Choosing the legal form of your company entails significant consequences, among others for liability, the decision-making process, the allocation of profits and succession. We take a look at the major differences between a single-person business (or sole proprietorship) and a legal entity (or company).
1. HOW DO YOU PROTECT YOUR PRIVATE ASSETS?
One of the most significant drawbacks of the sole proprietorship is the hazy separation line between the personal assets of the self-employed person and their business assets. The liability of the sole proprietorship is unlimited, that is, there is no distinction made between the business and private assets of the self-employed person. They can be required to pay in the event of a financial problem in their business (late payments of rent, to the government, a supplier or a credit institution, in case of bankruptcy, etc.).
This is why the best option for you, as a sole proprietorship, is to get married under the separation of property regime to ensure that the income and assets of your partner do not also become a pledge for your potential creditors. We also recommend that you file a declaration of non-seizability for your primary residence with your notary. This will ensure that potential future creditors of your company will not be able to seize your primary residence.
If you operate as a self-employed person via a company like an S.R.L. or an S.A. (limited companies), there are two distinct sets of assets, the company's and your private assets. This separation of assets provides an advantage, especially if you make significant financial commitments for your company or you hire staff.
As a company, your liability as a director is limited to the capital you've invested in your company. If things unexpectedly go wrong for your S.R.L., you can only be held liable for the amounts invested in it. Your private assets are normally protected.
Careful, however, as there are exceptions to the rule! A director can be held personally liable if they have committed management errors. Depending on the size of the company, the law provides for a cap on the amount the director is responsible for. It varies from €125,000 to €12,000,000. Note that there are director liability insurance policies available to cover this risk (D&O).
In addition, if your company takes out a loan with a bank, it will often ask that you guarantee the loan personally. This means that if your company stops paying its loan, the bank will be entitled to request that you, as a private individual, repay and may seize your personal property (savings, homes, vehicles, etc.).
The self-employed, people in the liberal professions, and company heads can protect their primary residence, i.e., their house, without the furniture in it, against seizure by their creditors. The latter can no longer seize the residence as of the date of the declaration of non-seizability of the primary residence, which must be done via a notary. One very important detail: banks tend to be more reticent to grant a loan when the entrepreneur has made their home unseizable, which plays a part in the limited success of the measure.
2. BETTER ALONE? OR WITH A PARTNER?
The entrepreneur’s freedom is a major benefit of sole proprietorship. Sole proprietorship has fewer obligations with respect to decision-making processes, administration and profit allocation. The entrepreneur can take decisions on their own, quickly, and informally. Simplified accounting is sufficient and, given that all of the profits of the sole proprietorship are subject to personal income tax, all revenue after taxes belongs to the entrepreneur. They can then decide to invest it in the business, and if so, in what amount.
Sole proprietorships can also come together for a joint activity or objective as a de facto company. This type of grouping is the result of a simple agreement between the self-employed and does have a legal personality. It is rarely used and is often a temporary measure prior to the creation of a company.
Operating as a company is appealing to partners who can contribute capital as well as become personally involved in the business. Since 1 May 2019, an S.R.L. or S.A. can be created with a single shareholder. An S.C. (cooperative company) must have at least three founders.
3. WHAT ARE THE FINANCIAL NEEDS OF A COMPANY?
A company has to have financial means. The amount of the financial resources is determined based on the financial plan prepared for the company.
The financial means of a single person are usually limited. A company is legally authorized to bring in partners who want to invest venture capital in the company. The investors share the future profits.
4. WHAT TAX SCHEME SHOULD I CHOOSE?
All revenue from a sole proprietorship is considered to be professional income and subject to personal income tax. The tax is calculated based on a progressive taxation by brackets, which means that
- part of the revenue isn’t taxed (€8,990 for revenue received in 2020), and
- the highest income brackets pay the most tax.
On the other hand, companies are subject to corporation tax. The corporation tax rate is 25% starting at the first euro of profit. However, a reduced rate of 20% can be applied to the first tranche of €100,000 of profit (under certain conditions). If the company’s profits are high, it will be more advantageous to be subject to corporation tax.
The salary paid by the company to its manager is taxed at the personal income tax rate. However, being a company allows for the transformation of all or part of the revenue generated by the company into different types of revenue for the manager. This means that they can be taxed at a lower rate (for example, part of the revenue is paid as salary and taxed at the personal income tax rate and part is paid as a dividend and taxed at the withholding rate of 15% or 30%). Revenue which is not explicitly paid to the manager stays in the company and cannot be used by the manager for personal reasons.
5. WHAT HAPPENS TO THE COMPANY AFTER YOUR DEATH?
In many instances, the entrepreneur’s death results in the termination of the company. Belgian succession law does not promote business continuity. After death, the company becomes the joint property of the heirs. However, our laws provide that every heir can claim their share of the inheritance at any time and, therefore, demand that it be divided.
The sole proprietorship also becomes vulnerable after the entrepreneur dies.
Operating the business as a company will prevent the above-mentioned problem to some extent. The joint ownership resulting from the death no longer concerns the company, but the shares the deceased received in exchange for their contribution. In addition, provisions can be included in the articles of association of the company to facilitate the transfer of the jointly owned shares.
NEED MORE INFORMATION?
Do you have questions about this topic? You can contact 1819 by telephone every business day from 9:00 am to 1:00 pm. You can also contact us via email at info@1819.brussels