Accounting requirements for SMEs: key documents

Accounting requirements and legal documents: two sides of the same coin

For many SME owners, accounting requirements and legal documents are two separate worlds: the accountant handles the figures, and the legal documents (contracts, articles, agreements) are something you deal with when problems arise.

That approach is expensive. The legal documents underpin the accounts. If the employment contracts are missing, uncertainty arises about pay obligations. If the data processing agreements are missing, GDPR fines can topple an otherwise healthy result. If the articles are outdated, a general-meeting decision can be challenged.

This guide gives you an overall picture of what the law requires of SMEs, both in accounting and in legal terms.

What is the Danish Financial Statements Act, and who is covered?

The Danish Financial Statements Act (årsregnskabsloven, ÅRL) governs which businesses must prepare and file an annual report, and what it must contain. The Act divides businesses into four classes:

Class	Examples	Requirement
Class A	Sole proprietorships, partnerships	As a rule no obligation to file an annual report with the Business Authority
Class B	Small ApS and A/S	Annual report; can opt out of audit below certain thresholds
Class C	Medium-sized and large companies	Annual report + audit
Class D	Listed and state-owned companies	Annual report + audit + extra requirements

Most SMEs in company form (ApS) are in class B. That means:

• You must prepare an annual report and file it with the Business Authority
• You can, below certain size thresholds, opt out of audit
• The deadline is at the latest 5 months after the end of the financial year (for a calendar-year accounting period typically 31 May)

When can you opt out of audit?

A class B company can opt out of audit if, in two consecutive financial years, it does not exceed two of the following three thresholds (section 135 of the Financial Statements Act):

• A balance sheet total of DKK 4 million
• Net turnover of DKK 8 million
• An average of 12 full-time employees

If the company exceeds two of the three thresholds in two consecutive years, audit becomes mandatory. Most very small SMEs are below the thresholds and can opt out of audit.

Note a couple of exceptions: a company with a balance sheet total over DKK 50 million cannot opt out of audit, even if the other thresholds are met, and a company in a classified risk industry must have at least an auditor's statement (of assistance or with assurance) if net turnover exceeds DKK 5 million.

Opting out of audit must be decided at an ordinary general meeting and applies going forward. The decision must appear in the annual report.

Legal documents with direct accounting relevance

Employment contracts

Payroll costs are often the largest single item in an SME's accounts. For the items to be correct and defensible, they must be supported by valid employment contracts.

The Act on employment certificates (2023) requires:

• Written information about the essential terms no later than 7 calendar days after work has started
• The remaining information no later than 1 month after
• Information about, among other things, training rights, flexible arrangements and notice terms

Missing or defective information can lead to compensation to the employee, typically up to 13 weeks' pay and more in serious cases. That is an unbudgeted expense that can affect the annual result.

Articles of association

The company's articles are the basic legal document for the ApS. They govern:

• The company's purpose and registered office
• Capital and ownership shares
• The competence of the general meeting
• The management structure (board or executive management)

What the accountant should check: Are the articles up to date in relation to the actual ownership structure? Have capital changes been made that do not appear in the articles? Does the management structure match what is registered?

Outdated articles can cause problems at the audit and at the Business Authority's checks. Update them if changes have occurred.

Data processing agreements (GDPR)

Do you keep your books via e-conomic, Billy or another external system? Do you process payslips, civil registration numbers or customer data in a cloud-based solution? Then a supplier processes personal data on your behalf, and that requires a signed data processing agreement (GDPR Article 28).

The Data Protection Agency can issue criticism and recommend fines for missing agreements. For SMEs, that can become an unpleasant item in the accounts.

The most important elements of the annual report

An annual report for a class B ApS must as a minimum contain:

1. Management's review (the smallest class B companies can, however, omit it)
2. Income statement: turnover, costs, result
3. Balance sheet: assets and liabilities
4. Notes: further information about the accounting items
5. Management's statement: the management's signature

If the company has validly opted out of audit, no auditor's statement is as a rule required on the annual report. Many, however, voluntarily have an auditor provide a statement of assistance or a review statement to strengthen credibility towards banks and business partners. In risk industries, a statement may be a requirement, as noted above.

