One of the most commonly cited reasons for converting a sole trader business to a limited company (bv) is limited liability. But is that picture entirely accurate? In practice, the protection is real, but far from absolute. In this article, you can read exactly what changes in terms of liability, and when you as a director-shareholder may still be held personally liable.
Liability as a sole trader: no separation
As the owner of a sole trader business, you are the business. In legal terms, there is no distinction whatsoever between your personal assets and the assets of your company. If your business incurs debts or is held liable for damages, a creditor can in theory pursue your home, your savings, or other personal possessions.
For many business owners, this starts to feel like a vulnerable position over time, particularly as turnover grows or risks increase.
What changes after converting to a limited company?
A besloten vennootschap (bv) is an independent legal entity. This means the company has its own assets and liabilities, separate from you as an individual. Once you move to a limited company structure, the debts of the business are in principle debts of the bv — not yours personally.
This is the great advantage of converting a sole trader to a bv: a legal barrier is created between you and the activities of your business. In the event of the bv becoming insolvent, you as a shareholder are in principle only liable for the capital you contributed.
When can you still be held personally liable as a director-shareholder?
This is where the catch lies. The bv protects you well in many situations, but there are circumstances in which you as a director-shareholder (dga) can still be held personally liable. It is important to be aware of this before you take the step.
Directors’ liability
As a director of a bv, you can be held personally liable if you have performed your duties improperly. Examples include failing to file the annual accounts on time, failing to pay taxes when you knew the company could not do so, or knowingly entering into obligations that the bv was unable to fulfil.
Personal guarantees and sureties
Banks and major suppliers frequently require a personal guarantee from young or small limited companies. In that case, you are signing personally for the debts of your bv. By doing so, you have effectively removed the protection of the bv structure for that specific obligation.
Unlawful conduct
If the bv acts fraudulently or deliberately causes harm to third parties, the court can pierce the corporate veil and hold you personally liable as a director. This is also known as ‘identification’ or lifting the corporate veil.
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Plan een gesprekPractical tips to maximise your protection
A bv only offers optimal protection if you genuinely comply with the structure. A few points to bear in mind:
- Keep your business and personal administration strictly separate; never use the business account for personal expenditure.
- Ensure the annual accounts are prepared and filed with Companies House (Kamer van Koophandel) on time.
- Report any inability to pay taxes and national insurance contributions to HMRC (Belastingdienst) immediately; late notification increases the risk of directors’ liability.
- Do not enter into obligations that you know the bv will be unable to fulfil.
- Always read guarantee clauses in contracts carefully and limit personal guarantees as much as possible.
- Have major contracts or investment decisions reviewed by an adviser beforehand.
Old debts: what happens to them?
One point that sometimes catches business owners off guard: debts built up as a sole trader do not automatically disappear after conversion. If there were creditors before the business was transferred into the bv, they may — depending on the conversion method chosen and the conditions agreed — continue to hold you personally liable. It is therefore advisable to map out the liability position regarding existing debts carefully before making the switch.
A good tax adviser will help you not only with the fiscal aspects, but will also consider how to structure the transition so as to avoid unnecessary risks.
Is a bv worth it in terms of liability?
For most growing business owners: yes. The protection a bv offers is real and worthwhile, provided you conduct yourself properly as a director and keep your administration in order. It is not an impenetrable wall, but it is a solid buffer that you lack entirely as a sole trader. Particularly if you work with larger contracts, employees, or significant stock, the risks as a sole trader are considerably greater.
Would you also like to set up your administration properly after your conversion? That too is something you need to pay attention to from the very outset.
Why Belastingadviseur Eindhoven
At Belastingadviseur Eindhoven, we understand that moving to a bv involves more than just a fiscal consideration. Liability, structure, and protection play an equally important role. We help business owners in Eindhoven and the Brabant region to make that decision on a well-informed basis — without any unpleasant surprises afterwards.
Do you have questions about your specific situation? Feel free to contact us without obligation. We would be happy to look at the best approach together with you.
We are happy to think along with you. For advice tailored to your situation we would gladly sit down with you. No rights can be derived from the content of this page and it may contain inaccuracies.
