Of all legal forms, the sole proprietorship is by far the most popular legal form chosen for a company. This is because almost all self-employed persons without personnel (ZZP) opt for this legal form. The sole proprietorship is so popular because it is very easy and quick to start a business. It is sufficient to register yourself in the Trade Register at the Chamber of Commerce. From that moment on you officially have a company. But what does that actually mean? What and how much tax do you have to pay? Who is liable? What social security do you have and what do you need to insure yourself for? All these questions are addressed on this page.
Name 'sole proprietorship' is misleading
Before going into more detail about the consequences of starting a sole proprietorship, a misunderstanding must first be cleared up. The name 'sole proprietorship' suggests that you as a company are not allowed to employ staff. That is incorrect. The name 'sole proprietorship' only refers to the legal form. If you have a sole proprietorship, there are no restrictions on hiring staff. Of course, employing employees does entail obligations. You have to pay payroll taxes on the salary of those employees and you are required to keep personnel records.
Advantages of a sole proprietorship
If you want to start your own business, the sole proprietorship is the most convenient legal form you can choose. Setting up a sole proprietorship is easy and inexpensive. Except for a few tens for registration in the Trade Register, there are no costs associated with starting a one-man business. Within a few hours you will have a company name that is officially registered and provided with a Chamber of Commerce number. You only need to apply for a business account yourself. From a tax perspective, a sole proprietorship is also lucrative, because you can take advantage of relatively large tax benefits.
Disadvantages of a sole proprietorship
In the euphoria surrounding setting up your own company, it is sometimes forgotten that there are also some disadvantages to a sole proprietorship. The biggest drawback is that as the owner of the business, you yourself are responsible for your actions. This means that as a private person you have to pay for debts that you incur with your company. Eventual bankruptcy could mean that personal liability means that you have to sell private assets to pay the creditors. Other disadvantages of a sole proprietorship are that it is more difficult to find investors and that the income tax is also relatively high at high profits.
The tax and the sole proprietorship
Every business has to pay taxes. If you have a sole proprietorship, you will have to deal with income tax, VAT and wage tax. Income tax is levied on the profit that is made. 52% of the profit must be paid to income tax. It is wise to estimate the amount of the profit and to start paying in the course of the year. If you do not do this, there is a chance that the amount that you have to pay at the end of the year will be extremely disappointing.
Entrepreneurs also all have to deal with VAT. There are three rates: 0%, 9% and 21%. As a sole proprietorship, VAT is charged to all customers and VAT paid to all suppliers. The surplus you have received will be paid to the tax authorities. The VAT return can be made per month, quarter or per year. If you hire staff, wage tax must also be paid. The amount of the wage tax depends on the amount of the employees' salary.
Tax arrangements for the sole proprietorship
There are various attractive tax schemes for sole proprietorships. For example, those who have little turnover can make use of the small business scheme (KOR). Then you have to pay less, or sometimes even no sales tax at all. In the first three years of your business, you are entitled to a starter's allowance. And if you work for your company for at least 1,225 hours per year, you can make use of the self-employed person's allowance. You must be able to demonstrate that you have spent sufficient hours on your company. So keep a time registration.
The accounting of a sole proprietorship
Anyone setting up a company would like to be able to fully focus on delivering their products or services. But accounts must also be kept. That can be quite time consuming. And maybe you don't know much about administration. Then it is good to outsource complicated matters to an accountant. You can do the simple things yourself, such as sending the invoices and checking the business account. If you send a lot of invoices, it may be profitable to use an online accounting program. Your accountant can also use this when drawing up the annual figures and taking care of the tax return.
Personal liability is one of the major drawbacks of a sole proprietorship. If you want to keep your private situation separate from the company, setting up a Private Company (Ltd) is an option. But that is - especially for small companies - a lot less attractive from a tax point of view. Moreover, it is much more complicated and expensive to set up and maintain a Ltd. If a Ltd is not an option, you can insure yourself for many risks as a sole proprietorship. A large part of the risks can already be covered with a business or professional liability insurance. Many problems can be avoided in this way.
