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Setting up a sole proprietorship: everything you need to know

sole proprietorship
Enterprise

Written by Niek van Son MSc on January 22, 2025

Niek van Son

Last updated January 27, 2025

Introduction

Choosing the right legal form for your business is important; as a start-up entrepreneur, you will have to make this choice first. Most entrepreneurs choose a sole proprietorship. This makes sense, because starting a sole proprietorship is easy and you can claim various tax benefits.

In this article, we explain everything you need to know about setting up a sole proprietorship.

What is a sole proprietorship?

A sole proprietorship is a simple and common form of business in which one person is the owner and solely responsible for the business. This person, the business owner, is personally liable for all activities, obligations and debts of the business. In a sole proprietorship, there are no legal divisions between the business and the owner, meaning that the finances and liabilities of the business and the entrepreneur are intertwined.

Is a sole proprietorship the same as zzp or freelance?

A sole proprietorship is different from zzp or freelance. The sole proprietorship is a legal form, zzp or freelance is not. Freelancers and freelancers do often have the legal form of sole proprietorship. Also read what does it cost to start a business here.

What are the advantages of a sole proprietorship?

  • Easy set-up: Setting up a sole proprietorship is relatively easy and usually only requires registering with the Chamber of Commerce and applying for a VAT number.
  • Lower costs: There are typically fewer administrative and legal costs associated with setting up and running a sole proprietorship compared to other business forms, such as a limited liability company (BV).
  • Complete control: As a sole proprietor, you have complete control over all aspects of your business, without having to answer to partners, shareholders or board members.
  • Easier taxes: A sole proprietorship usually has simpler tax returns because there is no distinction between the business and the owner. In addition, sole proprietors may qualify for certain tax benefits, such as entrepreneur deductions and SME profit exemptions.
  • Flexibility: A sole proprietorship offers more flexibility in making decisions and adjusting business strategy because you are not bound by the formal decision-making structures of other business forms.

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 and savings, could be at risk if the business gets into financial trouble.
  • More difficult to raise capital: A sole proprietor may find it more difficult to attract external financing, such as loans or investments, compared to other business forms.
  • Limited growth opportunities: It can be more difficult for a sole proprietor to grow and expand because you are solely responsible for all aspects of the business and may have limited resources and capacity.
  • Less continuity: A sole proprietorship has less continuity because the business is completely dependent on the owner.
  • Higher tax burden at higher profits: Compared to a limited liability company (BV), the tax burden for a sole proprietorship can be more unfavorable at higher profits because your income is taxed progressively in income tax.

Forming a sole proprietorship step-by-step plan

Setting up a sole proprietorship is not complicated. We explain the steps so you can get started with your sole proprietorship soon:

Step 1: Develop business idea

First, come up with a strong business idea that matches your passion, skills and market opportunities. Do market research to determine if there is demand for your product or service and if it is viable.

Step 2: Write business plan

Write a business plan outlining your business idea, target market, competitive analysis, marketing strategy, financial projections and operational plans.

Step 3: Arranging financing

Make sure you have sufficient financial resources to start your sole proprietorship. This could be your own savings, a loan from family or friends, or a business loan from a bank.

Step 4: Choose a company name

Come up with a unique and appealing business name that fits your product or service and is easy to remember. Check that the name is available from the Chamber of Commerce and that there are no conflicts with existing brand names. For inspiration, you could look for a company name generator.

Step 5: Registering with the Chamber of Commerce

Sign up with the Chamber of Commerce to officially register your sole proprietorship. You will receive a Chamber of Commerce number and be automatically registered with the Tax Office. After registering with the Chamber of Commerce, you will automatically receive a VAT number from the tax authorities. You need this number to file VAT returns and calculate VAT on your invoices.

Step 6: Opening business bank account

Open a business bank account in the name of your sole proprietorship. This helps keep your business and personal finances separate and gives a professional appearance to customers.

Step 7: Taking out insurance

Take out the necessary insurance to protect yourself and your business from risks. Consider business liability insurance, disability insurance and possibly legal expenses insurance.

Step 8: Set up administration

Set up orderly records for your sole proprietorship, including an accounting system for tracking income, expenses, invoices and tax returns. Also read our article on bookkeeping for beginners to gain the necessary knowledge. If necessary, consider hiring an accountant to support you in this process. He or she will know exactly which deductions you can make use of and that can save you a lot of money at the bottom of the line.

Step 9: Marketing and promotion

Promote your sole proprietorship through various channels such as social media, online ads, networking events and word of mouth. Create a professional image with a business website, business cards and a logo.

Frequently asked questions on establishing a sole proprietorship

How much does it cost to start a sole proprietorship?

The one-time cost for KVK registration is €75.00 (in 2023). You will not have other start-up costs, except for the purchase of materials you need to do your work.

Can you hire staff within a sole proprietorship?

By the way, it is allowed to hire staff if you are a sole proprietor. You must be the sole director, but you are allowed to employ employees. If you don't like working alone as much, or you have more work than you can handle, you can look to expand. Keep in mind, though, that there is a lot involved in being an employer. Instead of hiring people, you could work with another freelancer. That way you run less risk.

What taxes do you have to pay?

As an entrepreneur, you obviously pay income tax. So don't get rich when your invoices are paid, but immediately set aside a fixed portion for taxes. If you set aside about 40%, you will probably have a nice amount left over after tax. You can pay that out to yourself as a bonus, or you can put it into your pension, for example. You also pay an income-related Healthcare Insurance Act contribution (Zvw). This amount is paid at the same time as your income tax. Finally, you file quarterly VAT returns. This is the tax you pay on your turnover.

What tax benefits does a sole proprietor get?

Reading it above, it may seem like you have to pay a lot of taxes. But as an entrepreneur with a sole proprietorship, you can also count on several tax benefits:

  • The first three years you can use the start-up deduction. That is a fixed amount of €2,123.
  • If the IRS considers you an entrepreneur, then you are entitled to self-employment deductions. Among other things, this means that you must be able to demonstrate that you spend 1225 hours per calendar year on your business. If you suffer a structural loss or run no entrepreneurial risk, you are also not an entrepreneur according to the Tax Office. Do the check here to see if the IRS considers you an entrepreneur.
  • The SME profit exemption is a third tax benefit for sole proprietors. It allows you to deduct 14% of your profit, which remains after the start-up deduction and the self-employment deduction.

What deductions can I take advantage of?

As a start-up entrepreneur, you can take advantage of several deductions. Read our article on deductions for entrepreneurs in 2023.

What is the Small Business Administration?

Note: If you expect to turn over less than €20,000 in turnover per year, you may be able to claim the small business scheme. Then you do not have to pay VAT. You can read more about this scheme in our blog post about the KOR.

Niek van Son
THE AUTHOR

Niek van Son MSc

Marketing Management (MSc, University of Tilburg). 10+ years of experience as an online marketing consultant (SEO - SEA). Occasionally writes articles for Frankwatching, Marketingfacts and B2bmarketeers.nl.

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