Why transform into a limited company?

Transforming your individual firm into a limited liability company can be a strategic move for you as an entrepreneur. The transition offers several potential benefits that may be attractive depending on your company's specific situation and goals. The main reasons why it might be a good idea include:

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1. Limited personal liability: A limited liability company constitutes a legal entity, which means that your personal liability for the debts and obligations of the company is limited to the invested share capital. As you probably know, this is different from an individual firm, where you, as the owner, are personally responsible for the debts of the company.

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2. Tax efficiency: Limited liability companies can benefit from lower corporation tax on profits compared to the progressive income tax of an individual firm. In addition, limited liability companies offer the possibility of tax-efficient dividends under certain conditions, which in plain English means greater opportunities for more cash flow for you as an owner.

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3. Flexibility in ownership and capital raising: Limited liability companies allow greater flexibility in changing ownership and attracting investment through the possibility of selling shareholdings.
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4. Long-term perspective and possible transfer: Limited liability companies are often easier to transfer or sell, which is an important consideration for business planning and long-term sustainability.

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When is it appropriate to convert to a limited liability company?

Once we understand why a reshuffle can be beneficial, we also need to know when in time a change to a limited company is appropriate. Unfortunately, there is no universal answer here, as circumstances vary depending on the unique situation of each company. However, two good starting points that guide you in the decision are usually:

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Results above the breaking point:

If your individual company generates a profit that exceeds the cut-off point for state income tax (SEK 615,000, 2024), it is usually financially beneficial to move to a limited liability company. This is because in an individual firm you are taxed on the entire firm's profit while in a limited company you have the option to choose how much salary you want to charge. In addition, in limited liability companies, you can choose to both take dividends at a lower tax rate or save the surplus in the company.

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In other words, in a limited company, you can choose to collect salary up to the cut-off point and then take stock dividends on the remaining amount. In concrete terms, this means that you pay less tax than if you had made the same profit in an individual company. Thus, you should start considering a conversion into a limited company when your performance in your individual firm approaches the breaking point.

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Several employees:

When your individual company begins to expand and you bring in more employees, it is also usually beneficial to switch to limited liability companies. This is mainly for two reasons:

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1. Limited Liability: As we mentioned earlier, in a limited company, you are not personally liable for the company's debts, which you are in an individual firm. The more you expand and the more employees you have, the more your risks increase. In an AB, you get better protection in case something goes wrong.
   
   
2. Benefits and Wage Space: An individual firm does not have the same opportunities for tax-free benefits as a limited company. Some deductions can absolutely be made in an individual company, but the traditional tax-free benefits, such as car benefits, wellness allowances or employee stock options, are treated differently and in some cases can be viewed as income from employment and thus taxed with you as an owner. With more employees, you also pay more wages, which in accounting language increases your pay space. A larger salary cap may also, in some circumstances, entitle you to larger dividends under the general rule, which is another reason to rebrand your individual firm into a limited liability company as your company grows larger.

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How do you transform an individual company into a limited company?

We have reviewed why you should consider converting your individual company into a limited liability company and when in time you should make the change. Now let's take a closer look at how this is done, in practical terms.

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Register the limited liability company

The conversion of an individual company into a limited company begins with the registration of the limited liability company with the Swedish Companies Registration Office, a process that can be easily carried out free of charge via t.se. It is critical that you do not liquidate the individual firm until the limited liability company is formally registered.

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In order for your limited company to be started, a minimum capital of SEK 25,000 is required, which must be used as a stake for the company's shares, allocated to its owners — that is, you and any business partners.

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It is necessary that the share capital, whether in cash or consisting of property valuable to the business, is fully invested and confirmed by a certificate from the bank, which in turn must be submitted to the Swedish Companies Registration Office. If you choose that the stake consists of property or inventory, it is important that its value is verified by an accountant in order for it to be accepted as share capital.

