Starting a Business in Finland

Photo by Alexandr Bormotin on Unsplash.

Living in Finland, or planning to move here? Experienced entrepreneur, or just interested in trying something new? Starting a business in Finland might sound daunting, but it might very well prove to be one of the best decisions in your life. This article will give you some practical pointers on how to start a business here.

All examples and guidelines in this article are of general nature only. Laws change, numbers are tweaked, and there might always be particularities to each case. Always assess your situations and consult someone if unsure.

Naturally the first thing you need for a business in an idea – what exactly the business will be about. Is it about opening an e-commerce site to sell physical products, being a professional and selling your knowledge, or a growing manufacturing business?

Preferably you already have some idea on what you would like to do. Next thing would be to work out details concerning funding, figuring out any permits or licenses you might need, as well as acquire knowledge of the field and put together a preliminary roadmap.

A few general pointers on business in Finland:

  1. Labour laws and labour expenses can seem heavy and high, depending on where you are from. The actual cost of an hour of work is about 1,7 times the nominal hourly wage. A business model based on cheap labour may not work.

  2. Many public services are publicly funded and of high quality. You will have a hard time competing, if your business is too close to these.

  3. Bureaucracy and paying taxes apply to small businesses too. Even one-man businesses are subject to VAT and normal taxation laws. Bribing is non-existent.

  4. Finns are quite keen on digital. Cash is practically non-existent between businesses, and currently diminishing with private customers. Asking for, or trying to offer a cheque will mark you as ”that weird foreign guy”.

  5. While some public services are available in English, and younger customers may not mind a lack of Finnish or Swedish service, having someone around who understands Finnish will be of great help.

When you have an idea on what your business will do, it’s time to register your company.

Registering a company

Finland is a relatively organised country – nothing really exists here unless it is in registers and with proof in writing.

It is then no surprise that starting a business in Finland means registering a business at the Finnish Patent and Registration Office.

Once you have chosen your company type, you need to register it at the PRH. Details depend on the company type, and this is a good opportunity to check out our services.

There are several company types in Finland, though only the two most common ones will be treated in any detail.

Private Trader (FIN: Yksityinen elinkeinonharjoittaja, ”toiminimi”)

The most simple type to open, and the easiest to close. This company type is not a separate legal person, but just a way of registering yourself as doing business. You get a business ID, and the right to use a separate business name, so you don’t need to use your own name if you don’t want to.

Starting as a private trader is cheap (60€) and fast. There might be a wait time of a few weeks before you can effectively invoice your clients, due to other registration requirements (see further down). Stopping as a trader just requires a ”not doing business” declaration.

There is no separate company money or company property in terms of ownership, although such distinctions exist in taxation. Putting money in your business or taking money out of your business requires no extra step – it’s your money after all!

Since there is no separate legal identity, you as a natural person are fully responsible for any obligations and debts you might incur in doing business. This makes being a private trader risky, if your business is capital intensive and you need outside funding. Possible damages or reparations are also something to keep in mind.

While a private tradership cannot be sold, the business operation as a whole can be. It is also possible to switch company types from private trader to a limited partnership, general partnership or limited liability with little tax effects.

Tax-wise, the taxable profit (revenue – expenses) of a financial year first gets a 5% entrepreneur deduction. The remaining profit is treated mostly as personal income tax, so it is progressive.

A small part (up to 20% of your company’s previous financial year’s net worth) can be treated as capital gains tax, but this is taxed at 30%/34%, which for at lower income levels (c. <45 000€ / year) is higher than personal income tax would be. You can also opt for 10% capital gains, or no capital gains.

Let’s have an example:

  1. Susan’s Cab Service has a revenue of 60 000€ in 2020. She also had expenses worth 25 000€, so her taxable profit is 35 000€.

  2. The 5% entrepreneur deduction is applied, so her actual taxable profit is 35 000€ * 0,95 = 33 250€.

  3. In 2019 the company had a net worth of 34 000€. Susan wants 10% of that as capital gains, so 90% will be personal income.

  4. Susan has 34 000€ * 0,1 = 3400€ income taxed as capital gains, and 33 250€ – 3400€ = 29 850€ as personal income.

To summarise the pros and cons of being a private trader:

Pros:

  • Easy to set up, easy to close
  • Light governance
  • Can skip doing a financial statement if micro-sized

Cons:

  • Risky, if capital is involved
  • Very little tax planning options
  • Will look like a smaller business
Photo by Tapio Haaja on Unsplash.

Limited Liability Company (FIN: Osakeyhtiö)

Note: this is about a private limited liability company, i.e. shares are not traded on a stock market.

A limited liability company (LLC) is a separate legal person. Company money and property belong to the company, and not the entrepreneur. Likewise, any (legally incurred) debts belong to the company if things go sour.

Opening (or incorporating if we want to be fancy) an LLC takes a bit more work than with a private tradership. The Finnish Patents and Register Office, PRH, does offer good guidance, but documents have to be submitted in Finnish or Swedish. It can usually be done online for 275€, but if there are any exceptions, paper (380€) is needed.

