Are you planning to start up a business on your own? A sole proprietorship is often the simplest way to set up a business. This organisational form has some advantages, but also some disadvantages. It will give you a lot of freedom, but it could also entail considerable risk for you because you will be personally liable for your proprietorship’s finances.
The key features of a sole proprietorship are as follows:
- Unlimited personal liability (the more financial risk your enterprise takes on, the more you should consider choosing an organisational form with limited personal liability)
- Owned by a natural person, i.e. you will run the business on your own account and at your own risk (corresponding starting point where spouses run a joint business together)
- Owner cannot be an employee of their own sole proprietorship (But you can have employees).
- Owner has inferior social security rights compared with employees.
- Not a separate legal person.
- Not very investor-friendly.
One condition for registering a sole proprietorship is that you carry out commercial activity. In order for an activity to be accepted as commercial, it must be carried out on your own account and at your own risk and have a certain scope and duration. Over time, it must be likely to generate a profit. If your activity meets these conditions, the Tax administration will probably consider this as a commercial activity..
As the owner of a sole proprietorship, you are not an employee and are therefore not considered to be a salary recipient. You also do not need to pay employer's National Insurance contributions. You do not receive a salary, but you can make use of the company profits, and withdraw as much funds for your personal use as you see fit. The business profits are taxable income for you.
If you employ anyone, you will become an employer. You will then have to pay the employee a salary and calculate and pay employer's National Insurance contributions on this salary. Your spouse works for the enterprise and receives a share of the profits, but is not an employee.
Social security rights
As the owner of a sole proprietorship, you will have inferior social security rights compared with if you were an employee. Self-employed persons are entitled to sick-pay from the 17th day, with 65% cover. This is in contrast to employees, who have 100% cover from the first day. You can take out various insurance policies in order to improve your sick-pay rights.
You do not accrue entitlement to unemployment benefit on what you earn in your sole proprietorship.
As the owner of a sole proprietorship, you earn a pension on your business income. You should be aware that most people will experience a substantial reduction in their income when they retire. Saving for your retirement is therefore important. You can also enter into private pension agreements.
You must calculate how much profit you expect your business to generate. You can report your expected profit as a change in your tax deduction card. The Norwegian Tax Administration will then calculate how much tax you will have to pay. Sole proprietorships pay advance tax four times a year. The tax rate will generally be somewhere between 35.4 - 49.9%. Sole proprietorships must submit the tax return for self-employed persons. If an income statement must also be submitted, you will also have to submit the form entitled "Personal income from sole proprietorship" (RF-1224E) as an attachment to the tax return.
Value added tax
Value added tax (VAT) is a sales tax on goods and services. Some goods and services are exempt from VAT or subject to reduced rates. Sole proprietorships with a vatable turnover of more than NOK 50,000 over a 12-month period must register in the VAT Register.
Commercial activity normally also triggers a bookkeeping obligation. This means that you must retain documentation of your incomes and expenses and arrange them in a system. If you do not know much about accounting, you should consider asking an accountant to do it for you.
In certain industries, you must have a permit to run your own business. Examples of this are the catering/restaurant and cleaning services sectors.
Some advantages and disadvantages of sole proprietorships:
Easy to get started
Low start-up costs
Few formal requirements
Limited social security rights
Not very "investor-friendly"
Setting up your own business is a big step. Realising your dream can also be both expensive and take up a lot of your time. In order to find out what will be required of you, it is important to take the time to prepare a thorough plan before you register your business.
Registration and organisation number
Registering a sole proprietorship in the Register of Legal Entities is free of charge.
Some sole proprietorships must also register in the Register of Business Enterprises. This applies to sole proprietorships which, among other things, trade in ready-made goods, use goods as collateral or have more than five employees. Registration in the Register of Business enterprises is subject to a fee of NOK 2,250 by online registration. Manual registrations carry a fee of NOK 2,832.
You will be assigned an organisation number when your registration has been processed and approved.