What company structure should you choose in Denmark in 2024?

What company structure should you choose in Denmark in 2024?

This blog discusses what company structure you should choose in Denmark in 2024.

The 4 most common company structures in Denmark are:

Sole Proprietorship;
Limited Liability Company;
Branch Office;
Registration of duties/obligations as a Foreign Company.

When you decide between the company structures, you must consider how confident you are in your level of experience, business plan, how much money you will be investing, your risk, the type of products or services you sell, and the type of clients and contracts you will have.

The more experience you have, the more money you put on the table, the higher risk you take, the more expensive and complicated products or services you sell, the bigger the clients you have, and the more liability you have contractually, the more it is recommended to start a Limited Liability Company.

If you are inexperienced in business, will invest a small amount of money, have small risk, and sell cheaper and more simple products or services, have small clients and less liability contractually, often a Sole Proprietorship will be the best choice.

In Denmark Limited Liabilty Companies are usually either in the form of an ApS or an A/S. The ApS is by far the most common choice, requiring the lowest initial share capital of 40.000 DKK, and with incorporation costs of typically 2.000 DKK to 7.000 DKK + VAT depending on who assist you with the incorporation.

It is possible for both residents and non-residents to be shareholders and directors.

As a Foreign Company wanting to work in the Danish Market, often incorporating a separate Limited Liability Company makes sense when your investment is long-term.

For a more short-term commitment, registering a Branch Office, or simply registering for duties/obligations – typically only registering as an employer, and or for VAT liability, and or for Corporate Income Tax as a Foreign Company often is the simplest solution.

The choice you make will depend on your specific situation.

Sole Proprietorship

A Sole Proprietorship is a type of business that is not incorporated.

You need to be a resident of Denmark to operate your business as a Sole Proprietor, holding both a “CPR-number” (the Danish Social Security Number) and also a digital signature (called “MitID”).

Registering as a Sole Proprietor in Denmark is fast and easy.

Likewise, it is swift and easy to deregister again if your business idea is not successful.

Registering as a Sole Proprietor does not require any share capital to start.

There are no fees to register either, if you do this yourself online on VIRK.

We can assist you in the registration as a Sole Proprietor for 1.000 DKK + VAT, if you do not feel confident doing this yourself.

Read more about what information we need to help you start a Sole Proprietorship here

When deciding between a Sole Proprietorship and a Limited Liability Company, you must consider your level of experience, how confident you are in your business plan, how much money you will be investing and risking, the type of work you provide, and also the type of clients and contracts you make.

If you don’t have so much money, and are in a situation where there is not much liability, then a Sole Proprietorship might be your best option, because it’s cheap and very easy to start (and close).

Another benefit of choosing a Sole Proprietorship, is that it allows you to offset the often inevitable deficit of starting your business in other personal income to lower your overall personal tax bill.

A deficit occurs when you have more costs than sales.

Some people make a profit from the beginning, but most businesses have a deficit for 1-3 years or longer. With a Sole Proprietorship, if you have a job at the beginning on the side, and you are working full-time, f.ex. for six months while starting the business, then the deficit generated by your business can be used to lower the tax on your job, and contribute to an increase your cashflow compared to having a deficit in a Limited Liability Company.

The following example will illustrate this benefit:

The Personal Income Tax rate in Denmark is typically 35-38%, but to make this example easy, we’ll say that the Personal Income Tax rate is 40%.

Imagine you have a deficit in your business during the first year of 100.000 DKK.

At the same time, you keep a job on the side, where you earn a salary of 200.000 DKK per year.

In this case, you have 200.000 DKK in salary and you lost 100.000 DKK in your business due to all the startup costs.

When you calculate your Personal Income Tax at the end of the year, you will have a salary of 200.000 DKK; and from that amount, you can offset the 200.000 DKK deficit from your business.

When the Danish Tax Agency calculates your taxable income, it will be 200.000 DKK in salary minus the 100.000 DKK from your business deficit, so you would only have to pay tax on 100.000 DKK.

If the Personal Income Tax rate is 40%, then the Personal Income Tax would be only 40.000 DKK, instead of 40% of the 200.000 DKK, which would be 80.000 DKK.

This way, you can make use of the deficit in the first year of running your businss.

Read more about how Sole Proprietors pay tax here

In comparisson, Limited Liability Companies can generally only benefit from a deficit made in the first year, when they have a profit in future years.

So, if you expect a significant deficit and are low on cash, a Sole Proprietorship can be a good idea.

One significant disadvantage with Sole Proprietorships though, is that you are the business, and because of that you are also liable personally for everything that might happen during the lifetime of the business.

This means you could, for instance, be sued by a client or supplier or maybe end in a lawsuit if you fail to pay your bills.

If you lose the lawsuit, then you’d be held personally liable.

In the worst-case scenario, you might end up in a situation where you’d need to sell your house to pay some obligation.

