Choosing Between AS and ENK: Guide for Foreign Entrepreneurs in Norway

Thomas | Posted on 04/07/2024 |

As an aspiring entrepreneur in Norway, one of the most crucial decisions you’ll face is selecting the right business structure. The two primary options for sole entrepreneurs are AS (Aksjeselskap) and ENK (Enkeltpersonforetak). This guide aims to clarify these structures, exploring their key differences, tax implications, and the scenarios where each might be more suitable.

Understanding AS (Aksjeselskap)

An AS, similar to a limited company or corporation in other countries, is a separate legal entity from its owner. This distinction is fundamental to understanding its benefits and limitations. As a separate entity, an AS offers limited liability protection to its owners, meaning your personal assets are generally shielded from business debts and obligations.

The taxation structure of an AS is two-tiered. The company itself pays a flat 22% corporate tax on its profits. When owners withdraw money from the company, they pay personal income tax on salaries and a 37.8% tax on dividends. This system allows for strategic planning to optimize tax outcomes.

One of the most significant advantages of an AS is its ability to retain and reinvest profits without paying additional taxes. After paying the 22% corporate tax, the remaining profits can be kept within the company and used for various purposes without incurring additional personal taxes. This feature opens up opportunities for business growth and wealth accumulation.

For instance, these retained earnings can be reinvested in different companies, stocks, or other assets directly through your AS. This means you effectively have more capital to work with for investments or business expansion, potentially leading to higher returns over time. These accumulated funds can later be used for further business growth, building a retirement fund, or even providing a company loan to yourself (subject to specific regulations).

Moreover, an AS structure often lends more credibility to your business, especially when dealing with larger contracts or corporate clients. It’s also the preferred structure if you plan to bring in external investors or have ambitious growth plans.

Understanding ENK (Enkeltpersonforetak)

An ENK, equivalent to a sole proprietorship, represents a more straightforward business structure. In an ENK, you and your business are considered a single entity. This simplicity comes with both advantages and drawbacks.

The most notable aspect of an ENK is that all profits are taxed as personal income, typically at rates between 25-37%. While this means you avoid the double taxation scenario of an AS, it can result in higher overall tax rates, especially as your business becomes more profitable.

One of the main attractions of an ENK is its simplicity. Setting up and running an ENK involves less paperwork and lower administrative burdens compared to an AS. This makes it an appealing option for small businesses, side hustles, or those just starting their entrepreneurial journey.

However, the ENK structure does come with limitations. As the business and owner are one entity, you’re personally responsible for all business debts and obligations. This lack of separation can pose significant risks if your business faces financial difficulties.

Additionally, an ENK structure can be less flexible when it comes to business growth. It’s more challenging to bring in external investors or to scale the business rapidly under this model.

Feature	AS (Aksjeselskap)	ENK (Enkeltpersonforetak)
Legal Entity	Separate from owner	Same as owner
Liability	Limited to invested capital	Unlimited personal liability
Taxation	22% corporate tax + personal tax on salary/dividends	25-37% personal income tax
Social Security Contributions	14.1% employer’s contribution, 8% employee’s contribution	11.2% on business income
Profit Reinvestment	Can reinvest profits after 22% corporate tax	All profits taxed as personal income
Administrative Burden	Higher (annual reports, board meetings)	Lower
Startup Costs	Higher (minimum 30,000 NOK share capital)	Lower
Credibility with Large Clients	Generally higher	May be perceived as less established
Ability to Raise Capital	Easier to attract investors	More difficult
Pension Rights	Accumulate through salary	Voluntary schemes only
Ideal for	High-risk businesses, high profits, growth plans	Low-risk businesses, lower profits, side hustles

Taxation Differences: A Closer Look

The taxation differences between AS and ENK are crucial in understanding which structure might be more beneficial for your situation. Let’s delve deeper into these differences:

In an AS:

The company pays a flat 22% corporate tax on profits. This rate applies to all profits retained within the company, allowing for potential reinvestment at a relatively low tax cost. When you, as an owner, decide to take money out of the company, you have two options: salary or dividends. Salary is taxed as personal income, while dividends are taxed at 37.8%. This two-tier system allows for strategic planning to optimize your overall tax situation.

In an ENK:

All profits are considered personal income and taxed accordingly. The tax rate typically falls between 25-37%, depending on your total income. You also pay 11.2% in social security contributions on your business income. While this system is simpler, it offers less flexibility for tax planning, especially as your business becomes more profitable.

A key point to remember is that in an ENK, all profits are taxed whether you reinvest them in the business or not. In contrast, an AS allows you to reinvest profits after only paying the 22% corporate tax, potentially leaving more capital for growth and investment.

The Real Cost Comparison: AS vs ENK

Many entrepreneurs assume that running an AS is significantly more expensive than operating an ENK. However, when we consider the overall tax implications, the difference is often smaller than expected. Important to know is that we typically refer to the profit before any salary is paid out in an AS. This is because in an AS, the salary you pay yourself is a business expense that reduces the taxable profit of the company.

