Sole proprietorship or private limited company?

Many people are uncertain about the most appropriate form of business structure. Should they operate as a sole proprietor (eenmanszaak) or as a private limited company (BV)? The answer to this question will generally depend on two main factors: tax efficiency and liability. A sole proprietor qualifies as an entrepreneur for income tax purposes. Profits are taxed in Box 1. If you operate as a private limited company, you will be viewed as an employee for income tax purposes (your salary is taxed in Box 1) and as the holder of a substantial interest, (dividends and profits on the sale of shares are taxed in Box 2).

 

As a sole proprietor you can claim various tax allowances for which only entrepreneurs qualify. A proportion of your profit is then tax-free. Moreover, a relatively low profit is taxed at a low rate. The drawback is that if a high level of profit is achieved (which may be used for new investments in the future) tax is payable immediately on the full amount.

 

The profit made by a private limited company (BV) is subject to corporation tax. This also applies to the public limited company (NV) and the cooperative. The rates at which corporation tax is levied are significantly lower than those of income tax. The entrepreneur therefore has more money to fund future investments, which enhances effectiveness and growth potential.

 

If you wish to withdraw profits for private expenditure rather than reinvestment in the company, you can do so by increasing your own salary. This increases your payroll tax liability and the company makes less profit. Another option is to pay yourself a dividend, which will be taxed at the flat rate of 25%.

 

The overall tax liability will be more or less the same whether you opt for sole proprietorship or the private limited company structure. But the latter offers higher growth potential as well as limited liability. There can be other advantages which may sway your decision, such as the prestige and professionalism of a BV (at least in the eyes of some clients).

 

Please contact us for further information about the choice between a sole proprietorship and a private limited company. We shall be pleased to offer advice.

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