Types of business / Company form
In general, business in Finland may be carriod on by a private enterpeneur or in the form of a company. The forms of companies in Finland are:
- sole trader (private entrepreneur)
- general partnership
- limited partnership
- limited company (most common)
- branch of a foreign enterprise
How to pick the right type of business? You need to consider following issues when deciding
Number of people establishing the business: If there is only one person establishing the business, possible types of enterprises are sole trader or limited company (of one person). If you wish to establish a general partnership, limited partnership or co-operative, You need at least two founders (three in co-operative)
Need for capital and scale of activities: Need for capital depends on quality and scale of business operations. General partnership can be established without monetary contribution, work of the partners is sufficient contribution. In limited partnership the silent partner needs to make a monetary contribution, where as the mananging partners work covers his part. Limited company needs to have minimum 2500 euros of capital when starting, and public limited company 80 000 euros. The minimum capital has to be in the company account before registration to trade register. There is no minimum capital in co-operative.
Responsibilities : Sole trader as well as partner in general partnership and responsible partner in limited partnership are responsible with their personal property of the company’s obligations. Shareholder in limited company and co-operative member are responsible only of the share they have invested.
Operational flexibility: Sole trader makes decisions independently and is responsible with his/her personal property. General and limited company partners make decisions together or alone (defined in partnership agreements). Board of directors make the decisions in limited company and co-operative. In partnerships, limited company and co-operativa a managing director can be appointed to run the current business.
Continuity of operations: When an entrepreneur has the unfortune to pass away, the most vulnerable type of business is sole trader. In partnerships partners share can be transferred if it has been defined in the partnership agreement ori f all partners agree. Shareholders of a limited company can be changed and it does not affect the operation of the company. Membership of a co-operative cannot be sold, but selling the entire co-operative is possible if all the members reach an understanding about the possible sale.
Profit sharing and covering losses: Sole trader makes the decisions about the actions and gets the profit, but is also responsible for covering the losses. General partnership is an independent company, where the possible profits / losses are divided between the partners according to law and partner agreement. In a limited partnership at least one needs to be responsible partner and at least one a silent partner, who is not responsible for company’s debt personally, but who has invested a ccontribution of capital in the company. When sharing profit, silent partner will be paid his share of the profit according the partner agreement in the beginning of financial year. After this the responsible partners share the profit according to the partnership agreement. Limited company is an independent company, the assets and debts of which are separate from the shareholders personal property. If the company is a one-man limited company, when there is only one shareholder who is also the one actual board member, there is a need to have a deputy member in the board also. Shareholders are paid dividends.
The purpose of co-operative is to offer its members services - not make profit. From co-operatives profit a limited compensation is paid to members. Profit or surplus can be divided accoding to how much the members have been using co-operatives services or in other way stated in the rules of the cooperative.
Taxation: Taxation between different types of business vary. When choosing a type of business it is important to look into the direct taxes. The most important taxes are income tax (paid to the state) and municipal tax paid to the municipality. When thinking of the taxation of a type of business, you need to also consider the taxation of the owner (personally). Most profitable type of business in relation to taxation should be calculated remembering both - personal taxation and company’s taxation.
This type of business is quite light (in administration), requires less bureaucracy than the other types of business and can be established quite quickly.
An individual with a permanent domicile in the European Economic Area (EEA) may operate as a sole trader in Finland. A person who lives outside the EEA needs a licence from the National Board of Patents and Registration of Finland for establishing a business. Someone under the age of 18 can also act as a sole trader, but this requires the consent of the guardian.
Acting as a sole trader does not require a separate permit. EU citizens are not required to have a trade license, but there are terms and conditions or qualifications in certain fields, which require you to have a license.
Operating as a sole trader means that the person carries out business operations alone or together with their spouse. Even though the couple set up the business together, the business is registered only in the name of one person. The entrepreneur him/ herself makes decisions, and is fully liable for the business's commitments (concerning loans for example) which means his/her all assets are at risk. Thus, the entrepreneur is personally liable for the business's losses, but will also receive any profits made from the business's operations. The firm will not have a Board of Directors or a Managing Director, and audits are not required.
