You can choose from many company forms, they each have their pros and cons and it is important to to choose the right form depending on your situation or company.
How to choose a legal form
- Consider your business goals
- Ownership Structure
- Consider the liability protection
- Consult with a legal advisor
- Take into account your own personal preferences and risk tolerance
Here below you can read about different kind of legal forms.
Individually owned companies
An individually owned company is run by an individual on their own social security number. The individual is then responsible for the obligations that the company makes, such as debts. When sole proprietorships are established, no share capital has to to be submitted to the organisation, as in limited companies, and there is no registration fee unless the business is registered with a special name, but if this is done trough the Register of Companies. This is done in order to ensure business partner and creditors information about who is responsible for the company and its obligations. This form of operation is suitable for personal operations that are either short-term or low-risk.
The main advantages of sole proprietorships are that the start-up costs are generally low and legal environment is relatively simple. This form of operation is therefore best suited to simple and low-risk operations. However, the owner takes the most responsibility for this operation and that is the disadvantage, the company’s debts are his debts.
Step by step and important information
Registration and basic data
It is not necessary to register a sole proprietorship or to fill out special founding documents. If the company should be given a special name other than the name of the owner, the company must registered in the company register with the tax director. The form is not available in English and must be filled out in Icelandic.
The document can be found here
The price of registration is 68,000 and crash or bank transfer.
Payroll register and VAT number
Companies that pay wages must be registered with the payroll register at the tax authority, and if the person is involved in a business subject to value added tax, it must also be reported to the relevant tax authority and be assigned a value added tax number before the activity begins.
If the scale of operation is so insignificant that the calculated remuneration is lower than 450,000 per year, no withholding payment is required. This salary is only listed on the tax return and salary return. Income tax and local government are levied with a levy, such as a social security fee levied according to a salary return. If the salary payment and the calculated remuneration combined do not exceed ISK 504,000. The deposit and security deposit are returned only once a year.
Documents for notification can be found here
Information about insurance tax
Taxes and duties
Sole proprietorship pay the same income tax as individuals, but the withholding rate is from 36,94% – 46,24%. Individuals who are self-employed must submit a profit and loss statement with a tax report every year, where income and expenses (including wages/calculated remuneration) must be entered (am example of an operating account can be seen here). Taxes for sole proprietorship are considerably higher in this country than in other types of companies. This form is best suited for broad color or temporary operations.
When and what must be reported
- If the income is higher than 250 thousand in a 12-month period, the business must be registered in the payroll register
- If the business is subject to VAT and the turnover is more than 2 million in a 12-months period, the business must be registered in the VAT register.
- If the activity has interest income. The State Tax Commissioner keep a register of persons who are obliged to return capital income tax.
- If the activity includes the sale of accommodation, a notice of this must be sent to the tax authority for accommodation tax at the State Tax Administration before the activity begins. (taken from Icelandic banks website)
Joint-stock companies
Joint-stock companies are the type of companies where no individual/partner is personally responsible for the company’s total obligations. Their financial responsibility is therefore limited to the share capital they contribute. The owners of limited companies are named.
Joint-stock companies must be registered in the company register of the State Tax Administration. It is necessary to submit founding documents to the company register and pay a registration fee. You can pay cash, debit card or bank transfer.
The minimum share capital must be ISK 4,000,000 and at least half must be paid at the time of the company’s establishment, but never less than ISK 4 million. If they share capital is paid in other than cash, a confirmation from a lawyer or certified accountant must be provided regarding the availability of the relevant property. There must be at least two founders of a limited company.
Private limited company
The most common operating form in Iceland.
Law on limited liability companies:
- Maintain accounting and prepare annual accounts that are returned to the tax authorities.
- A certified public accountant or independent auditor confirms the reliability of the financial information on which the company’s financial statements are based.
- The company must be registered in the payroll register and the VAT register if the activity is subject to VAT.
Partnerships
A partnership is one of the most common business forms in Iceland, along with sole proprietorship and private limited companies. Unlike the private limited company form, at least two individuals are legal entities and must jointly establish a partnership and all bear direct and unlimited liability for its financial obligations. In general, it can be said that a partnership is only suitable for business activities run by a small group of parties who truest each other.
Special laws applicable to partnerships. It is important to keep in mind that the owners of partnerships must:
- Maintain accounting and prepare annual accounts that are returned to the Tax Office, except if the members of the partnership list income, expenses, assets and liabilities in their own annual accounts.
- Register the company in the payroll register and VAT register if the business pays wages and if the business is subject to VAT.
Registration
Partnerships must be registered with the Swedish Tax Administration’s register of companies. The cost of establishing a partnership is 89,000 ISK, but in addition you have to pay 5,000 ISK for a social security number.
Payroll register and VAT number
All companies that pay wages must be registered with the payroll register at the tax authority, and if the person is in a business subject to VAT, this must also be reported to the relevant tax authority no less than 8 days before the activity begins. Businesses must also be assigned a VAT number before starting operations.
Paying tax
It is necessary to submit founding documents to the company register and Pau a registration fee. You can pay by cash, debit card or bank transfer. The processing time for an application for the registration of partnerships is generally ten to twelve working days form the time the documents are submitted to the company register if they are satisfactory and payments is included with the documents.
The main advance of this form of company are that start-up cost are not hight compared to other forms, and the legal environment is quite simple, it is easy to dissolve the company, there are ample authorisation to withdraw funds and taxation is quite favourable if there is a profit in the operation. Care must be taken here regarding the extensive responsibility of the owners, but it is very limited as it covers obligations that the co-owners make in the name of the company.
Documents/Notifications necessary for founding:
- Notification of the establishment of a partnerships
- Notice of Beneficial Owners
- Memberships agreements
- Founding meeting minutes
Co-operative society
Co-operative society is a combination of a partnership and a limited company.
A partnership is form of partnership based on an agreement between two or more parties for joint financial activities where the members are divided into two types, on the one hand there is at least one member who bears direct, undecided and unlimited liability for the company’s obligations, while others may bear a limited liability based on a specific amount or percentage. A joint-stock company is another form of company, and the rules on limited companies apply to it, except that at least one party has unlimited responsibility for the operation, cf. Article 159 limited liability company.