From self-employed natural person to limited liability company

Why turn into a company?

There are many reasons for wanting to set up a company for your growing business. These may include the following reasons, either just one or a combination of them: your income is increasing, you want to bring partners into the business, you're hiring staff, you're renting a property, you're making significant investments (vehicle, goods, real estate, etc.), you're taking out credit, and so on. A detailed article on this topic is available on our website.

Here, we will be discussing the most common case: switching to a limited liability company (SRL).

For companies other than an SRL, whose regulations are set out in the Companies and Associations Code (CAC), please see the following links: public limited company (SA/NV),  cooperative company (SC/CV), ordinary limited partnership (general partnership or limited partnership).

Steps to set up your SRL

The first thing to do is to draw up a well-founded financial plan, ideally approved by a chartered accountant, which you must then present to a notary to draw up the company's deed of incorporation. The main purpose of a documented financial plan is to demonstrate that you have sufficient capital for the business planned. The notary could theoretically refuse to establish the company if the project appears undercapitalised in the financial plan you have prepared. Nevertheless, notaries' obligations in assessing financial plans are obligations of means. This means that you remain ultimately responsible for the financial plan, and it is not the notaries' liability that can be called into question in the event of a problem. Founders' personal liability may also be engaged in the event of bankruptcy within three years, if the judge deems that you have committed a management error or under-capitalised your project, thereby contributing to the bankruptcy of your company.

The financial plan should contain the following:

• A financing table showing your various sources of funding (including subsidies and loans)
• A description of your business
• An opening balance sheet. The founders must declare that they have sufficient funds to keep the company in operation
• Provisional balance sheets and income statements after 12 and 24 months
• An estimation of your budget over two years
• A table of investments. If there are no investments to be made as a company, because everything has already been done as a natural person, you can have these investments assessed by an auditor to include in the company's financial statements
• Hypotheses about turnover and profitability trends

Find out more about the financial plan on this page.

The notary will then file the minutes of the meeting and an extract from the articles of association with the clerk of the Commercial Court (or submit these online). From that moment on, your company "exists". You'll obtain a business number from the Crossroads Bank for Enterprises and can start carrying out your business. The articles of association will also be published in the Belgian Official Gazette.

The SRL you create will receive its own business number and a dedicated bank account number, so you won't need your business number as a natural person or the business bank account you used before. You must also notify your VAT office and your social insurance fund that you are operating as a company.

You don't always need an auditor when incorporating a company. This will only be necessary if you are contributing assets other than money to the company: equipment, real estate, land, a van or other contributions in-kind such as goodwill or a brand name; the value of these assets will then be assessed by an auditor responsible for this. If you need to hire an auditor, remember to include this cost in your financial plan.

Status

The self-employed person becomes a director of the company and is referred to as such. This name has replaced the term manager since the new CAC came into force. 
Directors work with self-employed status, but under the company's business number. If there are several of you, all shareholders (formerly known as partners) work under the same business number, that of the company. All directors are considered to be company managers, and may receive income from their work within the company.

Can you be an employee of your company? No. When you're a company manager, you must be self-employed. This applies even if the directors are assigned different tasks.

What will change when you turn into a company?

Your advantages (some of these should be put into perspective, depending on your situation)

• There is now a specific asset dedicated to your professional activity, separate from your private assets. This means that you are no longer personally liable for your business's debts, except in the event of mismanagement or if you have personally made yourself jointly and severally liable for certain commitments (for example, a credit agreement that you have co-signed with your company). 
• The option to regulate the way you are remunerated.
• Potentially lower taxes.
• Increased capacity if there are several of you (for invoicing, for visibility to third parties, for hiring staff).

