Sole Propietorship or the Dutch Private Company (BV)

Sole proprietorship or BV? - the differences

If you are planning to start a Dutch business, you might be in doubt between a sole proprietorship or a BV. The sole proprietorship is typically used by residents of the Netherlands, but could in some circumstances also be used by global entrepreneurs and expats.  In this article, we have prepared an overview of all considerations that are relevant for the choice of a sole proprietorship or BV.

                                       Sole Proprietorship                       BV

Legal formation               No                                                 Yes, by notarial deed

Registration Chamber     Yes                                                 Yes

of Commerce                                                                

Mandatory (share)          No                                                   EUR 0.01 minimum    capital                                                                                     starting capital                                                                                                                           

Liability                            Business and private 100%            Only the BV   

Income                           Tax on the profit.                               Corporation tax on                                                                                                     profits. Income tax                                                                                                     on salary and                                                                                                             dividends   

Employee insurance       No                                                    No, unless the                                                                                                          director-major                                                                                                            shareholder (DGA)                                                                                                    cannot prevent his                                                                                                     own dismissal

Personal liability vs director's liability

One of the biggest advantages of the BV compared to the sole proprietorship is the difference in liability for the owner/director of a company. The owner of a sole proprietorship is 100% privately liable for the debts of the company. Every creditor can directly recover from private assets.

 

The sole proprietorship does not have legal personality, which means that it cannot independently have rights and obligations. This allows creditors of the sole proprietorship to recover their claim from you.

This is different from a BV. The BV is a legal person and therefore has its own rights and obligations. As a result, a BV can also own equity. As a director or director-major shareholder (DGA) you represent this BV, but you are not personally bound. Creditors can recover from BV's assets, not your private assets. This is only the case if you as a director have committed improper management.

Taxes

An owner of a sole proprietorship is nothing more than a person with a VAT number. After all, the sole proprietorship does not pay tax, the owner of the sole proprietorship does. The income of the sole proprietorship is taxed in Box 1. When calculating the taxable income of the sole proprietorship, the entrepreneur can make use of a number of favorable tax deduction facilities, such as: - Deduction for old-age provision; - Self-employed person's allowance; - Contribution deduction; - strike deduction; - SME profit exemption (profit exemption of 14%). A BV pays corporation tax on the profit.

1. Corporate

tax Then you are better off at a certain point (€ 150,000 profit) with a tax, for example. The standard lower corporate tax rate then outweighs the deductions of a sole proprietorship and the gradually increasing income tax.

If you set up a, you pay company corporation tax on the profit. In 2019, this tax amounts to 19% to a profit of € 200,000. If you earn a profit greater than € 200,000, you pay 25% on the profit.

Corporate tax will go down in the coming years:

  • In 2020 you will pay 16.50% and 22.55% respectively.

  • In 2021, you will pay 15% and 20.50% respectively.

2. Substantial interest

rate The substantial interest rate will increase. Where the rate in 2018 and 2019 was still at 25%, it will increase in steps to 26.90% in 2021. In 2019, it is therefore still advantageous to pay out money to yourself.

Usual salary / DGA salary

In addition, the BV is 'obliged' to pay a salary to the director (DGA salary). The amount of this salary is set at € 45,000 in fiction. But the word says it all, this is a fictitious amount. The director's salary may be lower or higher. If the activities have just started, a lower or no salary is sufficient for the director. After all, the company does not yet generate enough money (free cash flow) to be able to pay the DGA salary. Read here how to lower this DGA salary. Payroll tax and national insurance contributions are payable on the DGA salary. A DGA is not compulsorily insured for employee insurance unless he cannot prevent his own dismissal. This is usually only the case if no majority of the shares are held by the DGA.

 

Attracting an investor or new shareholder

Another advantage of a BV is that this structure makes it easier to attract investors. This can be beneficial if you want to make certain purchases, but do not yet have the required capital.

Investors will not be eager to put money into a sole proprietorship. An entrepreneur will not want to guarantee the debts of the company. It makes sense that an investor does not want to bear more debt than the amount of his contribution. A BV is a so-called capital company. This means that a BV must issue shares that represent a certain value. By issuing these shares, a BV can raise capital from new investors. The persons who acquire the shares, the shareholders, are not obliged to contribute in debts to more than their contribution. This makes it attractive for investors to invest in a BV.

The appearance of your business

Creating a sole proprietorship is easy. You register with the trade register of the Chamber of Commerce and you are in principle ready to start. A sole proprietorship does not publish figures that are transparent to others. A BV does. A BV is obliged to file annual accounts with the Chamber of Commerce. In this way, creditors and other interested parties have a good overview of what is going on in the BV. Usually, no complete annual accounts are filed, but a summary thereof. This must show how the company is doing financially and whether the BV is able to meet its obligations. This gives the company a slightly more professional appearance.

Costs BV

The start-up costs for a BV are higher than those of a sole proprietorship. This is because a notary public one BV must establish and register and must create a shareholders register. The costs for the administration are fairly comparable. Both companies have to keep records. A BV must submit a corporate income tax return and annual accounts. Those extra costs are added. In the (simplified) example below, a company makes a profit of € 100,000 per year (without taking into account deferred future taxes).

Example 1 (2019)

However, due to the use of various entrepreneurial facilities (which are not accessible to companies that are subject to corporate tax) and the rates in the lower income tax brackets, the choice for an IB company was nevertheless often more advantageous in many cases.

How will profits be taxed at an IB company and at a BV in 2020?

As of 1 January, 2020 (in accordance with the 2020 legislative changes) the highest rate in box 1 is 49.5%. In addition, the SME profit exemption is no longer deducted at the highest rate, but at a lower rate. For 2020, the highest rate bracket after SME exemption will, therefore, amount to 46%. In later years, it is even deducted at the lowest rate, further reducing the benefit of the SME exemption. This means that by 2020 the marginal tax burden for an IB entrepreneur will be 43.06%.

Example 2 (2020)

*) According to rate table

**) Addition in connection with deduction restriction

As of January 1, 2020, the rate in the first corporate income tax bracket will be reduced to 16.5%. The rate in box 2 will be 26.25% in 2020. When the company is operated in 2020 by means of a BV that makes a taxable profit of up to € 200,000, the marginal tax burden is 38.42%.

Example 3 (2020)

All in all, it can therefore be concluded that the tax burden of companies that are driven in IB and in a BV structure are starting to diverge considerably. The ultimate effective tax burden does not only depend on the company's profit. The private situation of the client in question is also important for determining the effective tax burden. Ultimately, the tax position in a BV structure can still be optimized by determining the wages with due observance of the laws and regulations regarding customary wages.

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