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In addition, there must be a board of directors for the limited liability company to be registered. The Board of Directors shall consist of yourself and at least one deputy. For larger operations, with more than 25 employees, it is also required that the Board of Directors include employee representatives.

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Buy the individual company

The restructuring effectively involves the joint stock company buying up the individual firm — its inventory, inventories and any liabilities. This step requires a valuation, either based on market value or book value. Here we at Saldo and our accounting consultants can offer invaluable assistance.

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The choice between the two options often comes with both pros and cons where you can simply say that a purchase at market value means higher assets in limited companies but possibly higher profits tax in the individual firm, which affects you as an entrepreneur. A purchase at book value basically implies the opposite. The assets in limited companies will be lower but you as the owner will avoid paying a higher profit tax.

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The Board of Directors approves the purchase

The Board's approval of the purchase is a must, which must be documented by a written decision. A transfer agreement is then drawn up between the individual firm and the limited liability company, detailing the purchase objects and the price. This agreement, which is recorded in both the individual firm and the limited liability company, is important for a proper transition.

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The individual company is deregistered

Once the purchase is complete and paid, you should de-register the individual company. You do this by completing the F-tax, cash register, VAT and, if applicable, employer registration.

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Any expansion or accrual funds

If the individual firm contains expansion or accrual funds, these can be transferred to the limited liability company, which means you can avoid taxation in the individual firm. This assumes that you make your own deposit into the company equal to 78% of the value remaining in the fund. Why 78%? Well, because it is the value of the amount that would remain after the taxation has been made.

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Taxation at the time of conversion

In the process of transforming an individual firm into a limited company, it is also important to understand how taxation in the individual firm can be affected. A key aspect to consider is the treatment of the encumbrance, which in accounting language means the assets and liabilities that are transferred to the limited liability company. If these are transferred at a value below market value, a tax situation similar to that of an own withdrawal arises, which will be based on the market value.

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As with any other rule, there are exceptions that confirm it. It is possible to transfer assets without being taxed for their own withdrawal. The exception confirming the rule in this case is based on the fact that taxation occurs when the company changes its form of incorporation and that:

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• The transfer covers the entire business to the limited liability company.
• All shares in the new company are eligible.
• There are no outstanding deficits from previous years in the limited liability company.
• The limited liability company is expected to pay tax on income from business activities within Sweden.

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Prohibited loan

Furthermore, it is critical to be aware of the risks of a so-called prohibited loan, which arises if the assets at the time of the transfer are less than the liabilities. To avoid a prohibited loan, you must pay the difference between the liabilities and assets associated with the conversion.

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VAT at the time of conversion

VAT treatment during the transformation also requires special attention. When an individual company is reconstituted and the same activities continue within the new limited liability company, no VAT shall be charged. In cases where inventory or costs for real estate projects are involved, the responsibility to adjust input VAT passes to the limited liability company. It is important to note that VAT adjustment rules primarily concern fixtures acquired in the last five years, where the amount of VAT exceeds SEK 50,000.

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If VAT is involved in the conversion, it is important to draw up a detailed document that includes all the necessary information in order to carry out the adjustment. Without this act, the obligation to carry out a VAT adjustment still rests with the original individual firm, even after the conversion.

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Preliminary tax

Finally, it is also worth pointing out that your preliminary tax will not be correct after you close your individual business. To avoid incurring a tax liability, it is important to update the Swedish Tax Agency with a new preliminary income tax return that reflects the new structure as a limited liability company. This is something that many often forget, so be sure to file a preliminary income tax return and you will also avoid the risk of incurring an unnecessary and tedious tax debt.

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We help you with the transformation of your individual company

As you will notice, there are many things to consider when you are going to convert your individual into a limited company. To avoid unnecessary taxation and get a good start in your new limited company, we at Saldo are here to guide you through the process. If you have any questions, want to brainstorm ideas or need help with the transformation of your individual company, just contact you, and we will take it from there.

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