Establishing a Sole Proprietorship
How you can easily establish a sole proprietorship
In this article, we explain the process of establishing a sole proprietorship as plainly as possible.
Although the internet is full of information on this topic, many guides and articles are cluttered with bureaucratic and complex terms that can be confusing.
It’s a shame, because setting up a sole proprietorship isn’t rocket science, and it can be done very quickly, easily, and inexpensively by anyone – including you.
Content of the Sole Proprietorship Starter Guide:
- What are the benefits and potential risks of sole proprietorship?
- When is a sole proprietorship usually established?
- How does the establishment of a sole proprietorship work step by step?
- Which Tax Administration registers does a sole proprietor need to register in, and how?
- What should you know if you want to apply for start-up money for your sole proprietorship?
Filling out the sole proprietorship registration form online takes about 15 minutes.
You can also establish a sole proprietorship by printing out a paper form and sending it by mail, but this method is noticeably slower and slightly more expensive than online registration.
After reading the instructions on this page, you’ll know how to establish a sole proprietorship both ways.
Why Establish a Sole Proprietorship?
If you have a passion to try your hand at entrepreneurship full-time or part-time, a sole proprietorship is an excellent business form for you. It is easy and cheap to set up and requires less bureaucracy compared to operating in the limited company form.
Sole proprietorship is particularly suitable for businesses that are relatively small and based solely or primarily on your own efforts.
Benefits of Establishing a Sole Proprietorship
- The cost of establishing a sole proprietorship is very low: In 2023, the registration fee for the trade register is 60 euros online and 115 euros for a paper form. If you don’t join the trade register, you can also start a business via the OmaVero service or with a paper form. Registration without a trade register entry is free.
- The process is quick. Filling out the sole proprietorship registration form online can take as little as a quarter of an hour, and the processing time is a few days.
- Simple accounting is sufficient for sole proprietors. Essentially, it’s about tallying income and expenses, which you can do yourself. However, if you have a fair amount of receipts and other documents, hiring an accountant is advisable from the start.
- Tax arrangements are simple for sole proprietorships: all income is personal income and taxed as such, combined with other sources of income. Often, the income of new sole proprietorships is so small that it makes sense to tax it entirely as earned income.
- Sole proprietorship allows proper trading. As a private individual, you can buy and sell only in small amounts, but as a business owner, you can start growing your business. Expenses and acquisitions related to sole proprietorship can also be deducted from taxes.
- The amount of paperwork remains minimal. Initially, you can choose to submit the VAT return annually or quarterly if your turnover is low. This saves you some time and money.
- Terminating a sole proprietorship is relatively quick and easy compared to other forms of entrepreneurship.
Possible risks and disadvantages of a Sole Proprietorship
- The financial risks of a sole proprietorship are your personal risks. In a limited company, risks are limited to the invested capital, but as a sole proprietor, you are personally liable for all contracts and obligations. This means that the responsibility for your own finances increases.
- You’ll need to learn new things about taxation and accounting, but this can’t be avoided in any form of business.
- Sole proprietorship looks like a small business. It’s not the most credible form of business in terms of marketing, but this varies greatly depending on the industry.
- A limited company is a more tax-efficient solution if you’re making significant profits.
- A sole proprietorship makes you an entrepreneur. This can affect your benefits, such as unemployment compensation.
Who can establish a sole proprietorship?
The answer is that almost anyone can establish a sole proprietorship.
In Finland, an individual with a residence in the European Economic Area can operate as a trader or professional, i.e., as a sole proprietor (there are many terms for it!).
Even someone under the age of 18 can act as a trader or professional. However, consent from a guardian (usually a parent) is typically required.
In such cases, both the minor and their guardian sign the Y3 foundation declaration form. Minors cannot submit the establishment notification online.
If a guardian wants to engage in business activities on behalf of a minor, permission from the magistrate is required.
