From Sole Proprietorship to Private Limited Company (ApS)

Why It’s Easy to Start as a Sole Proprietorship but Expensive to Convert Later

When entrepreneurs begin turning their ideas into reality, choosing the right business structure is crucial. Many opt to start as a sole proprietorship because it’s a simple and cost-effective solution. However, as the business grows and develops, it may become necessary to consider converting to a Private Limited Company (ApS).
Unfortunately, this transition can be more costly than starting with an ApS from the outset. In this article, we’ll explore why it’s easy to get started as a sole proprietorship but expensive to convert to an ApS later. We’ll also discuss the considerations you should make when choosing a business structure.

Sole Proprietorship – A Simple Start

Establishing a sole proprietorship is a popular way to start a business. The process is relatively simple and less complicated than other business structures, making it attractive to entrepreneurs and startups.
As a sole proprietorship, no start-up capital is required. This means lower start-up costs and generally fewer legal requirements and formalities to comply with. Additionally, sole proprietorships are taxed differently than corporations, which can be advantageous for some.

Challenges of Converting to an ApS

While a sole proprietorship offers many advantages initially, the growth and development of a business may eventually require a more robust structure like an ApS. For example, if your business involves higher risks, it can be more reassuring to have your personal finances protected by the limited liability offered to owners of an ApS. However, you should be aware of the personal responsibility associated with being part of the management of a company, which you can read more about here: Management Liability vs. Limited Liability in a Private Limited Company (ApS).
To convert a sole proprietorship into an ApS, a minimum capital of DKK 40,000 or equivalent assets is required. This amount must be fully paid, which may not be readily available for sole proprietorships that haven’t accumulated significant resources during their start-up phase.

The conversion process often requires assistance from a (business) lawyer. Additionally, an auditor is needed to prepare a valuation report if assets from the sole proprietorship are contributed to the new ApS. The costs associated with this can be substantial and may represent an unexpected burden for sole proprietorships with limited resources. These costs can often be avoided by starting with an ApS instead of a sole proprietorship when embarking on your entrepreneurial journey.

Converting from a sole proprietorship to an ApS can also have tax implications due to changes in the company’s legal structure. Consulting a tax expert is essential to understand the potential tax consequences and ensure compliance with all rules and requirements.

Therefore:

Starting as a sole proprietorship is a simple and cost-effective way to begin as an entrepreneur. It gives you full control over your business without having to comply with complex legal requirements or invest significant start-up capital. However, this also comes with a price in the form of personal and unlimited liability. Additionally, you may later find yourself in a position where converting to an ApS becomes necessary to meet new challenges and opportunities in your business.
Capital requirements, costs, and tax implications can present significant barriers for small businesses with limited resources in the start-up and growth phases. It is therefore essential to carefully consider your business’s long-term goals and plan your business structure accordingly—where possible.

Consider whether starting with a private limited company from the outset might be a better option than converting later. We often see that failing to consider this from the beginning can become an expensive mistake.

If you’re unsure which business structure is right for you, it’s recommended to seek professional business law advice. This can guide you through the process and ensure you make the best decisions for your company’s future.