What is the main difference between a private entrepreneur and a limited liability company?

A private entrepreneur (sole trader) and the business are essentially the same entity for many purposes, while a limited liability company is a separate legal entity. This affects liability, taxation, and administrative requirements.

Who is liable for business debts as a private entrepreneur (sole trader)?

As a private entrepreneur, you are personally liable for the business’s debts and obligations. Creditors may pursue repayment from your personal assets if the business cannot pay.

Does a limited liability company protect personal assets?

In general, yes. In a limited liability company, shareholders are typically liable only up to the capital they have invested, which helps separate personal assets from the company’s liabilities.

How is taxation different for a private entrepreneur vs an Ltd in Finland?

A private entrepreneur’s profit is generally taxed as the entrepreneur’s personal income (earned and/or capital income). An Ltd pays corporate tax on profits, and the owner is taxed when withdrawing money as salary or dividends.

When is a private entrepreneur a good choice?

A private entrepreneur structure often suits low-risk, small-scale or part-time businesses where administration should be light and where you want simple withdrawals as private drawings.

When is a limited liability company a good choice?

An Ltd often suits growth-oriented or higher-risk businesses, situations involving loans or significant investment, and cases where you want more flexibility in how you take income (salary and dividends) and separate personal assets from business risk.

Private Entrepreneur vs. Limited Liability Company: A Clear Comparison for the New Entrepreneur

ainolaoskar
Nov 21, 2025
4 min read

Updated: Jan 2

Starting a new business is exciting, but the first major decision is often choosing the right business form. Should you opt for the light and flexible Private Entrepreneur / Sole trader / Self-Employed Individual (Tmi) or the secure and scalable Limited Liability Company (Oy/Ltd)?

This choice directly impacts your taxation, liability, administration, and future growth opportunities. We've compiled a clear comparison to help you make the best choice for your specific situation.

1. Quick Summary: Key Differences in Business Forms

Before diving into the details, here is a summary of the essential differences between a Private Entrepreneur (Tmi) and a Limited Liability Company (Oy/Ltd):

Feature	Private Entrepreneur (Tmi)	Limited Liability Company (Oy/Ltd)
Setup Cost	Cheaper	More expensive
Liability & Risk	The Private entrepreneur is personally liable for all debts.	Shareholders are liable only for invested capital (min. €0).
Taxation	The entrepreneur's income is taxed as personal income (earned or capital income).	The company pays 20% corporate tax (2025). The entrepreneur pays tax on withdrawn salary or dividends.
Withdrawing Money	The entrepreneur withdraws money from the company as private withdrawals (yksityisottoja) anytime.	The entrepreneur withdraws money as a salary or dividend distribution.
Administration	Lighter and simpler.	Heavier (requires a board, meetings, official financial statements).
Best Suited For	Light part-time or small-scale full-time businesses.	Growth-oriented, capital-intensive, or high-risk business.
Ownership Base	Single owner	One or more shareholders

2. Liability and Risks: Who is Responsible for Debts?

This is often the most critical difference influencing the choice of business form.

Private Entrepreneur: Personal Risk

In a Private entrepreneurship, the business and the entrepreneur are the same entity for tax purposes.

Debt Liability: The Private entrepreneur is personally liable for all business debts and obligations. If the business faces financial difficulties, creditors can collect receivables from the entrepreneur's personal assets (e.g., home or savings).
Best Suited For: Low-risk services (e.g., freelancer, consultant).

Limited Liability Company: Restricted Risk

A Limited Liability Company is a separate legal entity from its owners.

Debt Liability: The entrepreneur is liable for the company's debts only up to the capital invested (currently, an Oy can be established with €0 share capital). The entrepreneur's personal assets are generally protected, even if the company goes bankrupt.
Best Suited For: Businesses that take loans, require significant investment, or involve high risk (e.g., imports, new product development).

3. Taxation: When is Which Option Most Favorable?

Taxation is complex, but simplified, it depends on how much profit you make and how much money you need for personal use.

Private Entrepreneur Taxation

The profit of a Private entrepreneurship is taxed as the entrepreneur's personal income.

Earned and Capital Income: Profit is typically divided into earned and capital income (capital income is usually capped at 20% of the previous year's net assets).
Progressive Nature: Since the income is calculated as personal income, taxation is progressive: the more profit you make, the higher the percentage you pay in taxes.
Best suited For: Low profits or if you have little other earned income.

Limited Liability Company Taxation

A Limited Liability Company offers tax flexibility through two-tier taxation.

Company Taxation: The company pays 20% corporate tax on its profits.
Owner Taxation: The entrepreneur only pays tax when they withdraw money from the company as a salary or dividend.
- Salary: Taxed as earned income (progressively).
- Dividends: Can be taxed favorably, especially if they are deemed tax-advantaged (based on the company's net assets).
Best Suited For: When profits are high, and you want to optimize taxation by deferring income or distributing it as dividends.

4. Administration and Bureaucracy

Private Entrepreneur: Light and Fast

The administration of a Private entrepreneurship is very straightforward.

Establishment & Termination: Quick and inexpensive.
Accounting: Single-entry bookkeeping is usually sufficient (which is simpler than double-entry).
Use of Funds: The entrepreneur can freely withdraw money as private withdrawals (no payroll, no tax withholding needed).

Limited Liability Company: More Formal and Heavier

The bureaucracy of an Ltd is mandatory but lends formality to the business.

Mandatory Actions: Requires a board of directors, minutes of board meetings, and an annual general meeting.
Accounting: Mandatory double-entry bookkeeping and official financial statements.
Use of Funds: All withdrawals must be formalized through payroll or a dividend decision (requires handling payroll administration).
Additional Costs: Ltds often have higher accounting costs due to the mandatory bureaucracy.

Private entrepreneur vs limited liability company – comparison for new entrepreneurs

5. Accounting Firm Tips for Selection

The choice of business form is not permanent; you can change it later. However, choose the form that best meets your initial needs:

Choose Private Entrepreneur if...

Your initial income is low.
The business is low-risk (you won't take large loans or make significant investments).
The operation is part-time or you want to test your business idea with minimal commitment.
You value light bureaucracy and simple money withdrawal processes.

Choose Limited Liability Company if...

You aim for rapid growth and high profits (tax optimization becomes profitable).
You need external financing or plan to take loans (an Oy is more credible to investors and banks).
The business is high-risk, and you want to protect your personal assets.
You want to employ yourself through the Ltd as an employee and gain access to unemployment benefits through the entrepreneur's unemployment fund.

Do you need help with the selection or switching business forms? Legit Accounting is happy to assist you with setting up your company and planning optimal taxation right from the start!

Contact our Experts today!