When is a sole proprietorship usually established? – 3 different situations
Establishing a sole proprietorship during studies
Many set up a sole proprietorship during their studies, and for a student, it’s an excellent type of business. If the business activity is small-scale, the costs are usually negligible. By working on the side with your sole proprietorship, you build your future as an entrepreneur and finance a higher standard of living than with just student aid.
It’s also easier to do gig work if you can bill for it. Many entrepreneurs would eagerly accept temporary help for some tasks, without the hassle of paying salaries.
Having a sole proprietorship also signifies responsibility. It allows you to make beneficial purchases “on the company’s tab”. This essentially means that if, for example, you need a computer for your business, you can deduct it in taxation. However, always remember that deductible purchases must be related to your business.
Establishing a sole proprietorship alongside salaried work
In some situations, you might need permission from your employer to operate a sole proprietorship on the side. Some employment contracts might have a clause requiring employees to report any side activities. This obligation always exists in the case of public servants.
If you start crafting wooden toys and selling them online, make sure it’s not in direct competition with your day job. If the activity is small-scale and the turnover is less than 15,000 euros, you can choose not to register for VAT, reducing bureaucracy. Side entrepreneurship allows you to test business waters without financial strain.
Starting a sole proprietorship is usually best when you know you have paying customers. If you just want to test your business idea or bill customers only a few times a year, it might be easier to start via a traditional billing service, commonly referred to as “light entrepreneurship“.
Full-time entrepreneurship through a sole proprietorship
Starting full-time entrepreneurship as a sole proprietor is often a good option for many small business owners. Typically, starting costs are low, but it depends on the industry. If you sell your expertise, costs might be very low. But if you’re starting a significant business requiring high initial costs, consider other options. This is because the personal financial risks of a sole proprietor are greater than those of a limited company.
If your turnover is going to be small and you primarily plan to employ yourself by selling your skills and time, establish a sole proprietorship.
If you know right away that there will be significant turnover or costs, then weigh the possibility of a limited company—it’s usually the best option for growth-oriented business and offers opportunities for tax optimization.
Before we delve into the practical steps of establishing a sole proprietorship, we want to remind you that if you’re considering applying for a start-up grant, it should be done before establishing the sole proprietorship. If you apply for the grant after your sole proprietorship has been established, you won’t get it. One of the conditions for receiving the start-up grant is that the business activity hasn’t started yet. An exception is when a part-time entrepreneur becomes full-time. We’ll discuss the start-up grant in more detail later on.
Setting up a sole proprietorship here’s how it’s done in practice!
We will now go through step by step how the establishment of a sole proprietorship is done in practice.
We strongly recommend filling out the establishment form online. Compared to paper forms, the online registration has three main advantages:
- Lower costs. Setting up a sole proprietorship online costs 60 euros, whereas the fee for the paper registration in the trade register is 115 euros.
- The form is faster to fill out, as you don’t need to print it and then post it.
- The processing time for an online registration is several days shorter compared to paper forms, so you can get your business up and running faster.
Next, we move on to the establishment steps. If you have already considered bookkeeping and business banking matters, you can jump directly to step 3.
1. Consider how you will handle the bookkeeping for the sole proprietorship
If your business is part-time and there are few receipts, you can easily do single-entry bookkeeping yourself. However, in most cases, it makes sense to pay a little for someone to do things faster and better.
If you’ve already chosen an accountant or accounting firm, gather all questions regarding your upcoming business’s finances and go discuss practical matters in person.
Don’t stop until you get clear answers to everything. If the accountant can’t answer your questions, switch to another because communication should always be clear.
You are probably not a bookkeeping professional, so you are entitled to clear answers without professional jargon.
Also, make your accountant’s job as easy as possible. Send all receipts and other notes in order and on time. Especially for full-time entrepreneurs, electronic bookkeeping saves a lot of time compared to collecting your receipts in an envelope and sending them by mail to your accountant.
2. Set up an account for your sole proprietorship
If you ask the bank, they will probably suggest a more expensive business account. However, opening another personal account for the business’s transactions might also be possible. Practices can vary between banks, so it’s good to check the terms.