But you should also bear in mind the following points:

• You need a high-potential business that will generate income.
• The company must pay a minimum income to the manager, as the aim is to share the taxable base between the company and the manager. The income can be moderate, but it must account for a minimum lifestyle for the manager.
• You need money to set up the company (notary fees of around €1,500, sufficient capital to launch your business, any auditor fees, accountant fees of around €500 if the company is set up with the help of an accountant).
• You need a detailed financial plan, preferably drawn up with a professional (although this is no longer mandatory).
• Managing a company requires specific organisation, and the administrative and accounting management of a company is definitely more complicated than for a natural person.
• You must not confuse private and professional assets in terms of the money coming in and going out.
• You need have a good understanding of how an SRL works.
• The company will have to pay the annual contribution payable by companies and a special contribution to the supplementary pension for company managers to NISSE.

Getting paid

A large part of the advantage of setting up a company lies in the possibility of remunerating the manager by means other than paying a salary, which is highly taxed, and of being able to divide the profit into different income categories which will be less harshly taxed. 
Here are some explanations of income for the self-employed and these other possibilities.

Self-employed income

Whenever financially possible, your company can pay you a (self-employed) income, which should be declared in Part 2 of your tax return, under the heading "Revenus Dirigeants d'entreprise" (Company manager income). You can conduct a simulation of the income you could receive using Tax-Calc. This income will be taxed at the same rates as if you were a natural person, and will also serve as the basis for calculating your social security contributions.

If there are several of you, each director can receive a self-employed income. The partners must discuss in advance to agree on each person's tasks and income. It is also possible to replace or supplement an income with another benefit in kind (such as a car).

You can have your company pay the payroll tax on your income in advance, generating a deductible expense for the company. Your social secretariat can calculate the payroll tax. You can also ask your social secretariat for the 281.20 company director payslips, which may be useful or easier to use whenever you need to provide proof of your income (to a bank, for example).

Dividend distribution

At the closure of accounts on 31 December, or on another date set for the closure, the General Assembly decides whether or not to allocate part of the profit to dividends. In principle, the amount of dividends you may receive depends on the proportion of shares you own in the company.

Advantages:
For shareholders, dividends are net income, which is not included in the income used to calculate social security contributions, and do not have to be declared on the tax return as they are not subject to personal income tax (impôt des personnes physiques — IPP).

Important points:

• The balance sheet must remain positive and shareholders' equity must not fall below zero.
• The company will pay/must deduct 30% withholding tax before paying out dividends.
• If you only pay yourself in the form of dividends, you won't pay social security contributions. You therefore won't make any contributions into your pension, as dividends are not taxable income.
  You can find an in-depth article on dividend distribution here.

Liquidation reserve

The liquidation reserve is a mechanism that can be planned and organised in advance. It involves creating a reserve in your balance sheet if the company has made a profit of at least €50,000. It is booked as an accounting entry: The money is allocated to a special balance sheet item called the "liquidation reserve", and will remain tied up for three years. After three years, you can claim a dividend on these past profits, and you'll only pay 15% withholding tax, instead of 30% for traditional dividends.

Reducing capital

Another way of getting paid is through the reduction of capital. If your company was set up before May 2019, it may be possible to recover the money invested in capital. If there are several of you, you will have to respect the agreed distribution. 
For new companies, this will only be possible if there was significant initial capital, and then only after several years. In all cases, the balance sheet structure must remain positive even after the reduction. 
This operation requires a notarial deed.

Current account

In the event of temporary (not structural) difficulties, and after seeking advice, you could consider having your company temporarily lend you money, on the condition that you then repay it.
We recommend that you draw up a loan agreement between you and your company, setting out the amount and repayment period, as well as an interest rate. The money is marked as the company's claim against you under the Assets section. Failure to repay within the arranged period could result in the money being recategorised as income and subject to tax.

Rental income

People who own property privately can rent out, in a personal capacity, part of the property to their company in return for a rental payment. You need to make a reasonable calculation of how much rental income you can afford without causing the company any financial problems. In the event of an audit, if the rent is too high, the tax authorities could recategorise part of the rent as professional income.

In addition to these options, you can also discuss with an accountant whether or not you can set up other benefits in kind, such as meal vouchers or copyrights, depending on your situation.