It might take a few weeks to get it registered, but since you mostly likely need to wait for other registrations in any case, it may not be of much consequence.

Ownership of the company is decided by ownership of its shares; it is a good idea to create a company with a large number of shares, even if you are the only owner. This will make it easier to sell or transfer a more granulated portion of the company later, without the hassle and expense of splitting or issuing new shares.

Since an LLC has a separate identity from the entrepreneur, the entrepreneur can receive certain employee benefits from the company, such as travel allowances (mileage and per diem), lunch vouchers, company healthcare or cultural/sports benefits, even if they are the only employed person.

Any transfer of money or property from the company to the entrepreneur requires a legal reason, the 2 most common ones being paying a salary or paying out dividends.

Paying a salary is a business expense which decreases taxable profits for the company, but which increases taxable income for the receiver. In most cases entrepreneur salaries only get a tax withholding, while normal salaries also get unemployment insurance and earnings-related pension insurance withheld.

Paying dividends requires a financial statement from the previous period which shows retained earnings. Paying dividends is not an expense for the company, and they are effectively taxed at 7,5% capital gains tax for the receiver, when the amount dished out is 8% or less of the net worth of the company at the end of the previous tax year (sorry, there is no way to write this in simpler terms!).

An LLC as a whole is taxed at 20% each financial year on its taxable profits. This means [math omitted] that the total tax rate for light dividends is at 26% – 26,4%. Such a total tax rate is reached at around 35 000€ yearly with personal income taxes, so above a certain limit dividends become more tax-efficient. Thus, there is more room for long-term tax optimisation in LLCs, although it is not an exact science.

To summarise the pros and cons of operating as an LLC:

Pros:

  • More shielding against risks
  • Looks like a bigger company
  • More tax optimisation possibilities

Cons:

  • If company money and private money sounds like legalese, steer away from LLCs
  • Winding down an LLC is a more prolonged business
  • Requires a bit more governance

General Partnership (FIN: Avoin yhtiö)

A general partnership is its own legal person. Ownership is based on agreement between entrepreneurs, which must number at least two. All entrepreneurs have full responsibility of company debts, and unless otherwise agreed, all owners can freely act in the name of the company.

Governance is very light, and tax-wise it is similar to a private tradership.

Since a general partnership requires utter trust in the other owners, we suggest great and severe caution if you would consider starting one.

Limited Partnership (FIN: Kommandiittiyhtiö)

A limited partnership is similar to a general partnership. It needs to have at least 1 full owner with full responsibility and power for the company, and 1 so-called silent partner, whose only role is investing an agreed-upon amount of capital into the company.

This company type has some niche uses, combining some elements of being a private trader and of an LLC.

Association (FIN: Yhdistys)

Not really a company, an association is usually a non-profit organisation doing things for the ”public good”. Governance is bureaucratic, they are not meant to provide employment for members, nor can they really churn out profit. They are not owned by anyone, and members exercise power therein.

Co-operative (FIN: Osuuskunta)

Technically quite similar to an LLC, but with some elements of an association thrown in. Ownership is based on depositing a membership deposit. These are often meant to provide services or goods to their members at lower prices, or to serve as a general organisation to help e.g. artists organise the sale of their services.

In practice these are quite rare, and will most likely not be the company type most suitable for you.

Branch of a foreign trader (FIN: Sivuliike)

Not its own legal entity, but an offshoot of a foreign company with permanent activities in Finland. Activities in Finland often need to be accounted for separately, and you may need to register here.

Light Entrepreneurship (FIN: Kevytyrittäjä)

In the past few years, several service providers such as Ukko.fi or OP have offered a system called ”light entrepreneur”. The meaning of the term is not really defined.

In some cases it is an invoicing service, where you are considered an employee. In others you act through them with your own business ID, but they take care of administrative tasks.

This might be an option for a side gig, but service fees will quickly mount along with your revenue.

Registering to other registers

When you register your company, you will automatically register to the following:

  • Trade Register (FIN: Kaupparekisteri)
    A register of all active businesses.

  • Tax Register (FIN: Verohallinnon perustiedot)
    The taxman knows of your existence.

Next come a few ”optional” ones, which in practice are not so optional.

  • Prepayment Register (FIN: Ennakkoperintärekisteri)
    This is proof that your company is a ”big boy” that can take care of its taxes by itself. Normally you pay company taxes during the year in advance, based on your self-assessment of profits or based on past taxes.

    Not being in this register means that people or companies paying you for services need to withhold a part of the payment and pay that part to the tax office directly. This isn’t exactly something your clients want to do.

    Always apply for the prepayment register, since not being in it is a serious hindrance to business, and will flag you as shady in the eyes of suppliers and clients alike.

    The tax office might not let a company in the register if people involved in the business have a previous bad record with taxes.

  • VAT-Register (FIN: ALV-velvollisuus)
    Value-added tax is a tax on consumption, that is most often levied on goods or services sold. The universal rate is 24%, though there are lower rates of 14% (food), 10% (misc.) and 0% (e.g. export sales). Some fields are not within the scope of VAT (e.g. medical services, lease of real estate).

