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Soleproprietorship or limited company (BV)?
When starting a new company, you choose a legal form: this is the legal form of the company. Starting entrepreneurs regularly have doubts about the choice between setting up a sole proprietorship or BV (Private Company). The main differences between these legal forms are liability and taxes.
Differences sole proprietorship and BV
- Establishment: you need a notary to start a private limited company (BV). Rates for the foundation start at around 400 euros, but at local notaries the costs can rise to over a thousand euros. It is possible to use another company already established in the EU. With the 2012 legislative amendment, there is no longer a minimum of starting capital for a BV. A sole proprietorship only requires a visit to the Chamber of Commerce;
- Board: a sole proprietorship has an owner, a BV has a management board and possibly shareholders. The director (DGA) must receive a minimum salary of EUR 46,000 per year;
- Liability: in a sole proprietorship, the owner is fully liable (including with his private assets) for the company. A BV is a legal person and therefore itself liable, the owners are not. Only if there is mismanagement, the management is liable with its private assets. A BV is therefore attractive for companies with high investments and risks;
- Tax: a sole proprietorship is cheaper for companies with a low profit because of the tax benefits as deductions: mainly the self-employed deduction, start-up deduction (first three years) and the SME profit exemption depress the net profit. However, if the turnover increases, then at a certain point the BV becomes more attractive with a lower tax rate (corporation tax);
- Financial statements: a BV must submit annual tax documents to the Chamber of Commerce. Requirements of these annual accounts depend on the size of the company.
Tax difference sole proprietorship and BV
You pay income tax on the profits from a sole proprietorship. This is equal to the rate that salaried individuals pay on their income (Box1), which means a top rate of 49.50% (2020). At the BV, corporation tax is paid on the profit. The corporate income tax is 16.5% over the first € 200,000 and above this amount 25% (2020). The DGA (director) pays income tax on his salary and dividend tax when the profit is distributed privately.
In principle, the tax with a BV is lower than with a sole proprietorship, but with a BV there are additional costs. For example, it is mandatory to draw up annual accounts and there are compulsory audit fees. The big advantage of the sole proprietorship lies in the many tax advantages such as the self-employed person’s allowance, investment allowance and SME profit exemption. As a result, certainly with a lower profit, the tax benefit for a sole proprietorship will be relatively greater than the benefit for the BV.
Which is better: a sole proprietorship or BV?
The two main elements to take into account when choosing between a BV or sole proprietorship are:
- Risk: when a company runs a lot of tax risk, the wisest choice is to choose a BV as legal form. A sole proprietorship is sufficient at low risk.
- Profit: with a low profit (less than 150,000 euros per year) the sole proprietorship pays better. With a higher profit, a BV is more advantageous from a tax perspective.