You don’t necessarily need a separate payment card for your sole proprietorship. You can also pay expenses from your personal account and then record them in the business’s books, even if the transaction isn’t on the business account. Always keep all receipts and submit them to your accountant, if you have one.
3. Read the instructions below for filling out the registration form
In this section, we will go through step by step the registration form and the instructions for submitting information to the Tax Administration.
After reading this section, you will be able to fill out the necessary information either in the electronic registration service or directly on the form.
You can find the form in pdf format here if you want to take a look at it at this stage. However, you will encounter the same sections also in the electronic registration service.
After completing the electronic registration, you will immediately receive your Business ID, with which you can continue to provide the necessary information to the Tax Administration.
So, read the instructions below.
Note: If you do not join the trade register, you can start your business and join the Tax Administration’s registers directly through OmaVero. Without a trade register entry, however, you cannot register a separate trade name for yourself but will operate the business under your own name.
Name of the Sole Proprietorship
You get to decide the name of your sole proprietorship, but it’s wise to choose it carefully. Your operations will be much smoother if you come up with a name that both your customers and partners remember.
The same name for a sole proprietorship should not exist in the trade register. You can check for already registered names in the PRH’s name service. There you can see what the typical names are and if the name you want is already in use.
If you’re not sure if the name is in use, you’ll find out when the trade register examines your establishment notification. If the name is in use, the notification will be returned.
Often the term “sole proprietorship” or the abbreviation “tmi” appears in names, but there’s no obligation to use them.
Sometimes the sole proprietorship includes the entrepreneur’s own name. The first name can be freely taken into the name, and in most cases, the situation is the same for surnames. However, there are some exceptions.
You cannot use a surname for the sole proprietorship if its use could cause confusion with another protected name or trademark.
Just because someone else has already registered the same surname doesn’t prevent you from doing so. The only thing that matters is that confusion doesn’t arise.
You can also optionally set a second and third name option for your sole proprietorship if you fear your first choice won’t pass the strict scrutiny.
Registration in the Trade Register
As a private entrepreneur or sole proprietor, you must join the trade register if you meet any of the following criteria:
- You practice a licensed trade.
- You have a permanent office separate from your residence for your business.
- You employ people other than family members.
Exception: Individual entrepreneurs practicing fishing or agriculture are not required to register in the trade register.
Even if these conditions are not met, we always recommend registering because this way, you can get an official business name (e.g., “Andy’s Repair”) and protection for that name. If you don’t join the trade register, you operate as an individual entrepreneur under your own name (e.g., Andy).
If you don’t want to join the trade register, you must announce the start of your business on a paper form or through OmaVero. The announcement is free of charge if you don’t join the trade register. However, the digital notification via the YTJ service always goes automatically to the trade register.
Secondary Business Name and Parallel Business Name
A parallel business name is relevant if you want to register your sole proprietorship in another language – for example, in Swedish or English.
However, you can’t make up a fancy-sounding English name if it doesn’t relate to the Finnish name. The names in different languages must match in content.
If you report a parallel business name, the primary name must always be either in Finnish or Swedish.
You might need a secondary business name if you want to operate part of your business under a different name. This could be relevant, for instance, if you operate in two completely different sectors.
With a secondary name, you cannot operate a business that includes the entire industry of your company.
For example, if a construction entrepreneur does stand-up gigs on the side, he probably doesn’t want to market his performances with his construction-related business name.
Many wouldn’t hire a performer named “Andy’s Construction” for their company’s Christmas party. In such cases, using a secondary name can be beneficial for marketing.
The combination of construction and stand-up entertainment is admittedly a bit unusual, but this was just a rough example.
In any case, the industry of your sole proprietorship can be very diverse and include several different functions. We talk more about industries further below.
You can report the secondary name or names when establishing the sole proprietorship or later. Reporting a secondary name electronically costs 60 euros per name, and with paper notifications, the price goes up to 115 euros.
A secondary name doesn’t have a separate VAT-code or its own accounting; it’s an integral part of your “main business name.”
