In April 2019, the Danish Parliament decided to abolish Entrepreneurial Companies (IVS). By October 15, 2021, all IVS companies had been phased out. But what does this mean for those who already owned an IVS? And what options remain for those looking to start a business?
In April 2019, the Danish Parliament decided to discontinue the widely popular IVS (Entrepreneurial Company) structure. The reasoning behind this decision was an increased risk of fraud associated with this company type.
Instances of fraud were far higher than anticipated, with tax and duty arrears nearly double those of sole proprietorships. The structure made it too easy to exploit loopholes, while uncovering and addressing fraud demanded excessive resources and effort.
The IVS Phase-Out
Entrepreneurial Companies (IVS) could be established and managed in Denmark starting in January 2014. However, in February 2019, the Danish government proposed legislation to abolish the IVS.
- The last day to register a new IVS was April 8, 2019.
- The following day, the proposal was debated and approved.
- Existing IVS companies were given two years to either convert to another company type or shut down.
Due to the COVID-19 pandemic, the deadline was extended by six months. As of October 15, 2021, IVS companies ceased to exist. Any company not converted or dissolved by this date faced compulsory liquidation.
What Is Compulsory Liquidation?
Compulsory liquidation occurs when the Danish Business Authority assumes control of a company and auctions off its assets. This process is comparable to a forced auction.
If an IVS undergoes compulsory liquidation, all the work put into the company is lost, along with any rights or assets it holds, which will be sold off. To avoid this, it’s crucial to transfer ownership or assets before the Business Authority intervenes. Once the company enters probate court, it’s too late.
To prevent liquidation, IVS owners had two options:
- Convert the IVS to a Private Limited Company (ApS)
- Shut down the company
The decision often came down to whether the company’s value justified the cost of conversion.
Converting an IVS to an ApS required a share capital of DKK 40,000, reduced from the previous DKK 50,000 during the IVS phase-out to make the transition easier.
Additionally, in 2020, the process was simplified, removing the requirement for valuation reports and auditor statements.
Shutting down an IVS, on the other hand, was a less complicated and less expensive process. It involved preparing a liquidation statement, deregistering obligations, and reporting everything to the Danish Business Authority and the tax authorities. While both options required some effort, shutting down was usually the cheaper alternative unless the company’s value exceeded DKK 40,000.
What Did the Abolition of IVS Mean?
An IVS was an easy and affordable business structure for aspiring entrepreneurs. It was a private limited company with a start-up capital requirement of just DKK 1. This made it virtually free to set up while offering limited liability protection.
The idea was for businesses to save 25% of their annual profit until they reached the required DKK 50,000 to transition to an ApS. However, unlike an ApS, IVS companies didn’t require corporate tax payments initially, which likely contributed to instances of fraud.
The IVS structure contained too many loopholes, ultimately leading to its abolition. But what alternatives do today’s entrepreneurs have?
Remaining Business Types in Denmark
Here’s a quick overview of the business structures currently available in Denmark, from the smallest to the largest.
PMV (Small Business Enterprise):
A PMV is a personally owned small business, ideal for hobby-level activities. The annual taxable turnover must not exceed DKK 50,000, and the company is exempt from VAT registration and other obligations, such as payroll tax or non-EU imports/exports.
Sole Proprietorship:
A sole proprietorship is a step up. It’s a personally owned business with one owner, who assumes full liability for the company. There’s no minimum capital requirement, and registration is free.
General Partnership (I/S):
A general partnership is similar to a sole proprietorship but has at least two owners. It can be personally owned or owned by other companies.
ApS (Private Limited Company):
An ApS is a limited liability company, one of the most popular business structures in Denmark. It requires a start-up capital of DKK 40,000 and limits liability to the invested capital
A/S (Public Limited Company):
As businesses grow, they often transition to an A/S. This type of company distributes ownership among shareholders via shares, and liability is limited to the value of those shares. Establishing an A/S requires a minimum capital of DKK 400,000.
P/S (Limited Partnership Company):
A P/S combines features of a partnership and a corporation. A general partner (often an ApS) assumes personal liability, while limited partners (shareholders) have limited liability.
Which Business Type Should You Choose?
If you’re an aspiring entrepreneur, deciding which company type to start can be overwhelming. Here’s our recommendation based on your goals:
- For hobby-level ventures, start with a PMV.
- For small-scale operations with personal liability, choose a sole proprietorship.
- For serious business ventures with limited liability, go for an ApS.
The other business types become relevant only as your company grows.
Good luck with your entrepreneurial journey - we can’t wait to see what you’ll achieve!
Team pensopay