The entrepreneur may invest money in the business, but this isn't compulsory either. The entrepreneur is not able to pay salary to him/herself, to his/her spouse or to his/her children under the age of 14, but money may be withdrawn from the business account as so-called personal drawings. Tax is paid annually based on the business's result for the period.
Even though the entrepreneur owns the firm, his/her personal finances must be kept separate from from the business's finances with the help of bookkeeping. In this it is advisable to use help of a professional accountant.
Establishing your firm
You must notify the Finnish Trade Register and the Finnish Central Tax administration of commencement of Your operations. This is done using the Y3-form, which can be found here. After filling in that form, you need to send that to Finnish Patent and Registration office in Helsinki. Before you send the forms, you need pay the registration fee in bank. There is a charge for registration (price list and payment instructions can be found here). You may begin operating immediately once you have notified these organisations, unless your trade requires a license or you are applying for business start-up funds.
Few things to remember when filling in the form. Do not overestimate your income. If you register for prepayment register, the tax officers will calculate Your prepayments according Your estimated income. So if you estimate Your income a lot higher than it will be, you might have some challenges in paying the prepayments. You will eventually get your money back, but it is of course later on.
Remember that if You are applying for startup -grant from TE-Services, You should not register Your company before that issue is decided on.
Read Patent and Register office’s instructions and download forms from here.
Who is a firm suitable for?
A firm (Tmi) is easy to establish and the simplest of forms of enterprise to establish. Often, firm suits a small scale entrepreneur who is just starting off. If Your turnover will be under 30 000 euros a year and Your goal is to basically employ yourself by selling Your knowhow or time in one form or another - Sole Trader is your choise. If You are for example a student, and Your estimated costs are under 8500 a year, Your costs for running the business in Sole Trader -form are quite moderate. Working as an part-time entrepreneur while studying You are also building your own future while working to improve Your standard of living.
To establish a partnership, you need at least two partners. Partner can also be an enterprise or an organisation. There are two types of partnership: general partnerships and limited partnerships.
General partnership (“Avoin yhtiö” in Finnish) is a type of business where partners are personally liable for company’s debt and other obligations. In a general partnership, all the partners are fully liable for the partnership's commitments, meaning their personal assets are at risk, and they decide together on issues relating to the partnership unless agreed otherwise.
The partners invest a contribution in the partnership, and this will consist of money, assets of work. In a general partnership, a contribution in a form of work from the partners will suffice as an investment. In a limited partnership, money or other assets are required from a sleeping partner as a contribution. However, the law does not specify how large this contribution must be.
In general partnerships at least one partner, and in limited partnerships at least one active partner must have permanent residence , or if the partner is a legal person, domicile in the EEA area. If they don't, for all partners that are not in the EEA area, a licence must be sought from the National Board of Patents and Registration of Finland.
General partnership is an independent legal entity based on a partnership agreement made by two or more partners. When establishing a general partnership, pay attention to the agreement.
In a limited partnership (“Kommandiittiyhtiö” or Ky in Finnish), there are two kinds of partner: active and sleeping. In a limited partnership, there must be at least one active and one sleeping partner. Active partners are fully liable for the partnership's commitments, meaning their personal assets are at risk, and they decide together on issues relating to the partnership. Sleeping partners invest money or assets of monetary value in the partnership, and they receive interest on earnings. A sleeping partner does not have the right to participate in the partnership's decision making, and is not liable for issues relating to the partnership, unless specified otherwise in the partner agreement.
Partner in a limited partnership can be a natural person as well as companies. One of the partners needs to have a place of resience (or in case of other partner being a company domicile) in EEA-area. Limited partnership is possible to change to limited company later on.
Establishing a partnership
A general partnership can be established practically by anyone (there needs to be at least two partners though). One of the founders can be a company or other community. Founders of general partnership as well as limited partnership are required to draw up a partner agreement which should be made in writing. The contents are determined on a case-by-case basis, depending on the company’s line of business and scope of operations. Registration of the company in the trade register requires that certain basic matters (business name, domicile, line of business, partners, etc.) are defined. Also other issues such as the division of responsibilities between partners and their investments, the Managing Director, the accounting period, the distribution of profits and losses, and the terms of dissolution or continuation of the partnership – should be settled in the agreement.