When filling out your establishment notification, you’ll need to state your fiscal year. For sole proprietors, the fiscal year is typically the calendar year (1.1.-31.12.), which means 12 months.
However, when establishing a sole proprietorship, the fiscal year can be shorter or longer, but no more than 18 months.
For example, if you establish a business in August, the first fiscal year can extend from August to the end of the following year. Thus, the first fiscal year would be 17 months, after which fiscal years would roll normally in 12-month cycles.
The above example only applies if you have double-entry accounting. In single-entry accounting, your first fiscal year always ends on the last day of the founding year. So the maximum length of the first fiscal year is 12 months. After that, the fiscal year is always a calendar year.
If you choose a fiscal year other than the calendar year, you must have double-entry accounting. For a sole proprietor with single-entry accounting, the fiscal year is always the calendar year.
There are many different industries. When the industry is chosen correctly, it clearly indicates what the entrepreneur does or which industry or industries they operate in.
The industry is reported to two different entities:
- The Trade Register
- The Tax Administration.
Nowadays, you can also report a general industry to the trade register, covering all legal business activities.
However, the Finnish Patent and Registration Office (PRH) recommends reporting a more specific industry, as a broad industry might complicate the registration of the sole proprietorship. Confusions between company names must be avoided.
The entrepreneur must report the exact primary industry to the Tax Administration.
The names and numbers of industries from A to Ö are listed on the Statistics Finland website. Don’t worry, even if the classification is followed by the number series 2008, the guideline is still valid.
Information to be reported to the Tax Administration
The sole proprietor reports to the Tax Administration, among other things, whether he/she applies for:
- VAT liable register
- Employer register and
- Prepayment register.
What is the VAT liable register?
Entrepreneurs and businesses selling services or goods are liable for VAT, with a few exceptions in certain industries.
VAT means a consumption tax that, as an entrepreneur, you add to the price of the service or product you sell. The tax is paid by the buyer at the time of sale, and you forward the VAT to the government. The preceding link provides an example of how VAT works in practice.
An entrepreneur conducting VAT-liable activities should register if the turnover exceeds 15,000 euros annually. If this threshold is not reached, one can still voluntarily register. Note that during the first fiscal year, the turnover is adjusted to match 12 months of operations. So, if your first fiscal year is only half a year long and you make a turnover of 10,000 euros during that time, you will clearly exceed the 15,000 euro VAT threshold.
If you don’t register for the VAT-liable register, you obviously won’t charge VAT during sales.
If your turnover slips above 15,000 euros, then you will have to pay VAT retroactively on the entire turnover if you are not registered.
So it is definitely worthwhile to be registered, especially if you believe your turnover might approach the 15,000 euro mark.
And if your turnover remains below 15,000 euros despite registration, you can reclaim the VAT you paid thanks to the VAT threshold relief.
The VAT threshold relief is a tax relief for small entrepreneurs, allowing those with a turnover of less than 30,000 euros to get relief from VAT payments. With a turnover of less than 15,000 euros, the relief is granted in full.
How often do you need to pay VAT?
- If you register as VAT-liable and estimate that your turnover will be up to 30,000 euros, you can request an annual or quarterly VAT reporting and payment period.
- If your estimated turnover is 30,001-100,000 euros, you can request a quarterly period. This is done in the “Tax period for self-initiated taxes” section of the establishment notice.
A longer reporting period means that you can report and pay VAT quarterly or annually. This might be a good choice for part-time entrepreneurs with fewer transactions.
Why should you consider a longer reporting period?
Because it saves you time and money, as you don’t have to do accounting and pay VAT to the state every single month.
The aforementioned point will keep your accountant busy, and they will charge you for their work.
Save yourself the trouble and, if necessary, request a longer reporting period. However, remember to keep your receipts and vouchers safe.
Accounting should still be kept up to date, and it is advisable to update it at appropriate intervals, even if the reporting period is longer. You can arrange this with your accountant.
So you don’t have to sort out the whole year or quarter at once.
What is the prepayment register?
Joining the prepayment register is voluntary, but with a few exceptions, it is often necessary for entrepreneurs selling services.