Step-by-step plan for establishing a sole proprietorship
Although it is easy to set up a sole proprietorship, there is still a lot involved in starting your own business. Registration in the Trade Register is only one part of this. You must also think of setting up the administration in order to be able to meet the obligations to the Tax Authorities, you must have a business space, open a bank account, etc. We have made a step-by-step plan to turn an idea into a company.
Step 1: Writing a business plan
As a starting entrepreneur, it is not mandatory to write a business plan. However, it is advisable to make time for this. Because while writing a business plan you are forced to think about all kinds of practical questions. This gives you an idea of what your company will look like and what it entails. Where do you want to settle and how much does that cost in rent? How do you want to market your product or service and where do you look for customers? What rates will you use? How many competitors are located nearby?
In the business plan you describe in detail what your company entails. You have to think about the legal form, financial aspects, the activities you want to develop, marketing, etc. You will notice that during the writing process all kinds of dilemmas arise that you had not thought of beforehand. To avoid forgetting parts of the business plan, you can use one of the many templates that can be downloaded from the internet. Such a template will help you to write a good business plan step by step.
Step 2: Choose legal form
The two most obvious legal forms are a Private Limited Company ( Ltd ) and a sole proprietorship. In a sole proprietorship it is only mandatory to arrange a registration in the Trade Register of the Chamber of Commerce. As a business owner you are fully personally liable. With a Private Company, that liability lies with the Ltd and you are employed by the Ltd. as a director. The shares of the Ltd are owned by one or more persons. Setting up a Ltd is only worthwhile if large turnovers can be realized, as there are high costs involved.
Step 3: Registration in the Trade Register
We assume that you chose a sole proprietorship in step 2. In order to officially set it up, your company must be registered in the Trade Register at the Chamber of Commerce. This is done in two steps. First you enter your data online. You will then be invited for a visit. The cost of registration is a few tens, usually around 50 US dollars. As the founder of a sole proprietorship you are also the owner and completely independent. You can of course hire staff.
Step 4: Register with the tax authorities
In most cases, you do not have to do anything yourself to register your company with the tax authorities. As soon as your company is registered in the Trade Register, the Chamber of Commerce will report this to the tax authorities. You will then immediately be assigned a VAT number. Depending on the products and services that your company will provide, it may be necessary to apply for a Declaration of Employment Relationship (VAR). Sometimes clients ask for this. A VAR is free, but you have to request one yourself from the tax authorities.
Most entrepreneurs have to deal with two types of tax that they have to pay: income tax and sales tax. Income tax is paid on the profit you make as a business. Sales tax or VAT is paid on goods and services supplied. How high the VAT rates are depends on the type of goods and services you provide. Sometimes small businesses can qualify for a reduction or even remission of sales tax. The tax authorities can inform you about this. Entrepreneurs who employ staff also have to pay wage tax.
Step 5: Looking for a business space
When small entrepreneurs start a business that does not have special workspace requirements, they often do so at home. That is a great solution, because what could be better than stepping straight into your office from the living room without traveling time. A disadvantage of working from home is that you are more often disturbed. On the other hand, you have the opportunity to work a bit in the evening or at the weekend. Be critical in advance whether you have enough space. Also check that the zoning plan allows you to work from home.
A business space at home is not always suitable for receiving customers. For this you need a representative space that is easily accessible by public transport and has good parking spaces. Those who do not have such space themselves should look for an alternative solution. That is not that difficult, because there are plenty of nice affordable meeting rooms available. Take a good look at the appearance of the location and the space. The success of a conversation is often largely determined by the first impression.
Step 6: the accounting
There are two reasons why you need to have adequate records and books. Firstly, this is required by the tax authorities. You must keep all administrative information for at least 7 years. As long as the Tax and Customs Administration has the right to request company data. But it is also in your own interest to have the administration and accounting properly in order at all times. Because a good insight into the state of affairs is of great importance for operational management. Many sole proprietorships do the accounting with an online administration and accounting package. To be on the safe side, always make copies of receipts and invoices and keep them in a folder.