The partnership must be registered in the Finnish Trade Register and with the Finnish Central Tax Administration. This is done using the Y2-form. Notification of the partnership must be accompanied by the original, signed partnership agreement. There is a charge for registration, current prices and payment instructions can be found here.
After filling in that form, you need to send that to Finnish Patent and Registration office in Helsinki. Before you send the forms, you need pay the registration fee in bank.
Read more about establishing a partnership here.
Read more and download the establishing forms from Patent and register office’s web pages here.
When are partnerships suitable?
Partnerships are suitable for family enterprises. You must remember that in a general partnership the partners and in a limited partnership the active partners are liable for the partnership's commitments together equally. If one partner makes a commitment, the others are also liable for it. Therefore, there must be a ery high level of trust among the partners. However the liability of the partners can be limited in the partnership agreement.
In relation to sole trader, general partnership is able to pay partners salary as well as make private withdrawals from the company. Ask Your accountant more details about these.
A limited company may be established by one or more people or organisations. When the company is being set up, the founders register all the company's shares. In a private limited company, the share capital must be at least EUR 2 500. The Finnish Companies Act does not specify anything about the residence or domicile of the shareholders. This means the founding shareholders of a limited company may also be from outside the EEA area.
The shareholders are liable for the company's commitments only to the extent of the capital that they have invested in the company, unless they have guaranteed loans on behalf of the company.
Issues relating to a limited company are decided on by the shareholders. The one with the most shares also has most power over decisions and voting. A limited company must have a board of directors that the shareholders appoint. The board takes care of management of the company and it represents the company. The board may elect a managing director for the company, who takes care of its day-to-day management. However, the appointment of a managing director is optional. The managing director can also be elected in the initial agreement created on foundation of the company or at a meeting of the board held at a later date. If the board of a limited company is formed with less than three members, at least one deputy member must also be appointed.
At least one of the board members and one of the deputy members must have permanent residence in the EEA area. If they don't, a license must be sought from the National Board of Patents and Registration of Finland for all ordinary members or deputy members who are from outside the EEA area.
Establishing a limited company
One or more natural persons or a legal person (limited company for example). Founder of a limited company must not be legally incompetent or bankrupt. Founders do not need to have a permanent residence or domicile in EEA area, but as mentioned earlier, one of the board members (and in case of deputy members, one of them) need to have a permanent residence or domicile in EEA area.
To establish a limited company you need to draw up a foundation agreement , to which the articles of association are attached. The articles of association include minimum three items: the name of the business, its domicile and the line of business. The line of business may be shown as general commercial activities, which includes all lawful business operations (i.e. you don't have to indicate a specific line of business). The foundation agreement generally includes details on the members of the board of directors, the managing director, audits and the accounting period, as well as the number of shares, their price and the date of payment. In addition, the founders of the limited company allocate the shares. Templates to articles of association can be found on the internet,
A limited company must be registered with the Finnish Trade Register before it becomes legally valid. This is done using the Y1 form and its appendix. There is a charge for registration.
The Finnish Trade Register must be notified within three months of signing the founding agreement, otherwise the foundation of the company becomes void. Notifcation of foundation must also be accompanied by the original foundation agreement and a duplicate copy of the articles of association, if these do not form part of the foundation agreement.
Before filing the registration forms / registration of a limited company, the share capital (min. 2500 EUR) must be paid to the bank account of the new company. Therefore a bank account needs to be opened. In order to be able to open a bank account, You need to have a board meeting where You authorize someone to open the bank account, and write it down to the minutes of the meeting. Then take the signed minutes of the meeting with You when opening the account. Ask a document from the bank proving that You have paid the shares when delivering the registration papers to the local register office / Patent and Register office.Basically what You need when registering Your business are:
- Notification form Y1 (limited company) filled
- Attachment to the notification form Y1
- Receipt of paying the registration fee to patent and register office
- Copy of the articles of association
- Original founding agreement of the limited company
- Auditors proof of payment of share capital (min. 2500 EUR)
If shares are paid for using non-cash assets, there must be a term in the founding agreement which allows the share subscriber to pay the subscription price using non-cash assets. Also a description of the non-cash assets must be in the foundation agreement. An auditor's statement on the description of the non-cash asset capital contribution and on whether the assets had a financial value to the company that was at least equivalent to the price has to be in the Finnish Trade Register. This statement may be given either by a chartered accountant (KHT or HTM) approved by the Central Chamber of Commerce of Finland or by a firm of chartered accountants.