If your sole proprietorship is not found in the prepayment register, the party purchasing from you will have to handle the withholding tax on your behalf, resulting in unnecessary paperwork. It would be much easier just to pay the invoice you send.
By being in the register, you essentially indicate that you handle prepayment taxes yourself, and the buyer of the work or service does not have to withhold from the payment.
Businesses and consumers wanting household deductions for purchased services are very hesitant to buy from someone not in the prepayment register. For example, household deductions cannot be made for cleaning or renovation work if the seller is not in the prepayment register.
You also won’t get into the prepayment register if there are ambiguities or neglects in paying taxes in the background. So being in it is also a sign that the entrepreneur is handling their tax matters diligently and reliably.
So, join the prepayment register.
What is the employer register?
Employers in Finland have various payroll-related obligations, such as making withholdings and paying health insurance contributions.
If you are a “regular employer” as defined by the Tax Administration, you must register in the employer register (i.e., register as an employer who regularly pays wages).
- Criteria are met if you regularly pay wages to two or more employees.
- The conditions are also met if there is one permanent employee and you also employ one or more other employees whose employment is temporary or intended to be short-term.
- If instead of permanent, payroll is occasional, such short-term employees must be employed simultaneously at least six times for the “regular employer” condition to be met.
As you might have noticed, most new sole proprietors don’t need to join the employer register.
One more reminder about advance tax
When establishing a sole proprietorship, you estimate to the Tax Administration how much profit you will make during the first fiscal year. Based on this estimate, you pay tax in advance on this profit. This is called advance tax.
So if you estimate that your profit (income minus expenses) will be 30,000 euros, you pay tax in advance throughout the year based on this amount. Later, you will supplement missing taxes or receive a tax refund depending on what your actual result turned out to be.
If you do not make a profit estimate to the Tax Administration and the Tax Administration does not have an estimate from you, you will not receive an advance tax bill. Instead, you pay taxes afterwards.
It is also good to note that different registers have different reporting responsibilities. If you are not registered in a particular register, you cannot use the rights or services associated with that register, and you may face sanctions for non-compliance. So it’s essential to stay informed and act correctly.
Note: By registering in different registers, you fulfill certain obligations and get certain rights. It is important to understand these and, if necessary, request help from an accountant or consult an expert.
More information about paying taxes from our article Solo Proprietorship Taxation.
4. Fill out the form online or on paper
In the previous paragraph, we provided instructions on how to fill out the sections on the founding form and the details required by the Tax Administration – it doesn’t matter whether you handle it online or on paper.
The purpose of this section is simply to quickly explain how the online establishment process works. If, for some odd reason, you wish to complete the establishment on paper, you are probably already on your way, and you can skip to section 5.
However, remember that with paper notifications, the processing fee is paid in advance, and the receipt is attached to the notification.
You can complete the electronic founding form on the website of the Finnish Patent and Registration Office (PRH). The form opens when you press the green image found at the bottom of the PRH website.
Completing the form in 5 steps
- First, you authenticate yourself in the service using a certificate card, mobile certificate, or your own online banking credentials.
- After authentication, you continue to the service and click on the “Business Establishment” link. You then choose to set up a sole proprietorship (i.e., private entrepreneur).
- After that, filling out the form is quick. You add your contact details to the empty fields, then choose a name for your sole proprietorship. The selection of the name of the sole proprietorship was already discussed earlier.
- Once the name is chosen, the founder of the sole proprietorship provides the company’s domicile, address details, and line of business. The details you provide will later be visible on the ytj.fi service, and at the same time, the address details are forwarded to the Tax Administration.
- Next is the electronic signature of the founding notification, which is done with a few mouse clicks. After signing, the notification is paid for either with a credit card or online banking.
Once the payment is registered, the person filling out the notification is automatically returned to the founding service, where they receive their Business ID (Y-tunnus) and registration number of their founding notification.
It’s a good idea to jot down this information immediately, although it’s also saved in the service.
