The vof contract, laying down good ground rules

You are about to form a vennootschap onder firma (vof). It is a very common legal form in the Netherlands. The law does not contain many specific provisions for vofs, so it is important that you and your partners lay down good ground rules yourselves. Make good arrangements about liability, financial risks, and business continuity, and put them in writing in a vof contract. The 9 most important ground rules.

You do not have to draw up a vof contract when you form a vennootschap onder firma, but it is highly advisable. You can make all the verbal agreements you want, but you will not have any evidence when push comes to shove. Partners in a vof have a lot of freedom to draw up ground rules as they see fit: you get to make the contract yourself. You can decide to use a model contract or consult a specialist.

Tip! The partnership contract should open with the business name, a description of the partnership’s goal and activities and the names of all partners. Expressly stating the goal and activities of the partnership is especially important if one partner performs entirely different activities on behalf of the vof. If they do something out of line, they are personally liable. Try to avoid defining a very broad goal and activities, as it may give partners too much leeway.

1. Term

Do you want to work together for a fixed period of time or indefinitely? Make arrangements on this in advance and state it in the contract. Typically, people enter into a vof indefinitely, because it means they can decide to continue or stop at their own discretion. If you agree on a specific term, the cooperation will end after the term expires. Fixed-term contracts are common for groups of construction companies that decide to work together for a new-build project and start a vof. As per the contract, the vof is terminated upon completion of the project.

2. Contribution

The law assumes that everyone contributes knowledge, labour, and goods. However, if particular partners contribute equipment, inventory, or money, it can be helpful to lay this down in the contract, possibly in an Annex. This lets you check exactly who contributed what whenever you want and helps prevent misunderstandings.

3. Legal powers

In a vof, the basic premise is that partners can make whatever commitment they wish without the knowledge of the other partners. In other words, that partners may do anything they wish for and on behalf of the vof, such as entering into a contract for the purchase of a company car. If you want to arrange things differently, add restrictive provisions to the vof contract. These provisions clarify what partners are and are not allowed to do and set a cap for independent actions. If you want the same agreements to apply to contracts entered into by a partner with other persons and businesses, you can list the restrictive provisions in the Business Register. This lets your business partners check whether a partner has the power to act independently or whether all partners have to sign the contract.

It is important that the contract stays practical: after all, the last thing you want is to need lots of signatures to approve everyday expenses and activities. Adapt the restrictive provisions to your situation.

4. Remuneration and profit

When problems arise, money is often the culprit. To avoid quarrels about money, make clear arrangements about money or remuneration in the contract. Partners are not employees, so their remuneration is not salary but an advance on the profit distribution at the end of the year. You can pay out this remuneration at your discretion, such as weekly or monthly. Partners can decide to distribute the money however they wish, for example based on time worked or a fixed ratio. A 50/50 split, for instance, is common for two-person vofs.

Whatever you agree, think about it carefully, because profit distribution is often a point of contention in practice. Another important consideration is to keep plenty of money in the business.

If the remuneration you pay out during the year exceeds the partnership’s profits, return the excess to the account of the vof. If you have money left over at the end of the year, you can split it as you see fit or as you agreed in the contract.

5. Disbanding a vof

Before you formalise your vof, agree whether it will be temporary or indefinite. After all, you may become disillusioned after a while if your partner puts much less time and effort into the business than you had expected. If that happens, you may decide to leave the partnership. How and when you can leave depends on what was laid down in the partnership contract and who owns the customer base, for instance. The contract may also stipulate whether you have to observe a notice period or pay compensation. You can also decide to disband the partnership together or agree on situations that automatically trigger the dissolution of the partnership, such as if a partner declares bankruptcy, is put into receivership, or has to undergo restructuring.

6. Illness and incapacity for work

As an entrepreneur, you do not have employee insurance, like unemployment benefits under the Unemployment Act (WW). You have to make your own arrangements to guarantee an income if you are unfit for work or temporarily unable to work, such as saving money or taking out insurance. Even if you stay healthy, the business can also suffer if your partner gets sick or is unable to work. How long do you have to keep paying your partner when this happens? When can you dissolve the partnership? Are you entitled to a share of the profits if you are sick and have insurance? Are you required to take out disability insurance? You can include arrangements on all these matters in the partnership contract. It is best to make these arrangements beforehand, because the continuity of your vof may be jeopardised if you cannot come to an agreement.

7. Continuing the business

If a partner leaves the vof or dies, the vof ceases to exist by operation of law. This can be a highly undesirable situation, as you or the other partners may have wanted to continue the business. In the contract, you can give each other the right to continue the business if one of the partners leaves or dies, and you can also choose to take out term life insurance for each other to protect your business capital. These provisions on survivorship and acquisition help prevent ambiguity and save a lot of hassle.

8. Valuation

If a partner leaves the business, they are either entitled to their original contribution and part of the value of the business or will have to pay extra. The actual market value of real estate, for example, will often be higher than the value stated in the business’s books. The clientele of a business also has value. It is very important to agree in advance how you will arrive at a valuation for the company and who will appraise it for you. Different valuation methods exist, all with different outcomes.

Find out which one suits you best. This will help you finalise things quickly and avoid time-consuming arguments and procedures.

9. Resolving disputes

When you go into business together, everyone has the best intentions, but quarrels, disagreements, and arguments may arise over time. You may be dissatisfied with each other’s efforts or the distribution of profits, for instance, or things may just not click. Running a vof can be compared to a marriage with community of property: it can always end in an acrimonious divorce. That is why it is clever to set out a road to resolution in the vof contract. After all, you will have to decide what to do if you cannot find a solution together. If you make no agreements in advance, finding a way out together will cost you a lot of money, time, and effort. Mediation can be a quick and inexpensive solution, and if that fails, you could consider arbitration or bringing the matter before a judge.

Joint and several liability: impossible to avoid

You cannot exclude joint and several liability in a vof contract. With joint and several liability, creditors can always choose to whom they wish to submit their claim. You can, however, use the contract to arrange which of the partners bears more or less liability behind the scenes. Contracts you enter into together, however, have no bearing on creditors.

The only way to limit the risk of joint and several liability is by carefully describing the general partnership’s goal and activities.

Maatschap contract

The maatschap is a partnership much like a vof. A maatschap consists of multiple partners working together under one name, such as GPs, lawyers, and surgeons. 
Just as for a vof, it is wise to draw up a contract for a maatschap, containing many of the provisions you would find in a vof contract:

• The purpose of the maatschap.
• The contributions made by the partners.
• The distribution of profits. You are not allowed to pay out all profits to one partner.
• What happens if one of the partners becomes unfit for work.
• What’s next if one of the partners dies (survivorship provision).
• How to disband the maatschap.
• Non-compete clauses.
• Dispute resolution clauses.

The main difference between a vof and a maatschap is that partners in a maatschap act on their own behalf, while partners in a vof act on behalf of the vof. If you want the partners in a maatschap to act on behalf of the maatschap as well, you have to lay this down in the contract and give each other full power of attorney.