Choosing legal form: sole proprietorship or private limited company?

Introduction

One of the first decisions you have to make as an entrepreneur is the following: what legal form will you choose for your business? Will it be sole proprietorship or will you choose a bv (limited liability company) or is a VOF the best choice for you? Most entrepreneurs hesitate between a sole proprietorship and a bv. Both forms have their advantages and disadvantages and the best choice depends on your business and personal situation.

In this article, we will help you make the right choice for you by listing everything.

What is a legal form?

The legal form is the legal form of your business. The biggest differences between the various legal forms are in liability and taxes. If you are choosing between a sole proprietorship and a PLC, you are weighing the financial and legal consequences. It is important to be favorable on taxes and you want to minimize the risks associated with your business.

Setting up a limited liability company or sole proprietorship?

Sometimes choosing a particular legal form is obvious. Suppose you are just starting out as a sole proprietor and you expect your income and expenses to be limited. You run little risk and do not plan to expand for the time being. Then a sole proprietorship is a logical choice. That changes if you are going into business with a partner, want to attract investors or expect tons of revenue. Then a limited liability company makes sense. The choice becomes trickier if your business hangs in between.

Differences between the sole proprietorship and limited liability company

1. Legal form: A sole proprietorship is a business run by one person, unincorporated. The entrepreneur is personally liable for all of the company's obligations. A limited company is a legal entity with its own legal identity, which means that the limited company has independent rights and obligations separate from the shareholders.
2. Liability: In a sole proprietorship, the entrepreneur is personally and fully liable for the debts and obligations of the business. This means that the entrepreneur's private assets can be used to pay off any debts. With a limited liability company, liability is limited to the company assets, which means that the private assets of the shareholders are basically protected.
3. Formation: A sole proprietorship is easier and cheaper to set up than a limited liability company. You just need to arrange for registration with the Chamber of Commerce. To establish a BV, you need a notarized deed and must meet certain legal requirements.
4. Taxes: A sole proprietorship is taxed through the progressive income tax rate, and the entrepreneur can take advantage of tax benefits such as the self-employment deduction and the SME profit exemption. A limited liability company is taxed through corporate income tax, at a flat rate, and profit distributions to shareholders are subject to dividend tax.
5. Administration: A limited liability company faces more administrative obligations, such as preparing financial statements and filing them with the Chamber of Commerce. A BV must also keep a register of shareholders. The administrative burden for a sole proprietorship is generally lower.
6. Profit distribution: In a sole proprietorship, the entrepreneur can decide how to use the profits. In a limited liability company, profit distribution depends on share ownership, which offers less flexibility.
7. Transfer and succession: Transferring a limited liability company is generally simpler than transferring a sole proprietorship because the shares of the limited liability company can be transferred. With a sole proprietorship, the business itself is transferred, which can be more complex.

Financial and legal considerations

Sole proprietorship or limited liability company: financial considerations

• Only when your profit exceeds €150,000 is the BV more fiscally attractive than a sole proprietorship. As the owner of a sole proprietorship, you pay income tax on your profits. A bv pays corporate tax on its profits. This tax is 19% on the first €200,000 and above this amount 25.8%. The director-major shareholder of a bv also pays income tax on his tax-minimum wage and on dividends paid out.
• On average, a BV has a lower tax burden on higher profits than a sole proprietorship. The costs are higher, however, due in part to accounting fees.
• A sole proprietor is entitled (subject to conditions) to entrepreneurial deductions. Starting entrepreneurs may also apply starter's deduction for the first three years. Entrepreneurs with a sole proprietorship can use the SME profit exemption through income tax. This makes a sole proprietorship attractive for starters.

Sole proprietorship or limited liability company: legal considerations

In a sole proprietorship, you are both business and personally liable. The personal and business assets of a sole proprietorship are one. A PLC has separate assets, so you are usually not personally liable for the debts of the PLC. As a legal entity, the PLC itself is liable. With a sole proprietorship, you run more risk privately, but that doesn't mean you should go for a PLC. You can also reduce your entrepreneurial risks by taking out insurance and drawing up good general conditions.

Pros and cons

What are the advantages of a sole proprietorship?

• Simplicity: Establishing a sole proprietorship is very simple. You don't need a notary. All you have to do is register with the Trade Register of the Chamber of Commerce. You then get a VAT number from the Tax Office and you can get started. To set up a PLC you need a notary and that can be expensive.
• Deductions: A sole proprietorship is fiscally attractive (up to a certain profit) for startups. This is because your business profits are subject to income tax. You can itemize various deductions as a startup entrepreneur.
• Freedom: A sole proprietorship is manageable and offers a lot of freedom. You don't have a business partner to consider and you don't have to lay down anything in terms of responsibilities and obligations.

What are the disadvantages of a sole proprietorship?

• Personal liability: As the owner of a sole proprietorship, you are personally liable for all debts and obligations of the business. This means that your personal assets, such as your home or savings, could be at risk if your business runs into financial trouble.
• Limited financing options: A sole proprietor often has limited access to outside financing, such as bank loans or investors. This can make it more difficult to raise capital to grow or expand the business.
• Taxes: In a sole proprietorship, you pay income tax on the entire profits of the business. Depending on your tax bracket, this can result in a higher tax burden compared to other business forms.

What are the advantages of a limited liability company?

• Private assets are safe: As director of your private limited company, you are not personally liable for debts: that is your private limited company. If you have a sole proprietorship, however, creditors can recover from your private assets.
• Less tax: You pay less tax than with a sole proprietorship. However, you have to turn a high profit: from an average profit of €150,000 per year, it can be more fiscally favorable to start a BV.
• Shares: As a limited liability company, your company is more attractive to investors. This is because they get shares in the BV and thus share in the profits. They are not liable for debts of the BV.
• You build capital: within your PLC you can save for your retirement, for example.
• Reliable reputation: Limited liability companies have a trustworthy reputation because they require a notarized deed.

What are the disadvantages of a limited liability company?

• Formation costs and formalities: Establishing a BV involves more costs and formalities compared to a sole proprietorship. For example, you need a notarized deed to establish the BV, and you must be registered with the Chamber of Commerce.
• Administrative burdens: A BV faces more administrative obligations, such as maintaining a shareholder register, preparing financial statements and filing these documents with the Chamber of Commerce. This can involve additional time and costs.
• Fewer tax benefits: Unlike a sole proprietorship, owners of a limited liability company cannot take advantage of certain tax benefits, such as the self-employment deduction, start-up deduction and the SME profit exemption. This can lead to a higher tax burden depending on the company's profits.
• Less flexibility in profit distribution: In a sole proprietorship, the owners can decide how to distribute profits. In a limited liability company, profit distribution depends on share ownership, which offers less flexibility.

Converting from sole proprietorship to bv

Of course, your situation may change and a different legal form may be the better choice for your business. That's not a problem. Have you opted for a sole proprietorship, but is your business growing so fast that a PLC makes more sense? Then you can always convert your sole proprietorship to a BV. The other way around is also possible. So it is not a problem if you have to adjust your legal form afterwards.