    In most cases, having a revenue of more than 10 000€ per year means you have to levy VAT on your customers. It also means you can deduct the VAT from your business purchases serving a vatable purpose. There is a scheme to help small businesses (revenue under 30 000€ per year) get a part of the VAT back.

    It is often a good idea to apply for VAT even if not required, since crossing the threshold mid-year means you would need to also pay VAT on what you already billed earlier.

    VAT is often reported once a month, but smaller businesses can opt for quarterly or even yearly cycles.

  • Employer Register (FIN: Työnantajarekisteri)
    The only truly optional register. If you pay salaries to 2 people permanently, or 6 intermittently, you have to register.

    If you only employ yourself, you needn’t register. The only difference is that registered companies have to file a salary declaration each month, even if they paid nothing that month.

It might take a few weeks to process these registrations. It is good to note that selling or invoicing before being in the VAT register can be problematic, so best not leave registration to the last minute.

Photo by Harald Arlander on Unsplash.

Other Preparations

Within days of registering you will have a business ID, which is your unique number tag for the business. It’s time to start getting things ready for operations.

Bank Account

It is crucial to get a bank account for your business. The easiest would be with a Finnish or Nordic bank, but other options may also work.

Banks may require you to open a business account, but with private traders it might be possible to use a second consumer account. Always check with your bank.

Always use a separate account for your business, and never use the same account for both business and private life on a permanent basis. It is a problem for accounting, and questionable for your privacy.

Accounting

All people or legal persons need to keep accounts of their business. While you may consider keeping your books yourself, learning the know-how and choosing appropriate tools may cost you in both time and money, which can be better spent.

We recommend going with an outside accountant. They will be able to help you at all stages of your business, and will probably save you money and time with their skills.

Accounting and bookkeeping are not really differentiated in Finland. Anybody may call themself as such. Your best bet is to choose a provider with a good reputation and with whom you ”click” easily. Accounting is a customer service industry first and foremost.

Entrepreneur pension insurance or YEL

If you are an entrepreneur, you need to take an YEL pension insurance.

You are considered an entrepreneur, if your work income is above 7 958,99€ per year. Work income is defined as ”the amount you would pay someone else to do what you are doing”, and can be tricky to define. In practice even many part-time entrepreneurs must take it. Not taking it may cause the Finnish Centre for Pensions to force it on you at a higher cost.

You set your work income level yourself for YEL, and your yearly payment is around 25% of that amount, with first-time entrepreneurs receiving a discount for the first 4 years. At the minimum level this works out to around 125€ monthly.

There are 4 companies offering YEL-insurances, and the insurance itself is identical between them (why the system is like this is a product of history, politics and happenstance). The companies are Ilmarinen, Varma, Elo and Veritas.

Premises, equipment, insurances et cetera

Now what you need for your business obviously depends on what you will be doing, but a few general pointers:

  • Whenever you buy something, always try to buy it for your business, with the business name in documents. This is especially important with LLCs.

  • If you buy goods or services from abroad, always mention you VAT-ID. You have a VAT-ID if you are VAT-registered. It is composed of the letter FI+your business-ID without the dash before the last digit.

    International VAT rules most often mean that the seller will not apply VAT to the invoice; instead you pay their VAT in Finland (and often also deduct the same amount).

  • Keep all receipts and invoices for accounting.

Personnel

Consider what would serve you best; is it hiring people directly, networking with other professionals, or using a worker rental service? It is quite easy to hire someone, but much harder to hire the right person.

You might need external help you in the hiring process if the employment system in Finland is not familiar to you.

Things to Beware of

If you register a phone number for your business, you may get advertisement calls form service providers.

Some of these are very legitimate, and might offer accounting services, website creation or insurances.

You will also get scam calls. They will often start by asking whether ”their information is up to date”, and will list your company names, address etc.

If they haven’t told what they want within 10 seconds, hang up without remorse.

They might try to make you say ”Yes”, and will edit phone records to try and claim you ordered some service from them.

They might claim that you need to apply for their register, which is not true. You will not gain any visibility by paying 400€ to appear on some phony trash listing.

If they do send you an invoice, don’t pay it, but don’t ignore it either. Contact someone who can help you deal with the nuisance.

These companies prey on new entrepreneurs, and try to make a quick buck from your inexperience. They are not there to help you.

Good luck!

If you managed to read this far, you have the patience and tenacity an entrepreneur needs. Even if you don’t end up opening a business, you have hopefully gained valuable information.

Starting a business in Finland or anywhere else can be overwhelming at the beginning, but remember that you are not alone. Make friends with other entrepreneurs (or network, as trendy people say), have a trusty accountant and remember: business is just business.

Resources

InfoFinland has more in-depth and technical information on starting a business.

Vero (The tax office) has the basics of taxation on their website, sometimes in an easily understandable format.

ELY-Keskus (Centre for Economic Development, Transport and the Environment) offers links to other resources, as well as information on possible financial support or free expert services you might be able to get.

Asiakastieto offers credit information on businesses and private customers, as well as contact and register information on businesses.

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