You’ll need the Business ID when reporting your sole proprietorship details electronically to the Tax Administration. You can tackle this step immediately after the founding notification is filled out and paid for. The link can be found on the same page as your Business ID.
We already went through filling out the details sent to the Tax Administration in section 3.
5. Wait for your founding notification to be processed
The estimated processing time for electronic notifications at PRH is currently about 3-4 business days, while you’ll have to wait significantly longer for the return of the paper form. For this reason alone, it’s best to establish a sole proprietorship online.
6. Visit your accountant or get one
Take the approved company establishment forms and the approved notification period notification to your chosen accountant. If you haven’t chosen an accountant yet, start considering it at this stage.
Of course, you can also handle the accounting yourself, but this is usually only worthwhile if the business is very small or only a few documents accumulate per month.
Remember, even before receiving the Business ID, the purchases you made for business purposes are deductible.
7. Kick-start the operations
If something remains unclear, it’s best to act as an entrepreneur usually would. Ask until you get an answer. If you have tax-related questions, call the Tax Administration. They have an excellent phone service that can be highly recommended.
If other financial matters concern you, contact your accountant. It’s in everyone’s best interest for you to gain a sufficient understanding of your company’s finances.
For questions related to permits, you can find answers on the Suomi.fi-service.
Briefly about applying for a start-up grant for a sole proprietorship
The purpose of the start-up grant is to secure your livelihood during the initial phase of entrepreneurship. Our society understands that money doesn’t come flooding in during the early days of entrepreneurship, and therefore a small financial aid is often needed.
TE-services grants the start-up subsidy initially for six months, after which you can apply for an extension for another equivalent period. The maximum duration for the start-up grant is 12 months. The grant is €37.21 per day (2023) and is paid for up to five days a week.
Therefore, the monthly start-up grant amounts to about €740. Taxes are, of course, deducted from this, as the grant is taxable income. The more you earn, the greater portion of the start-up grant goes to taxes. The extension period for the grant (i.e., the second half-year) needs to be applied for separately during the first support period.
Receiving the start-up grant largely depends on the industry in which you establish your business. Especially in many popular sectors, the grant is hard to come by, as it shouldn’t distort competition. For this reason, professions like hairdressers and café entrepreneurs often miss out on the grant. However, each situation is unique.
A few words about the conditions for granting the start-up subsidy
To be eligible for the start-up grant:
- The applicant must have or acquire the necessary skills for the intended business activity.
- The intended business activity should be full-time and is expected to be continuously profitable.
You will not receive the start-up grant if:
- Your business is estimated to provide sufficient income at the beginning of your venture. If your business is immediately highly profitable, you may not receive the grant. This is because the grant is specifically to secure a livelihood.
- The grant is estimated to distort competition between entrepreneurs or businesses offering the same products or services. Thus, if the support gives you a significant competitive advantage, it might prevent you from receiving the grant.
- You began your business activities before a decision on the grant was made. One should not rush with the establishment. It’s best to check precisely with your local TE-office on what actions they interpret as starting a business.
- Don’t accumulate bad credit records. The grant may be denied if the applicant has significantly neglected their obligations to pay taxes or statutory fees, or they have significant private legal payment defaults.
- The grant cannot be paid if the livelihood of the entrepreneur is otherwise secured, for example, by salary, various supports, or other benefits. As previously mentioned: the start-up grant is a support for livelihood.
If you have questions about the start-up grant, seek advice from your local TE-office.
If you’ve waded through all of the above, including additional information, you should now be equipped with the essential aspects related to establishing a sole proprietorship.
Of course, entrepreneurship involves dozens of other things besides the actual establishment process.
You will need to familiarize yourself with new tax and accounting matters and consider, among other things:
- Client acquisition
- Entrepreneurial unemployment security
- Possible business plan
…and so forth.
On our website, you can find a lot of basic information on these topics written in plain language. If you outsource your accounting right away, your accounting firm can, of course, also assist you with matters related to the early stages of sole proprietorship.
Are you interested in some other kind of company than a Sole Proprietorship? We have written about them as well: