Both starting and existing entrepreneurs often ask the question: What is better, a sole proprietorship or a BV (private limited company)? It’s important to regularly evaluate whether the legal structure of your business is still the right choice. Your business may grow, shrink, or there may be tax considerations that come into play. From a financial or tax perspective, a BV is generally more advantageous when your annual profit is approximately €150,000 or higher. This is due to the difference in taxation. Below, we’ll explain this further and provide more information along with the option to download a sample calculation.
Differences Between a Sole Proprietorship and BV
There are many legal forms available, and an overview can be found here. The main differences between a sole proprietorship and a private limited company (BV) lie primarily in the fiscal and legal aspects. For instance, a sole proprietorship is not a ‘legal entity’ from a legal perspective. The sole proprietorship is directly linked to the owner, who is therefore personally responsible for the business. In terms of liability, this responsibility falls entirely on the owner.
A BV, on the other hand, is considered a separate legal entity and, as such, is a legal person. This separates liability from the owner. Often, a holding structure is set up. In this structure, the holding BV owns the operating company BV. If the operating company were to go bankrupt, any accumulated profits in the holding BV would be safeguarded. Only in cases of improper management can the director be held liable. This structure minimizes risks related to liability.
Taxation
An important factor in the choice of legal form is the impact on taxation. In a sole proprietorship, profits are attributed directly to the owner as ‘income from business activities’ (also known as Box 1). The tax rate on this income can be as high as 49.5%. If you meet the so-called ‘hour criterion,’ you may qualify for entrepreneurial tax benefits, which can reduce this tax burden.
In a BV, the director/shareholder is taxed differently. First, profits within the BV are subject to a maximum corporate tax rate of 25%. When the BV distributes any profits to the shareholder in the form of dividends, the recipient pays income tax on these dividends in Box 2 (26.25%, 26.9% in 2021 and 2022). If profits are retained within the holding, they remain untaxed. As a result, it is fiscally advantageous to accumulate profits in a holding.
In summary, a BV becomes more advantageous from an annual profit of approximately €150,000, compared to the previously mentioned taxation for a sole proprietorship. However, please note that there is also an obligation for director-majority shareholders (DGA) to receive a customary salary.
Customary Salary Regulation
To prevent profits from remaining within the entities, DGAs are obliged to receive a salary from the BV. This is referred to as the ‘customary’ or ‘deemed’ salary. In brief, the customary salary is a minimum of €46,000 per year (€47,000 in 2021 and 2022). You can find more information about the customary salary regulation on the Belastingdienst website.
Additional BV Costs
Aside from the advantages, a BV also entails additional costs compared to a sole proprietorship. This starts with the establishment of the BV, as a notary is required to set it up. Official (notarial) deeds are needed to establish the BV. It is important to carefully review the content of these documents. Due to cost pressures, we often see the use of standard deeds. While this may be fine initially, it is advisable to keep these deeds updated as your business grows.
Additionally, it is not customary to establish just one BV; it is common to establish two at once: a personal holding and an operating company.
Furthermore, the BV has an obligation to prepare financial statements and deposit them with the Chamber of Commerce. The costs, such as those related to the accountant or administration office, will be higher due to the additional work required to comply with these obligations.
When Does a BV Become Financially Advantageous?
From a tax perspective, the BV may seem more attractive, but this also brings additional costs, such as preparing financial statements and filing corporate income tax returns.
Moreover, sole proprietors are entitled to entrepreneur tax benefits, which means no tax is paid on the first portion of profits. As a guideline, we suggest that a BV could start becoming advantageous with profits of around €150,000.
Conclusion
It’s not a one-size-fits-all answer to when a BV is more advantageous. This depends on various factors such as liability and taxation. What is clear is that you need to achieve a substantial profit (around €150,000) for a BV to become financially advantageous. This is primarily due to the additional costs of a BV, the mandatory customary salary regulation for DGAs, and, on the other hand, the benefits of operating as a sole proprietorship, including entrepreneur tax benefits.
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