The world of work is changing and part-time entrepreneurship is on the rise. A part-time entrepreneur is often defined as a person who earns their living mainly from doing something else other than being a part-time entrepreneur. As the name suggests, this type of work may be part-time or seasonal. This blog post outlines key points that every aspiring part-time entrepreneur should think about.
Do I need to inform my employer about this?
In principle, a person working in the private sector has the right to do what they want in their free time, be it running a part-time business or other hobbies. Private sector workers are therefore not directly obligated under the Employment Contracts Act to inform their employer about their part-time jobs. In contrast, persons working in the public sector have at the very least a duty to notify their employer of any part-time work. In some cases, they may even require their employer’s permission to engage in part-time work.
It is important to remember that the Employment Contracts Act clearly prohibits employees from engaging in other work during their employment that might harm the employer given the nature of the work and the position of the employee. Engaging in competing activity and its preparation are considered examples of this. An employee is also not allowed to exploit or divulge to third parties the employer’s professional or business secrets. An employment relationship therefore always involves a duty of loyalty towards the employer. If the employment contract contains a separate clause, which obligates the employee to inform their employer about part-time work, this duty to report is valid for the entire duration of the employee’s employment. An employee should always check whether their employment contract includes a non-compete clause, which may prevent or restrict part-time entrepreneurship.
What type of business entity?
The type of business entity chosen has an important effect on taxation, and also on the position and responsibilities of the part-time entrepreneur. Most Finnish part-time entrepreneurs currently work as private traders (“yksityinen elinkeinonharjoittaja” or “toiminimi” in Finnish). The popularity of being a private trader is surely at least partly based on how easy and cheap it is to set up. The drawback of operating as a private trader is that you are your business – the entrepreneur is personally responsible for the company's liabilities.
The biggest advantage of a limited liability company compared to operating as a private trader is that the shareholder is not liable for the company's commitments or liabilities with anything else other than the capital they have invested in the company. A disadvantage of a limited liability company is that setting up such a company requires an investment of 2,500 € minimum share capital, as well as more time and effort than setting up the business as private trader. Also, the dissolution of a limited liability company does not happen overnight.
The income earned from the business activities from operating as private trader (can also be called “sole trader” or “self-employed professional”) is equated with the part-time entrepreneur’s other earned income for tax purposes. Thus, the company’s business activity is not taxed separately. The total net income earned from the business activities is divided between capital income portion and earned income portion based on the net assets. The general rule is that private trader’s capital income is 20% of the net assets (net assets = assets of the business – liabilities of the business). The Valuation of Assets Act provides more detail on how net assets must be calculated. This blog post will not explore in more detail how this valuation is done in practice. The proportion of earned income from the business activities that exceeds the capital income is considered as earned income. It is important to note that the entrepreneur can request that 10% of net assets is considered as capital income portion or that all of the earned income from the business activities is earned income. The entrepreneur must calculate which model is more affordable for them.
Unlike private traders, limited liability companies are always independently liable to pay corporate income tax. A limited liability company’s income is taxed as income of the company rather than of the owner, as is the case with private traders. A limited liability company’s taxable income is calculated by subtracting deductible expenses from the company’s taxable income. Thus, if the company has more income than expenditure, this generates taxable income. However, if the company has more expenditure than income, this generates a loss, which can be deducted from the results of the coming years.
The owner can withdraw funds from a limited liability company in the form of salary, dividend, fringe benefit, interest, rent or another type of expense. The owner cannot take funds from a limited liability company as a single withdrawal, as is possible for private traders. The owner’s salary in a limited liability company is taxed normally as his earned income.
If the owner receives dividend from a non-listed limited liability company, this is divided into earned income and capital income. 25% of this dividend is taxable capital income and 75% is non-taxable income up to 150,000 € if the dividend is up to 8% of the mathematical value of a share. 85% of the portion that exceeds 150,000 € is taxable capital income and 15% is non-taxable income. It is important to note that this limit of 150,000 € includes all dividends from a non-listed company received by that person in that year. The portion of the dividend that is taxed as capital income is taxed at 30% up to 30,000 € and any excess of this is taxed at 34%.
If the dividends exceed 8% of the mathematical value of an asset, then 75% of the excess part is the owner’s earned income and the remaining 25% is non-taxable income. Earned income is always taxed using the progressive scale.
The amount of advance tax to be paid by the company is determined according to the estimated net sales and taxable income for the first fiscal year provided in the declaration of foundation. The advance tax is based on an estimate that can always be updated if the company's income and expenses change. When business continues as normal, the latest tax years’ income data will be used as a basis for determining the advance tax for the following years.
If the company has not paid a sufficient amount of advance tax during the year, the outstanding taxes will have to be paid retrospectively as residual tax. In contrast, if the company has withheld too much tax, he will receive a tax refund. If the entrepreneur notices later during the tax year that he has not paid enough advance tax, the amount can be added to by making a supplementary payment.
Value added tax (VAT)
A company whose business operations are subject to VAT must register on the VAT register, regardless of whether he/she is private trader or the business is operated by a limited liability company. However, registration is not required if the company’s net sales in the financial year (12-month period) do not exceed 10,000 €, that is, the business operations are categorised as small-scale business. When a company goes over this threshold, it is liable to pay VAT effective from the start of its business – not from when the threshold was overdrawn. If you are working extensively as a part-time entrepreneur, you should register for VAT as soon as you start your business. It is worth noting that a VAT liable company can get VAT relief if its net sales in the financial year, excluding VAT, are not more than 30,000 €.
Entrepreneurs are always responsible for their own pension. A part-time entrepreneur should apply for YEL insurance (insurance under the Self-Employed Person’s Pensions Act) if their accumulated commercial income is at least 7,557.18 € (threshold in 2016) in a 12-month period and their business operations have continued for at least four months.
Whether insurance is needed depends largely on the sector in which the part-time entrepreneur is working, but it is a good idea to consider whether you will need e.g., liability insurance, legal expenses insurance or accident insurance? If an accident occurs, it may also have an impact on the part-time entrepreneur’s day job and ordinary home insurance does not cover such accidents.
Being part-time entrepreneur provides the entrepreneur the opportunity to try out his/her business idea in practice. Part-time entrepreneurship also provides an opportunity for additional income and may be a flexible way to pursue a career as an entrepreneur depending on the person’s circumstances. You should turn to a lawyer when you are starting your own business. No one needs to go through the establishment of the company and tax questions alone.