Taxation

Corporation tax

The company is taxed at the corporation tax rate on its net profit, i.e. after payment of income to the directors. Unlike personal income tax (IPP), the income earned is taxed from the first euro received.
The corporation tax rate is a uniform rate set at 25% (it was previously 33%).

However, SMEs can benefit from a reduced rate of 20% under certain conditions. 
Firstly, the company must be considered a "small company" and must meet at least two of the following conditions:

• Fewer than 50 workers (annual average);
• Annual turnover of less than €9,000,000 (excl. VAT);
• Balance sheet total of less than €4,500,000.

Secondly, the company manager's annual remuneration must be at least €45,000 gross if the company's taxable income is at least €90,000. All types of income received by the manager are taken into account for this calculation. If the company's income is below the €90,000 threshold, it can pay the manager a lower annual remuneration, provided that this amount is at least equal to the "taxable income", i.e. the taxable base obtained after applying remuneration and tax deductions (social security contributions, business expenses, etc.)
If the company's profits are high, only the first €100,000 is eligible for the reduced rate. Any amount over this will be taxed at 25%.

There are also a number of specific rates, such as 33% for certain miscellaneous income and some capital gains (Article 171.1° of the Belgian Income Tax Code, CIR), and 16.5% for certain capital gains on tangible or financial assets, some indemnities, grants, subsidies and annuities (Article 171.4° of the Belgian Income Tax Code, CIR).

Make sure you work with a chartered accountant to check which rates apply to you.

Personal income tax

This involves the salaries and directors' fees paid by the company to its managers, considered as professional income, which are taxed at the personal income tax rate (IPP) according to the principle of progressive tax rates, in brackets. 
Paying yourself a salary therefore means deducting from the company's profit (taxed at 25% (the corporation tax rate)) an amount that will be taxed (in part) in the 25%, 40%, 45% and 50% brackets (IPP).
If the company increases or decreases your income, you will pay more or less tax (IPP).

Expenses required for the company's business activities and operations can be entered as such in the company's tax return, and are considered to be the company's business expenses. In addition to this, a fixed deduction of expenses for the company manager will be automatically applied to their tax return by the tax authorities.

In any case, consult a chartered accountant to find out exactly which expenses qualify as business expenses, how much of them can be deducted, and whether or not they should be amortised for tax purposes over several years. For more information on this subject, please see our article on deductible expenses.

Useful links:

• Corporation tax reform (SPF Finance document): 
• Link to the latest coordinated version of the 1922 Belgian Income Tax Code (2023 edition)
• See also the following article on fiscal incentives for companies.

Does the end of your career mean the end of your company?

To ensure you have enough income when you stop working, set aside some pension savings and a Voluntary Supplementary Pension for the Self-Employed (VSPS) as a precautionary measure, as your self-employed pension may not be enough for you.

What some people do, for financial reasons and to keep one foot in the working world, is to continue working as a self-employed person (for their company or another company) after retirement.

You can combine a pension and a job, but be careful about the age at which you do this. If you are under 65, your pension may be reduced in whole or in part. If you are over 65, you are no longer at risk of this, regardless of your profits, but you will still have to pay social security contributions (solidarity contributions).

If you wish to stop working when you take your pension, you can liquidate the company. This must be done using a notarial deed (costing around €1,200), and you will also need a report from an auditor (costing around €1,700) or a certified public accountant. Therefore, you should plan for a total budget of €3,000 to €4,000 for the liquidation process. This can be an opportunity to withdraw the last of the company's funds.

For your information, you can only declare a company bankrupt if the company has debts, which is hopefully not the case for you.

A more cost-effective way of organising your exit would be to sell your company and find a buyer for it. You'll then receive a capital gain that is not usually taxed. If you choose this option, it's advisable to surround yourself with the right people. Detailed information on this subject can be found in this article.
If you only sell the business assets, the amount of the sale will be included in the company's income, taxed at the corporation tax rate. 
A sale needs to be organised well in advance, and we recommend that you do your research about the support structures and assistance available in this area. Don't hesitate to visit our website and contact us if you're thinking of selling.