Closing the accounts of a sole proprietorship

Because a business owner has the right to access all of his/her company’s profits, he/she needs to properly separate the private from the professional.

In a sole proprietorship, the business owner provides all of the equity. He/she manages the company and is free to make all decisions, within the scope of the law. He/she bears liability for the company with his/her entire personal and business assets. In return, he/she has the right to all of the profits, but has to pay income tax. The situation is the same for general and limited partnerships.

It is, therefore, essential to separate private life from professional life correctly. The tax authorities make a clear distinction between necessary business assets and personal assets. There is a gray area between the two regarding assets used both privately and professionally (e.g. business and private premises, vehicles). In those cases, proportional allocation is applied.

In the same way as assets, business and private expenses also need to be clearly separated. A sole proprietor does not have the right to offset personal costs against the company. He/she can only deduct business expenses from revenue.

In accounting terms, this aspect is taken into account by establishing a private account and a separate equity account.

  • The private account acts as a link between the private and professional domains. It is used for processing current assets and withdrawals by the company director.
  • The equity account, however, holds the capital made available by the company director over the long term. This account is used to record capital increases and withdrawals for the year. Moreover, it is used as the basis for calculating return on equity and shows the private account's balance, and records profit and loss. At the end of the fiscal year, the private account balance is accounted for under the equity account, so that the private account does not appear on the company balance sheet.

The business owner’s personal income includes his/her salary, interest on his/her capital and the company’s net profit.

For a corporation (SA) or limited liability company (SARL), this is far less complicated: private assets are clearly separate from those of the business, and the company’s fixed assets are part of corporate assets. The company director is an employee of his/her company and he/she is involved directly in the operation of the company.

Last modification 17.08.2018

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