the trade name.
The limited liability company is better suited to expanding its business than the trade name. New shareholders can be included and there are more options for financing the limited liability company’s operations. It is also easier to finance investments with the company’s income financing in a limited liability company.
Administrative differences between the trade name and the limited liability company
There is less mandatory paperwork in establishing and maintaining a trade name than in a limited liability company. A limited liability company is more bureaucratically burdensome to set up and maintain. The limited liability company must, for example, hold an annual general meeting. In addition to which the limited liability company must have a board of directors, the minutes of which must be kept. In general the benefits to a limited liability company outweigh the costs of bureaucracy.
How to change company form from trade name to limited liability company?
Changing a trade name to a limited liability company is easy. In the change process, a memorandum of association is drawn up, in which the trade name entrepreneur undertakes to invest the company assets used in the trade name in the limited liability company to be investment in kind. A statement of non-cash assets is prepared, and the auditor issues an opinion on the non-cash assets to ensure that the value of the assets invested in the company has been correctly determined. The memorandum of association and the annexes to the memorandum of association are submitted to the Trade Register together with the notification of the incorporation of the limited liability company and the company is formed when the company’s registration in the Trade Register is completed.
How we can help you with the change?
We at Gallant have experience in several business name changes to limited liability companies. The change process usually takes a few months and we will support you throughout the change process. At its fastest, the process can be completed in just over a month if the company’s information is up to date.
If you are interested and want to hear more about changing your business name to a limited liability company, please contact us. We will be happy to help you!