A very important part of your sole proprietorship is the bank account number. It is certainly not recommended to run the business transactions through the private account. That is asking for trouble. Firstly, you can easily lose the overview. Secondly, it is very annoying when there is an inspection by the tax authorities. He will then also see all your private transactions. It is therefore best to open a business account. If you think that is too expensive, you can open an extra private account. Certainly if your name is included in the company name, there is no objection whatsoever.
Social security and insurance
If you set up a sole proprietorship, this has major consequences for your social security. You are entitled to the national insurance schemes that apply to everyone, such as the AOW (old age law), ANW (surviving dependents' law), AWBZ (special medical costs) and AKW (child benefit). As the owner of a sole proprietorship, you are no longer entitled to employee insurance policies, which everyone who is employed by a company can count on. This concerns the various schemes for unemployment, incapacity for work and illness. If you still want some security, you will have to insure yourself.
Weighing the risks
As a self-employed person, you have to arrange all the insurance you need yourself: pension accrual, childcare and medical expenses. In order to be able to estimate the risks as accurately as possible, it is important to remain well informed about developments in this area. After all, you must determine which risks you do and do not want to run. Every entrepreneur has to weigh this up for himself. This partly depends on the risk of the work, your financial situation and that of any partner, your age and your health.
What risks do you want to run?
Self-employed persons are quite vulnerable if they are not insured. If you are sick for a few days, you will immediately lose income. Most entrepreneurs can bridge a limited period of illness themselves. But if it takes longer, serious financial problems can arise. And what happens if you have an accident? Who then pays the costs of the mortgage or the study costs of the children? When determining the risks that you do or do not want to run, the following rule is often given: in any case insure what you cannot estimate the consequences of yourself. The following insurance policies are available for this.
Disability insurance (AOV) is an insurance policy whereby an independent entrepreneur continues to be paid from a collective provision. There are many different types of AOVs. Despite the many options, many of the self-employed persons do not have AOV. This has to do with the high premiums that have to be paid for this. These are determined, among other things, by the type of work, the age and the health of the person who wants to insure himself. Those who do not have an AOV run the risk of going bankrupt in the event of incapacity for work and losing all personal belongings.
Self-employed entrepreneurs do not accrue pension, like employees. In order to be able to stop the company in time, they have to save themselves. Taking out life insurance is a common method of doing this. That works just like a pension provision. During the years that work is being done, money is put in. As soon as you retire, that money will be paid in installments. Life insurance also prevents your partner from getting into financial trouble when you die. In that case, the insurance covers the mortgage costs.
Liability insurance and legal expenses insurance
As the owner of a sole proprietorship, you are fully responsible. So if you cause an accident at work, you will bear all costs. This can add up, especially if someone is injured and is not able to work for a while. These kinds of risks are prevented with liability insurance. Legal expenses insurance can in some cases offer a solution in legal conflicts. Such insurance covers the costs of the lawyer, bailiff and legal costs. However, legal expenses insurance does not cover all legal disputes. Conflicts with suppliers are usually not covered, but problems with personnel are. It is therefore important to study the policy carefully.
Just like everyone else, entrepreneurs are obliged to take out health insurance. This consists of a basic insurance policy, which is the same for everyone, and an income-related contribution. For entrepreneurs with a sole proprietorship, this is part of the taxable income in box 1. Entrepreneurs who are going on maternity leave for a number of weeks will receive a benefit from the government for 16 weeks under the zez scheme. That benefit is at the level of the minimum wage. In many cases it is also possible to claim disability insurance (AOV) during maternity leave.
Conclusion: when do you choose a sole proprietorship?
If you want to start a business and be completely independent, the sole proprietorship as a legal form is the right choice. You are then the owner and founder of the company and do not have to deal with one or more persons who have a say in it because of the investment. So with a sole proprietorship you have complete freedom. If you expect to generate a lot of turnover, then you should consider opting for a Private Company, because it is more attractive from a tax point of view. But otherwise the sole proprietorship is the best choice. Keep in mind that you are then fully personally liable.