If the company has more than one founding member, it is important to create a written shareholder agreement that explains the relationships between the shareholders and their relationship with the limited company. The shareholder agreement helps to control in advance the legal risks that may arise in relationships between the shareholders and the company. In this way, unnecessary disputes that impede the business's operations can be avoided. When creating the shareholder agreement, it is worth consulting a legal expert. The shareholder agreement does not need to accompany the registration forms.
Read more and download the necessary documents from here
When is a limited company suitable?
All types of business are suited to being a limited company. The limited company is, along with the firm, the only form of enterprise that can be established by a single person. In this case, a second person is required as a deputy member of the board. An advantage of limited companies is the limited liability, which is restricted to the shareholder's capital holding, unless a guarantee has been given on behalf of the company.
For large enterprises, a public limited company is a suitable form of enterprise. For this, the minimum possible share capital is EUR 80,000. With public limited companies, their shares are offered to the public and traded on the stock markets.
Co-operative is a type of business in which the members own the co-operative. A co-operative is an independent association of individuals. The members manage the co-operative together and democratically having economic, social and cultural aims. To establish a co-operative at least three people or organisations are needed. The owners of a co-operative are referred to as members, and its capital is referred to as co-operative capital. The amount of the members in co-operative can be chosen by owners as well as the share of co-operative capital members need to pay when joining the co-operative.
Co-operative pays the capital back when a member resigns or is removed from the co-operative. The members are liable for the commitments of the co-operative only to the extent of the capital that they have invested in the co-operative, unless they have made commitments on behalf of the co-operative.
The decision making in the co-operative is done by the general meeting of the co-operative. In large co-operatives this can be replaced with representatives of the members. The members decide on issues relating to the co-operative, and each member generally has one vote. The members elect the board of the co-operative. The board takes care of management of the co-operative, and it represents it. Generally, the board elects a chief executive offcer (CEO) for the co-operative. However, this is not mandatory. The CEO takes care of the day-to-day management of the co-operative. The CEO can be elected when the co-operative is established in the memorandum of association.
Examples of co-operatives are:
- consumer cooperatives (cooperatives)
- owner co-operatives
- labor, services and expert co-operatives
- energy co-operatives
- purchasing cooperatives
- cultural, publishing and communications co-operatives
- marketing cooperatives
Establishing a co-operative
In order to establish a co-operative, you need to draw up a memorandum of association and regulations of the co-operative. The regulations must specify, as a minimum, the name of the co-operative, its domicile, the line of business, the accounting period and the amount of each contribution, the term of payment and the method of payment.
The co-operative must also be registered with the Finnish Trade Register. This is done using a Y1 form and its appendix. Notification of the co-operative must be made within six months of the memorandum of association being signed, otherwise establishment of the co-operative becomes void. There is a charge for registration, prices and payment instructions can be found here.
Before registering, the co-operative needs to arrange the first board meeting and attach minutes of that meeting to the notificatication form.
Basically these are the things You need to remember to establish a co-operation
- Choosing partners
- Finding out if Your choise of business requires licenses or permits
- Calculating Your funding needs
- Choosing Your co-operatives name
- Making the memorandum of association
- opening a bank account
- choosing a good accountant
- Filling the notification form
- Notifying registers needed
- Applying for administrative authorization (=licenses)
- Insurances (linkki)
- Joining an unemployment fund (if You want)
Who is co-operative suitable for?
Often, a co-operative is suitable for expert entrepreneurs such as those providing cultural and well-being services, or translation and interpreting services.Read more about cooperative here.
A branch is a part of a foreign organisation or foundation that engages in business or professional activities on a constant basis in a permanent office in Finland. The name of the branch must include the name of the foreign trader in the registered form together with an addition that indicates it is a branch. The addition can be, for example, "sivuliike Suomessa" (branch in Finland), "filial i Finland" or "filial".
When a branch is established, notification of this must be sent to the Finnish Trade Register. Notifcation must be given before operations commence. If the foreign organisation or foundation is from outside the EEA area, a licence must be sought from the National Board of Patents and Registration of Finland to establish a branch in Finland.
Read more here.