The choice of form of business is a vital decision when starting up a business. Criteria for this include the nature of the future operations of the business, the need for capital, the number of those participating in the establishment and operations of the business, taxation and responsibility issues.
Alternative options include entering business as an entrepreneur or a self-employed person, a general partnership, limited partnership, a limited liability company, and cooperative.
Number of founders
How many founders or owners does a company have? One person or several people, or an enterprise can set up a limited liability company. In Finland, a European Economic Area (EEA) resident may act as a private entrepreneur. Such a private entrepreneur (entrepreneur or self-employed person) is not a company, as he/she acts in his/her own name. In a general partnership, there must be at least two general partners (founders). A cooperative may be established by at least one person.
The minimum share capital of a private limited liability company is 2,500 euro, and that of a public limited liability company, 80,000 euro. These sums must be in the company’s account before the limited liability company is entered in the trade register.
A general partnership may be established without a monetary investment. Partners’ work contribution is sufficient.
In a limited partnership, the silent partner is required to make a capital investment, while a work contribution is sufficient for general partners.
No minimum cooperative capital is specified for a cooperative.
An entrepreneur or self-employed person makes decisions personally, and is responsible for them with his/her personal property at stake. Partners in a general partnership and limited partnership exercise decision-making power either on their own, or together. Limited liability companies and cooperatives are represented by boards of directors.
A managing director may be appointed for private enterprises, limited liability companies and cooperatives, to manage day-to-day administrative duties.
Risk and responsibility
The following are responsible for business operations, both personally and by staking their entire property:
an entrepreneur or self-employed person
a partner in a general partnership and
a general partner in a limited partnership.
Limited liability shareholders and members of a cooperative are not personally responsible for the obligations of a limited liability company or cooperative.
An entrepreneur or self-employed person acts in his/her own name and bears financial responsibility for commitments in person.
The general partners in a general and limited partnership are personally responsible for the debts and other obligations of the company. In a limited partnership, the responsibility of silent partners is limited to the amount of capital investment agreed in the partnership agreement.
Continuity of operations
Can business operations continue if the founder or other key person quits or even dies? The business of a private entrepreneur is most vulnerable in this sense. In a general partnership and limited partnership, the share of a partner can be transferred, if so agreed in the partnership contract or if other partners so agree.
A change of shareholders does not affect the existence of a limited liability company. Membership in a cooperative cannot be sold, but the entire cooperative can. This requires sufficient agreement between members.
Withdrawal of assets and profit distribution
A private entrepreneur gains full use of any profits from the company, but on the other hand, he/she is responsible for any losses incurred. You cannot pay wages to yourself and your spouse, or gain any tax-free fringe benefits. An entrepreneur may use the profit of the company for private withdrawals after taxes.
In a general partnership and limited partnership, the partners agree on the criteria for dividing any profit and loss. Partners can withdraw a reasonable amount of wages and gain fringe benefits and tax-free expense allowances. In practice, the partners usually withdraw profits as private withdrawals.
A limited liability company is responsible for any profit or loss itself. Profits are distributed by paying dividends to shareholders. Shareholders can also receive moderate wages and fringe benefits. Private withdrawals are not possible.
From the profits of a cooperative, only limited compensation is paid for the capital invested in the cooperative. The profit, or surplus, can be distributed as a return of the surplus in accordance with the extent to which members have used the services of the cooperative, either as interest on the cooperative capital or in another manner specified in the rules of the cooperative. Additional wages may be paid to members of workers’ cooperatives.
Proceeds gained by an entrepreneur or self-employed person on a business activity are subject to taxation as his/her personal income. In the case of partnerships, they are divided and subject to taxation as income for the partners. A limited liability company is liable to pay taxes independently. Its income is subject to tax as income for the limited liability company. A cooperative is subject to tax in a similar way to a limited liability company.