Sole proprietorship or private limited company?
- Henk Herkink
- How to
- 11 Jan 2020
- Edited 27 Feb 2023
- 6 min
When you start a business, you have to choose a legal structure. It defines what your business is from a legal point of view. Starting entrepreneurs do not always know which legal structure suits their business best. Often, the choice comes down to a sole proprietorship or a private limited company (bv). Which one do you choose?
The choice for a sole proprietorship or a private limited company has everything to do with taxes and liability. You want to pick the structure that will cost you less in taxes and limit your entrepreneurial risk. Private considerations can also play a part: are there investors involved? What have you got planned for the future? This article lists the differences and the pros and cons of the 2 legal structures, so you can make an informed choice.
Differences between a sole proprietorship and a private limited company (bv)
A sole proprietorship means a business that belongs to one natural person: you. The profits are for you, and you are personally liable for your business. If there are debts, you are liable with both your business and your private assets. Your turnover minus purchasing and other costs is your profit. You pay a yearly income tax over your profit. Your profit minus the amount of income tax is your net income.
A private limited company (bv) is a legal entity. An attorney sets up the bv for you by notarial deed. A legal entity can be the independent owner of rights and duties, and that includes a company. What this means, is that the bv, as a legal entity, is liable for everything that concerns the business. As director and major shareholder of the bv, you are not liable with your private assets. You are a paid employee in your own private limited company. The turnover minus purchasing and other costs are the bv’s profit. The costs include your wages as director/major shareholder. That is why a bv’s balance sheet looks different from that of a sole proprietorship. The bv pays corporate income tax over the profit.
The differences at a glance:
|Sole proprietorship||Private limited company (bv)|
|Setting up||no requirements||notarial deed|
|Starting capital||no requirements||starting capital of at least € 0.01|
|Other involved bodies||none||shareholders|
possibly a supervisory board
|Liability||100% business and private||only the bv (in principle)|
|Taxes||income tax; subject to conditions: sme profit exemption and entrepreneurs’ allowance||corporate income tax, income tax over wages, and dividend tax|
|Social security||not entitled to employee insurances and benefits||no employee insurances, unless dismissal against the director/major shareholder’s will is possible and/or if your percentage of shares is less than 50% (alone or together with your partner)|
Advantages of a sole proprietorship or a private limited company (bv)
The main advantages per legal structure:
Sole proprietorship advantages
- Quick and easy setup
You register with the Business Register at the Netherlands Chamber of Commerce KVK, and you are in business. You pay a one-off registration fee. To start a bv, you have to let an attorney draw up a notarial deed. This takes more time, and it costs you a couple of hundred euros.
- Fiscal advantages for starters
The profits of a sole proprietorship are taxed under income tax. Under certain conditions, you can make use of schemes to lower the amount you have to pay. The bv cannot make use of these schemes.
Private limited company advantages
- No personal liability
Do you have debts you cannot pay, and that you did not cause by acting irresponsibly? The bv can go bankrupt, but you as a director and shareholder will not have to pay with your private assets.
- Suited for complex business management
You can set up a holding company structure with multiple operating companies, to spread risks or gain tax advantages.
- Attract investors
Persons who fund your business, like investors or family, can participate in a bv as shareholders.
A bv may have a more professional image in the eyes of business partners, especially when doing business abroad.
- Build capital
A bv allows you to set aside money: a reserve, or a provision. For example, you can build your own pension, or add profits to the bv’s business capital.
Profits and taxes
Roughly speaking, a bv only becomes fiscally advantageous when you have a profit of over € 130,000. This is one of the reasons why many starting businesses opt for a sole proprietorship. A sole proprietorship pays income tax on the profits. A bv pays corporate tax on the profit, and in case of profit division, dividend tax.
In a bv, turnover minus purchases and expenses is profit. The costs of the bv also include your salary as director. The profit and loss account therefore looks different with a bv than with a sole proprietorship. A bv pays corporate income tax on the profits and, if applicable, dividend tax from the profit distribution. The director-major shareholder (DGA) of a bv also pays income tax on their tax-minimum salary (€51,000 in 2023) and on dividends paid.
As a starting entrepreneur, you may not have enough turnover to pay yourself the fiscal minimum customary salary of € 51,000. You can appeal to the Dutch Tax Administration to lower the wage to a feasible amount.
When profits are higher, a bv usually pays less in taxes than a sole proprietorship. But the costs are higher. Among other things, for drawing up and filing the annual financial statements, and accountant’s fees. The owner of a sole proprietorship may be entitled to entrepreneurs' allowance, including the private business ownership allowance. The first 3 years in business, you may also deduct tax relief for new companies. And you can use the SME profit exemption scheme. These tax schemes make starting a business as a sole proprietor the more attractive option.
If you are the owner of a sole proprietorship, you are personally liable. With your private capital, including your car and your house. And possibly your partner’s possessions as well. That depends on your partnership or marriage arrangements (whether or not you have a pre-nuptial, for instance). For financial purposes, the private and business assets of a sole proprietorship are one. A bv has separate capital, and this means you are usually not personally liable for the bv’s debts. The bv is liable, unless you as a director have been demonstrably negligent. For example, if you are unable to pay your employees’ wages or the bv’s debts, and you fail to report this to the Dutch Tax Administration, or if you enter into agreements you know the bv cannot honour.
As a sole proprietor, you run a greater risk. But that should not be your main reason to choose for a bv. You can reduce entrepreneurial risks by drawing up solid general terms and conditions, and by taking out business insurance. And if you need financing for your starting bv, odds are your financing party will make you sign the contract as a private person as well – and that means you will be personally liable after all.
What type of board you have depends on the size of your organisation, and on how much money you need. A bv has a board of directors and may have shareholders. That means you share control over the bv’s management. Shareholders contribute money to the bv and in return receive voting and profit-sharing rights. As a sole proprietor, you alone are in charge. You can also set up a bv with yourself as the sole director and shareholder, making you the director-major shareholder, or DGA in Dutch (directeur-groot-aandeelhouder).
Do you want to be in charge? A sole proprietorship may be your best option. Is the management of your business more complex, do you need to take more risks, and do you need external funding? Then, consider setting up a bv.
An entrepreneur is not insured for social benefits like unemployment benefit (ww) or sickness pay (wia). You have to make your own arrangements. Are you employed as DGA by your bv, and do you (and your partner) own less than 50% of the shares? And can you be dismissed against your will? In that case, you are insured for social benefits. The bv has to pay contributions for these benefits via your wage tax.
Changing your legal structure
It is possible to change your legal structure from a sole proprietorship to a private limited company. This often happens when a business starts to grow. You are not stuck with one legal structure. The sole proprietorship can transfer its assets to the bv without fiscal consequences.
A change the other way round is also an option. Is your turnover or profit margin decreasing? The bv may no longer suit your business. You may profit from a transfer from private limited company to sole proprietorship.
Perhaps you are still undecided. Or your situation is different from what is described in this article. Your business may require a change of structure because profits are rising, risks have increased, or you need to invest large sums of money.
Use the tool for choosing a legal structure on Business.gov.nl to find the structure best suited to your needs, or contact KVK for personal advice.
Please note: if your company's legal structure changes, it may affect your permits. For example, an operating permit or an all-in-one permit for physical aspects. For each permit, check if it is connected to you personally or the business. Do you employ staff? If so, a change in legal structure may affect the excess for your employee insurance. Check with the UWV (in Dutch) if this will have an impact on you.