Let’s break down the costs for both structures:

Detailed Calculation Example (500,000 NOK income):

For an AS:

Salary: 500,000 NOK
Employer’s social security contribution (14.1%): 70,500 NOK
Total cost to company before tax deduction: 570,500 NOK
Corporate tax saving on employer’s contribution (22% of 70,500): 15,510 NOK
Net cost to company: 554,990 NOK

For the employee:

Employee’s social security contribution (8%): 40,000 NOK
Standard deduction (minstefradrag): 104,450 NOK
Taxable income: 395,550 NOK
Income tax (approx. 22% average rate): 87,021 NOK
Total personal tax and social contributions: 127,021 NOK

Total tax and contributions for AS: 554,990 + 127,021 – 500,000 = 182,011 NOK

For an ENK:

Business income: 500,000 NOK
Social security contribution (11.2%): 56,000 NOK

Base tax calculation:

Base tax (22% of 500,000): 110,000 NOK

Trinnskatt calculation (2024 rates):

First 208,050 NOK: No trinnskatt
208,051 to 292,850 (84,799 NOK): 1.7% of 84,799 = 1,441.58 NOK
292,851 to 500,000 (207,149 NOK): 4.0% of 207,149 = 8,285.96 NOK

Total trinnskatt: 1,441.58 + 8,285.96 = 9,727.54 NOK

Total tax calculation:

Base tax: 110,000 NOK
Trinnskatt: 9,727.54 NOK
Social security contribution: 56,000 NOK

Total tax and social contributions: 110,000 + 9,727.54 + 56,000 = 175,727.54 NOK

The difference in total tax and social contributions:
182,011 NOK (AS) – 175,727.54 NOK (ENK) = 6,283.46 NOK

This detailed calculation reveals that the difference in total tax and social contributions between an AS and an ENK, for an income of 500,000 NOK, is about 6,283 NOK in favor of the ENK structure. While this difference is not negligible, it represents only about 1.26% of the total income. This small margin suggests that the choice between AS and ENK should be based on factors beyond just immediate tax savings.

When is an AS More Advantageous?

An AS structure becomes particularly attractive in several scenarios:

Higher Profits and Reinvestment Opportunities: If your business is generating substantial profits, especially over 1 million NOK, an AS can offer significant tax advantages. The ability to retain earnings in the company, paying only the 22% corporate tax, allows for greater reinvestment potential. This feature is particularly valuable for businesses aiming for rapid growth or diversification.

Risk Management: For businesses involving significant financial risks or potential liabilities, the limited liability protection of an AS is invaluable. This separation between personal and business finances can provide crucial protection for your personal assets.

Investment and Growth Plans: If you anticipate needing external investment or have ambitious growth plans, an AS structure is typically preferred. It provides a clearer framework for bringing in investors and scaling the business.

Credibility and Perception: In certain industries or when dealing with larger clients, an AS may be perceived as more professional and stable. This can be a significant advantage in winning contracts or establishing partnerships.

One additional feature where the AS has an advantage over the ENK, is that you can give yourself as a board member (and a fellow board member) a tax free gift with a value of NOK 5,000 per board member per AS.

When is an ENK More Suitable?

An ENK structure can be the better choice in several circumstances:

Lower Income or Side Businesses: For businesses with lower profits (typically under 500,000 NOK) or those run alongside other employment, an ENK often provides a simpler and potentially more tax-efficient structure.

Simplicity and Lower Costs: The reduced administrative burden and lower startup costs of an ENK make it an attractive option for solo entrepreneurs or those just testing the waters of business ownership.

Flexibility in Early Stages: For new businesses unsure of their growth trajectory, starting as an ENK allows for easier transition to an AS later if needed. This flexibility can be valuable in the early stages of your entrepreneurial journey.

Loss Offsetting: In the initial years of a business, when losses are common, an ENK structure allows these losses to offset other personal income, potentially reducing your overall tax burden.

Additional Considerations

Beyond the core structural differences, there are several other factors to consider when choosing between AS and ENK:

VAT Registration: Both AS and ENK must register for VAT if annual turnover exceeds 50,000 NOK. This requirement is identical for both structures and should be factored into your business planning.

Pension and Social Benefits: As an employee of your own AS, you can accumulate pension rights through salary payments. ENK owners, however, must rely on voluntary pension schemes. This difference can have significant long-term implications for your financial planning.

Tax Deductions: While both structures allow for business expense deductions, the process is often simpler in an ENK. However, the range of possible deductions is similar for both structures.

Exit Strategy: If you’re considering selling your business in the future, an AS can offer more tax-efficient options, particularly due to potential exemptions on capital gains.

AS or ENK Decision Helper

Conclusion

Choosing between an AS and an ENK is a decision that requires careful consideration of your business goals, financial situation, and long-term plans. While ENKs offer simplicity and flexibility that can be appealing for smaller or side businesses, AS structures become increasingly advantageous as profits grow and business risks increase.

The ability to retain and reinvest profits within an AS structure is a significant advantage for businesses aiming for long-term growth and wealth accumulation. This feature allows for more flexible financial planning and potentially higher returns on investments made through the company. However, this benefit must be weighed against the increased administrative responsibilities and costs associated with running an AS.

Our detailed calculations show that at moderate income levels, the tax difference between AS and ENK structures can be relatively small. However, as income levels increase, the potential for tax optimization in an AS becomes more pronounced.

Ultimately, the decision should be based on a holistic view of your business. Consider factors like liability protection, credibility in your industry, growth plans, and your overall business strategy. Remember that as your business evolves, the optimal structure may change. Many successful businesses start as ENKs and transition to AS structures as they grow and their needs change.

Given the complexity of this decision and its long-term implications, it’s always advisable to consult with a tax professional or business advisor. They can provide personalized advice based on your specific circumstances and help you navigate the nuances of Norwegian business law and taxation.

Your choice of business structure is a foundational decision that will shape the future of your enterprise. By carefully weighing the pros and cons of AS and ENK structures, you can set your business on the path to success, tailored to your unique goals and circumstances.