The general meeting and the annual report: the legal process

The annual report must be approved at the ordinary general meeting before it is filed with the Business Authority. The process:

1. Prepare the annual report (typically with an accountant or bookkeeper)
2. Convene the general meeting in accordance with the articles' deadlines
3. Hold the general meeting and approve the annual report
4. Sign the management's statement
5. File with the Business Authority by the deadline

If the formal steps are missing, the annual report is not validly adopted.

The legal documents the accountant should ask for

The accountant reviews the accounts, but to do a good review the accountant should also be aware of:

• The shareholders' agreement to understand the ownership structure and any obligations
• The employment contracts to validate the payroll costs
• Important customer and supplier agreements to understand material obligations and income
• Any loan agreements, including loans to or from the company
• The data processing agreements to assess any GDPR risks

If the documents are missing, it is the accountant's job to make the client aware of the risk, and the client's responsibility to put the documents in order.

Shareholder loans: a special legal and tax problem

Many SME owners are tempted to borrow money from their own company. A shareholder loan is only lawful under strict conditions in section 210 of the Companies Act (among other things that it is within the free reserves, decided prudently and made on market terms).

And even when the loan is lawful under company law, the tax rule applies unconditionally: the loan is taxed at the owner as salary or dividend under section 16 E of the Assessment Act, as soon as it is paid out, and even if the money is later repaid.

The consequences:

• The loan must be repaid to the company
• The owner is taxed on the amount as salary or dividend
• The accountant must note an unlawful shareholder loan in the annual report

It is a frequent audit finding in SMEs. If you need to take money out of the company, make sure it happens as approved salary or dividend, and not as a loan.

Compliance checklist for SME owners and accountants

Accounting:

• Annual report prepared and ready before the deadline
• General meeting held and annual report approved
• Annual report filed with the Business Authority
• Audit or statement provided, if there is an obligation
• No unlawful shareholder loans in the company

Legal documents:

• Employment contracts updated to the Act on employment certificates (2023)
• Articles match the current ownership structure and capital
• Data processing agreements signed with all relevant suppliers
• Shareholders' agreement in place (with 2 or more owners)
• Important customer and supplier agreements in writing and valid

Common mistakes SME owners make

Mistake 1: An outdated employment contract

The rules on employment certificates were tightened in 2023. Many businesses have not yet updated existing contracts and carry on with a document from 2015 or 2018 that does not meet the new requirements.

Mistake 2: Articles that do not reflect reality

The company has been through a capital increase, a new owner has joined, or the purpose has changed, but the articles have never been updated. This gives a misleading picture towards the accountant, banks and potential investors.

Mistake 3: A missing data processing agreement with the bookkeeping supplier

The vast majority of SMEs keep their books digitally via a cloud service, but only a few have a current data processing agreement in place. It is both a GDPR problem and an unnecessary risk.

Mistake 4: No shareholders' agreement, or an outdated one

The company has two owners with a 50/50 ownership share, but no shareholders' agreement. That is a recipe for conflict: what happens if the two owners disagree about an investment, or if one wants to sell?

New legislation and requirements you should know

The legal framework for SMEs has changed on several points in recent years:

The Bookkeeping Act: A requirement for a digital bookkeeping system that meets the Act's requirements. The requirement has been phased in for reporting businesses and is gradually being extended to smaller and personally owned businesses above a certain turnover. Check the current status with your accountant.

The Act on employment certificates (2023): Tightened requirements for what the employment contract must contain, including training rights, rules on flexible arrangements and clarification of notice terms.

The NIS2 Directive: Tightened requirements for IT and cyber security for companies in certain sectors (including energy, transport and digital infrastructure). The rules are being implemented in Danish law. Contact an IT security adviser to assess whether you are covered.

Sustainability reporting (CSRD): Large companies have gradually become covered by sustainability reporting requirements, but the timeline and scope have been adjusted. Most SMEs are not directly covered, but as a subcontractor to larger companies you may be asked for data.

Keep up to date via the Business Authority and your accountant, as the rules change continuously.

Conclusion

Accounts and legal documents are more closely connected than many think. An annual report that rests on valid employment contracts, up-to-date articles, data processing agreements and a shareholders' agreement is far less vulnerable to disputes, fines and unpleasant audit findings. Use the checklist above at year-end, and get your accountant and a legal adviser to work together.

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This article is informative and does not constitute legal or audit advice. Contact your accountant for guidance on your specific situation.