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LLC or sole proprietorship: Which is the best choice for you?

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What are the differences between a limited company and sole proprietorship? Read more about this here.

When you start a business, you choose a legal form. In this article, we look at the differences between the legal forms the sole proprietorship and the limited liability company (bv). We list the pros and cons so you can choose which legal form suits you best.

Differences between sole proprietorship and limited liability company

The sole proprietorship and the limited liability company are two legal forms that have several differences. These include differences in liability, taxes, formation & costs and asset accumulation. The table below compares the two legal forms:

 

Sole proprietorship

Limited Liability Company (LLC)

Founding

Registration in the CoC

Limited Liability Company (LLC)

Capital contribution

No requirements

Initial capital of at least €0.01

Board

Owner

Board/director

Property

Personal

Shareholders

Participation in other companies

No

Yes, the LLC can hold shares in other companies

Liability

100% private liability

Shielded private assets

Tax

Income tax and sales tax (except for KOR scheme)

Payroll tax, sales tax, corporate income tax and dividend tax

Financial annual report

None

Mandatory

Social security

No entitlement to employee insurance benefits

No employee insurance except if dismissal is possible against the wishes of the director-major shareholder (dga) and/or if the shareholding, with or without your partner, is less than 50%.

Advantages of a limited liability company or sole proprietorship

Discover the main advantages by legal form.

Limited Liability company advantages

  • Investors or family can get shares in a limited liability company, making it more interesting for investors to invest in a limited liability company.
  • A limited liability company appears more professional.
  • Within a limited liability company, you can save without having to pay tax on it. You only have to do so when you pay it out as profit/dividend.
  • Only the LLC (bv) is liable

Benefits of sole proprietorship

  • Because you are sole owner, you are always in control.
  • You can make decisions quickly without accountability.
  • Starting a sole proprietorship is relatively simple and inexpensive.
  • Accounting remains easier.
  • For the first few years as a sole proprietor, you have many tax advantages.

Liability

Perhaps the biggest difference between a sole proprietorship and a limited liability company is liability. With a sole proprietorship, you are liable both in business and in private for any debts incurred by the sole proprietorship. Creditors can then recover not only the assets in the sole proprietorship, but also the assets you have in your private life. If you have very high debts in your sole proprietorship and cannot pay them in business, this is a risk for your private situation. For example, you could lose your own savings, house or car. When a limited liability company goes bankrupt, creditors can only appeal to the assets left in the company to get their money back. When, as a director of the LLC (bv), you performed your managerial duties properly, you are not liable privately.

Tax

The sole proprietorship is usually more tax advantageous in the early stages of a business. Only the profit (turnover - purchases and expenses) of a sole proprietorship is taxed in Box 1 of income tax. In addition, the owner of a sole proprietorship is entitled to various deductions such as entrepreneur deduction, self-employment deduction and start-up deduction. Want to know more about taxes with a sole proprietorship? Then read our blog on this subject.

From a profit of €80,000, it is more advantageous to conduct the business in a LLC (bv). With a LLC, profit is turnover - purchases and expenses. These costs include your salary (as director). A LLC pays corporate tax on profits. All profits up to €200,000 are taxed at 19%, everything above is taxed at the high rate of 25.8%. In addition, the DGA (director-major shareholder) pays income tax on his/her salary and any dividends paid.

Formation and costs of limited liability company or sole proprietorship

Starting a sole proprietorship is very simple, a visit to the Chamber of Commerce and a payment of €80.10 and you have registered your sole proprietorship and can start operating from it. With a limited liability company (bv), this is a bit trickier and more expensive. To set up a LLC you need to go to the notary, you need a notarial deed. A visit to the notary can quickly run high in costs, this is something to consider when starting up.

Also, with a limited liability company, you are obliged to pay start-up capital into the company, recently this minimum amount has been reduced to €0.01. Despite being allowed from as low as €0.01 these days, it is still something formal to take into account when setting up a company.

With a limited liability company it is easier to attract investors. A bv has shares that can be sold/given away. At incorporation, all shares go to the founder(s). When the founders then start looking for investors, these investors can be promised shares (or bought with the amount to be invested) in exchange for the investment. This way, the investors also get a direct connection with the company and also benefit if, partly because of the investment, the company is doing well.

If you choose to start your business as a sole proprietorship and want to convert it to a LLC (bv) at some point, for example due to the growth of your business, you can still do so! We can assist you in converting a sole proprietorship to a LLC Please contact us to do so.

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