So having a small business, a Sole Proprietorship, is more accessible than the Limited Liability Companies in many ways, but you must understand the risk involved also.

So, when is a Sole Proprietorship a good choice in terms of risk?

Let’s consider the following example: If your business involves writing articles for friends, family, and close acquaintances, then you’re not likely to end up in any huge lawsuits.

And since your costs would be limited to a computer, paper, pen, etc., your overall risk would be limited.

However, if you then scale up your business to include two or three full-time employees, you will also have a liability towards them regarding salaries and their taxes and if something goes wrong.

Moreover, if you acquire some big clients, which, for instance, results in sales of 1.000.000 DKK per month, but decide to source the work and pay your outsourcing partners 900.000 DKK, your margin would not be great in this scenario.

Your profit wouldn’t be a million; it would be much less. But you would have provided the client services for 1 million DKK, resulting in a big liability.

One way to avoid such significant liabilities is to avoid them with a contract.

We suggest that you look at your competition to see what they negotiate in their contracts or seek advice from a lawyer to stay competitive.

If you expect to work mainly for 1 customer be careful that it could be seen as normal employment.

You can read more about this situation here

Limited Liability Company

When comparing a Limited Liability Company to a Sole Proprietorship, first ask yourself if there’s any liability in your work.

Look at your worst-case scenarios.

If you have a disagreement with a client becuase you did an error in your work, and the client lost money as a consequence of your error – could you have written your way out of this liability in a contract that would potentially hold up in court?

If you can write your way out of the liability in a contract, the liability will be limited due to the contract, and a Sole Proprietorship may be the quickest and easiest option to start your business.

If you can’t write your way out of the liability in a contract, you should consider the Limited Liability Company.

Should everything go bad, then you can “only” lose the company.

But all your private assets are protected.

You must have 40.000 DKK in share capital to start the business.

A Limited Liability Company works differently than a Sole Proprietorship in that, even if there is a deficit, that deficit is isolated in the limited entity, so you can’t use that deficit for anything relating to your personal income tax.

Read more about Corporate Income Tax here

If you want to receive a salary from your Limited Liability Company, the company would be required to register as an employer and produce a payslip for you.

The company must withhold your personal income taxes and pay these taxes to the government.

So, in a situation where you already have a deficit and also need a salary, you will have already lost money due to the deficit, and now you must also pay taxes on your salary.

This can be very hard for the cash flow of the company.

We can help you incorporate a new ApS.

Here you can see the prices for incorporating a new ApS

Here you can read what information is needed to incorporate a new ApS

We sometimes see that the Danish Tax Agency investigate the shareholders and founders in detail before approving the VAT and employer registration following the incorporation of the company.

Should this happen, you can see what questions the Danish Tax Agency typically ask here.

Branch Office

You can also choose to register a Branch Office of a Foreign Company.

A Branch Office is an integrated part of the Foreign Company, and the registration does not require any share capital.

If the Branch Office have a permanent establishment in Denmark or employees who can enter into agreements on behalf of the parent company, it will become a tax resident in Denmark as well.

The Branch Office will receive a Danish company registration number called “CVR-number”.

The Branch Office will need to keep separate Danish accounting records in accordance with the Danish Accounting Legislation.

It is important to understand, that the Foreign Company will be liable for obligations arising from the activites in Denmark.

Sometimes a liable person in Denmark needs to be appointed also.

The Danish accounting shall be incorporated into the parent company’s accounting.

You must submit the parent company’s annual report each year to the Danish Business Authority and prepare a separate Danish tax return.

We sometimes see that the Danish Tax Agency investigates the parent company of a Branch Office in detail before approving the registration.

Should this happen, you can see what questions the Danish Tax Agency typically ask here.

Registration of duties/obligations as a Foreign Company

If you are not ready to register a Branch Office and you don´t want to incorporate a new Limited Liability Company, registration as a Foreign Company is also something to consider.

As a Foreign Company, you can often register only for specific duties/obligations in Denmark.

It is the “light” version of getting started on the Danish market.

The typically duties/obligations that Foreign Companies register for, are:

Employer Registration
VAT Registration
Company Income Tax

It is important to understand, that the Foreign Company will be liable for obligations arising from the activites in Denmark.

Sometimes a liable person in Denmark needs to be appointed also.

The registration process as a foreign company has an expected processing time of 2-4 weeks.

We sometimes see that the Danish Tax Agency investigate a foreign company in detail before approving the registration.

Should this happen, you can see what questions the Danish Tax Agency typically ask here.

You should register 8 days before starting your activities in Denmark.

We can assist with the registration as a Foreign Company for 3.000 DKK + VAT.

Depending on your company structure, an onboarding fee may also apply.

The registration as a Foreign Company can sometimes require a fiscal representative or a person living in Denmark with signatory rights, which can be jointly liable for payments of tax and duties.

Sometimes, registration also requires an address in Denmark.

Please get in touch with us to clarify your situation.

(Last update of this blog: 29.3.2024)

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