A sole proprietorship or a personally owned business is a business structure where the owner is personally liable for the company's finances. There is often confusion regarding the requirements for annual accounts for this type of business, as there are different requirements for different types of companies. Read on to learn more about the rules when you have your own business.
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Is it a requirement to prepare annual accounts for a sole proprietorship?

There is a fair amount of confusion about whether you need to prepare annual accounts for a sole proprietorship. This is primarily because the accounting industry and the Danish authorities do not always use the same terminology. Words like annual report, annual accounts, tax return, tax accounting, and financial statements are used interchangeably. Consequently, many people get a misconception about the requirements for annual accounts in a sole proprietorship.

We want to start by clarifying that, as a general rule, it is necessary to prepare annual accounts for a sole proprietorship. This is the financial statement you need to use when reporting the company's results (including profit or loss) in the various fields of the Danish Tax Agency (Skattestyrelsen) when filing your tax return.

However, it is not a requirement that you submit the annual accounts to the public authorities. You only need to do so if you are asked to present them. Annual accounts for a sole proprietorship are also referred to as tax accounts by the Danish Tax Agency.

If you have not prepared annual accounts for the sole proprietorship for a given tax year, you must at a minimum be able to trace your bookkeeping and generate annual accounts if the tax authorities want to see them. They can request accounting records going back 5 years.
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‍What do the annual accounts for a sole proprietorship contain?

Now that we have established that it is generally necessary to prepare annual accounts for sole proprietorships - even if the Danish Tax Agency does not need to receive them.
This is because the annual accounts form the basis for your reporting to the Danish Tax Agency. 

The annual accounts thus become tax accounts and help you get a handle on the sole proprietorship's taxes, when the year is over.

According to the Danish Tax Agency, annual accounts for a sole proprietorship contain all the accounting accounts you have booked during a tax year. The annual accounts themselves consist of the following parts:

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1. An income statement

The income statement shows your company's revenue minus the expenses incurred during a financial year. It reveals how much money your company has earned throughout the year and whether you have made a profit or a loss. This specific result is what the Danish Tax Agency (Skat) needs to know in order to calculate how much tax you must pay.

2. A balance sheet

The annual report must also include a balance sheet. The balance sheet is a statement of the value of what your company owns and owes. The difference between these two figures is your company's equity. The balance sheet also includes the company's assets and liabilities. The balance sheet total must be reported to the Danish Tax Agency if your company has a turnover of more than DKK 300,000.

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Can I prepare the annual report for my sole proprietorship myself?

There are several ways to approach your accounting and determine your company's taxable result. For example, you can do it all yourself and then report the year's result to the Danish Tax Agency. For some, this can be a bit overwhelming, as it can be difficult to maintain an overview when performing accounting tasks, reviewing bookkeeping, and preparing an annual report. 

If you are interested in preparing the annual report yourself but find it to be a cumbersome task, you can use online tools that help you calculate your tax and automatically generate an annual report for your sole proprietorship.

At Reportability, we have created such a tool. You simply need to go through 5 quick and easy steps to prepare your sole proprietorship's annual report.

To get started, upload your bookkeeping from your online accounting system and follow the tool's steps. Once you have uploaded your figures, you will answer a series of questions, and your annual report will be generated. When everything is finished, you will have an overview that shows you exactly what to fill in on your tax return form.

The tool is always updated with the latest legislation, so you can confidently meet all requirements and ensure you get all the deductions you are entitled to.

If you need to prepare an annual report for your sole proprietorship, you can create a free account by clicking the button below and trying the tool in a demo version. You can also read more about how the tool works here.

Sole proprietorships fall under reporting class A

There are four reporting classes in Denmark: A, B, C, and D. Each letter corresponds to a set of requirements and regulations that become more extensive and complex from A to D.

Sole proprietorships and other small personally owned businesses fall under reporting class AThis means that this type of business has the fewest requirements, while large companies in reporting classes C and D face far more and more complex requirements. This is often where the confusion we mentioned at the beginning of this post arises. There are several places online where you can read about what companies in Denmark are required to do regarding the reporting of their financial results. However, these texts often fail to mention which reporting class these requirements and rules apply to.

In the post you are reading right now, we focus exclusively on reporting class A, which consists of sole proprietorships and personally owned businesses. The requirements for this type of business are basically that you must report your company's results to the Danish Tax Agency (Skattestyrelsen). You compile these results into an annual financial statement for your sole proprietorship, as described above.

