Converting from sole trader to limited company

When a limited company takes on the liabilities of a sole trader business, these are offset against the assets of the sole trader business. However, if you transfer own capital to the limited company as part of your sole trader business, the result will normally be a debt to you from the limited company. In this case, you should draw up a promissory note from the limited company in respect of the debt.

If own capital in the sole trader business is at least equivalent to the share capital you paid in when you formed the limited company, you may refund the share capital amount. If own capital is less than the share capital, you may only refund the equivalent amount from the limited company.

If you wish to transfer tax allocation reserves or expansion funds, you must provide additional capital to the limited company, and you may not withdraw an equivalent amount. If own capital in the sole trader business is not sufficient to meet this requirement, you must provide additional funding.

If the liabilities of the sole trader business are greater than its assets, this results in what is known as a “forbidden loan”. To avoid paying tax on a forbidden loan, you can pay the difference between liabilities and assets to the limited company at the time of conversion.

The cost basis of the shares does not change when you convert your sole trader business to a limited company.

How to change company type without paying tax at the time of conversion

When you transfer the assets and liabilities of a business, and the cost basis is below the market value, the transfer will be taxed as a withdrawal. This means you will be taxed as if the transfer had been made at market value.

There are some exceptions to this rule. When changing company type, you may be able to transfer assets at their value for tax purposes, even if this is lower than the market value. This applies if all of the following criteria are met:

• the limited company is liable for corporate income tax in Sweden
  
• the entire business, or an entire branch of activity, will be transferred to the limited company
  
• all shares are qualified
  
• the limited company has no deficit from previous years.

Reserves and funds

It is possible to transfer tax allocation reserves and expansion funds to the limited company. If you wish to do this, you must provide additional capital to the company. This capital must not be included in the cost base of the shares in the limited company.

Commercial property and commercial tenant-owned property

When the assets of a sole trader business include commercial property or commercial tenant-owned property, you must report the transfer on form K7 (for commercial property) or form K8 (for commercial tenant-owned property).

If you are voluntarily liable for tax on the rental of premises, the limited company will take over your rights and obligations with regard to voluntary tax liability. When you transfer the property, you must report the transfer to the Swedish Tax Agency using form SKV 5722.

Remember that you must also apply to the Property Registration Office of the Swedish National Land Survey (“Lantmäteriet”) to change the title deed.

Forest account and forest damage account

If you have funds in a forest account or forest damage account, you can transfer the account to the limited company. You must declare the funds as business income.

VAT

You should not charge VAT when you convert your sole trader business and continue operations as a limited company.

If the transfer includes inventory and fixed assets, or if you have incurred costs for building, extending or converting a commercial property, the limited company assumes the obligation to adjust input VAT.

Input VAT must be adjusted when there is a change in the use of an asset in VAT-liable activities. The rules regarding adjustment apply to inventory purchased within the last five years, on which VAT is at least SEK 50,000. For building, extension and conversion costs, the rules apply if the VAT is at least SEK 100,000 per financial year and you have had these costs for the last 10 years.

If the input VAT needs to be adjusted, you must draft a special document for the limited company. This must contain all the information necessary to adjust the VAT correctly. Unless you do this, you will still be obliged to adjust the VAT yourself if the limited company changes the use of an asset, even after you have converted your business. One example of a change in use is when an asset is no longer used in VAT-liable activities.

Paying the right preliminary tax

Your current level of preliminary tax will probably no longer not be correct after changing to a new company type. To ensure you continue to pay the correct amount of preliminary tax, you should file a new preliminary income tax return.

If you don’t file a new preliminary income tax return, you must continue to pay the same preliminary tax as before. If you don’t pay your preliminary tax, you risk incurring a tax debt that may be passed on to the Swedish Enforcement Authority (“Kronofogden”) for recovery.