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The difference between an annual report and an annual financial statement for a sole proprietorship

It is also possible for sole proprietorships to voluntarily prepare an annual report. Normally, only companies in reporting classes B, C, and D are required to prepare an annual report, which they must submit to the Danish Business Authority (Erhvervsstyrelsen).

In some cases, it may be necessary for sole proprietorships to create an annual report. Perhaps the bank requires it for loan purposes or something else entirely. If you choose to do so voluntarily, there are some minimum requirements you must meet:  

• Statement by the management (if there is more than one member of management)
• Income statement
• Balance sheet
• Notes (including accounting policies)

You can also use the annual report as documentation for the Danish Tax Agency if they request it, as it contains both an income statement and a balance sheet, just like your annual financial statement. If you create an annual report for your sole proprietorship, there is no requirement to submit it to the Danish Business Authority.

When using our tool, you automatically get the annual report included, and it is generated completely automatically once you have entered all your figures.

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What can I deduct in the annual financial statement for my sole proprietorship?  

At the end of the financial year, you must assess how the items you have acquired during the year should be treated in the accounts. Getting this right can have a significant impact on your company's tax deductions.

You can only claim deductions for expenses incurred to secure your company's income – in other words, these must be acquisitions used for business purposes, not private ones. You receive these deductions either by deducting the entire amount at once or by spreading it out. Larger acquisitions are spread out, and these are called depreciation.

Not all acquisitions provide a full deduction, but through tax depreciation, you can ensure that you do not pay more in tax than absolutely necessary.

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Examples of common items you can claim as tax deductions:

Business entertainment

Business entertainment covers expenses incurred to build business relationships or close a deal, such as restaurant visits and gifts. You are entitled to a 25% tax deduction for business entertainment.

Minor assets

Minor assets are operating equipment with a maximum cost of DKK 33,100 (2024 rate). A minor asset could be a printer or a mobile phone, for example. You get a full tax deduction for minor assets in the year of purchase – a so-called immediate write-off.

Tangible fixed assets

Tangible fixed assets include operating equipment (e.g., a machine), installations, and improvements to rented premises. If the purchase price of the asset exceeds DKK 33,100 (2024 rate), you must spread the expense over a number of years. For operating equipment, you can write off a maximum of 25% per year.

Example of depreciation

If you invest in a car for DKK 100,000, you can write off 25% in the first year. This means you can deduct an expense of DKK 25,000 from your annual accounts. The following year, you can again write off 25% of the remaining balance, which is DKK 75,000. Consequently, you can deduct DKK 18,750 from your annual accounts in subsequent years.

If the operating equipment is also used for private purposes, the deduction can only be claimed for the portion of the asset used for business.

If a car worth DKK 100,000 is used 50% for private purposes and 50% for business, the depreciation will be 12.5% of the DKK 100,000 instead of 25%. Or 25% of DKK 50,000.

When you use Reportability, you get help ensuring your depreciation is calculated correctly, and you capture all the tax benefits. Our tool ensures you get all the deductions you are entitled to.

The Business Tax Scheme offers several tax benefits

If you run a sole proprietorship, you can be taxed in a way that is very similar to how limited companies are taxed. You do this by using the Business Tax Scheme (Virksomhedsskatteordningen).

The benefits of the Business Tax Scheme are that you can tax a portion of your business profit as capital income instead of personal income. In addition, you can retain earnings in the business, which are taxed at a lower rate. Furthermore, you get a full tax deduction for your interest expenses.

The Business Tax Scheme can be complex to navigate if you are not used to working with bookkeeping and auditing, but you can easily take advantage of the benefits of the Business Tax Scheme using Reportability's online tool. You can read much more about tax deductions at Skat.dk and in the Danish Depreciation Act.

You can complete the entire process with Reportability in just 5 steps. We pull figures from your accounting system, handle legislation and deductions, and ensure you can easily fill out your tax return and file your sole proprietorship's annual accounts. Furthermore, you can sign the annual accounts digitally, which significantly streamlines your workflow.

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Create an account and try our online tool right away

The Danish Tax Agency requires you to prepare annual accounts, which you use to enter your figures into the tax fields when filing your tax return. Doing this all by yourself can be a hassle. At Reportability, we make it easy for you.

When you prepare your annual accounts with our tool, you are told exactly where to enter your figures in the tax fields, and we also calculate your depreciation and identify all the deductions you are entitled to. If you wish to use the business tax scheme, you can do that too. Throughout the entire process, you can always message our accounting-savvy staff, who are ready to assist you.

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