Private Company (Ltd)
- Comparison with sole proprietorship
- Step-by-step plan to establish Ltd.
- Social security
- Other features Ltd
- Why choose a Ltd?
If you want to set up a company, a legal form must be chosen. A frequently chosen and very popular legal form is the private limited company or Ltd. The main features of a Ltd are that the capital is divided into shares and there are only limited risks of joint and several liability. The shares are owned by shareholders. However, they cannot trade them, because the shares are 'registered'. The tax authorities regard the Ltd as an entrepreneur, who must therefore also pay VAT and - if there are personnel - payroll taxes.
If you are a director of a private company, you are employed there. You are then acting under the Ltd. It is possible to establish a Ltd alone or together with others. Establishing a Ltd was once a fairly costly affair. A mandatory starting capital of € 18,000 was required plus a statement from the bank and sometimes an auditor's statement. Now that is no longer necessary. In principle, it is already possible to set up a Ltd for € 0.01. What remains are the obligations to have the Ltd assessed by a notary and to be registered in the Trade Register at the Chamber of Commerce.
Advantages of a Ltd
The biggest advantage of a Ltd over a sole proprietorship is that the Ltd is held liable for any debts. Thus, a shareholder / owner is not personally liable for those debts, apart from the capital he has invested in the shares. Another advantage is that a Ltd can be easily transferred to one or more other owners. This can be done by selling shares. The party purchasing the shares is automatically the new owner of the Ltd. Another advantage is that a Ltd can act as a legal entity. Thus, the Ltd can request a PO box, send invoices and open a bank account .
There is also an advantage in terms of taxes payable. Anyone who has a sole proprietorship pays income tax on the profits. In the highest tax bracket this is 52%. Also at a Ltd there is tax to be paid on the profits but this corporate tax is 20-25%. That is considerably lower, although it must be noted that as a shareholder you do not have access to this money. It must first be paid out as a salary or dividend and tax must be paid on that as well. You will get the most benefit from the tax break on profits by investing this back into the Ltd.
Ltd's also offer the opportunity to spread the risks. This can be done by placing several Ltd's in a holding structure . The holding company is then the parent company, but the structure is set up in such a way that the Ltd's remain separate companies. If one of the Ltd's goes badly, there is the possibility to let it go bankrupt. The purpose of this construction is risk spreading: you will only lose that one Ltd. The other Ltd's that fall under the holding company can continue to operate.
A subjective advantage of a Ltd is that there is a sense of quality around it. Because when you set up a Ltd. you create a professional impression . After all, you don't just set up a Ltd; you have to meet a large number of requirements. In addition, the deed of incorporation must be ratified by a civil-law notary. The Notary has a duty to investigate the Ltd if he thinks something is wrong. This strict procedure gives a Ltd a kind of quality mark. This indicates that the chance that things are in order is much greater than with a one-man business.
Disadvantages of a Ltd
Obviously there are also disadvantages associated with the Ltd as a legal form. For example, you should not regard the Ltd's money as yours. If you want to have access to the money Ltd you must have to pay it yourself. This can be in the form of a dividend or as a salary, but income tax must still be paid on this. Another disadvantage is that you have to go to the notary to set up a Ltd or to transfer shares. An annually recurring disadvantage is that the administrative effort to prepare the annual accounts is very time-consuming and expensive.
Start-up Ltds often struggle with the salaries that have to be paid. If you are a director and shareholder with more than 5% of the shares of a Ltd, it is considered a director major shareholder. You are then obliged to pay yourself a salary of € 45,000 or more per year. Most Ltd's would much rather invest that money in the company in the early years. There are ways to get that salary down. You can contact specialized consultancies for this.
Ltd's are required to pay different types of taxes. It has already been described above that if you are a director of a Ltd and own 5% of the shares, you will be regarded by the Tax Authorities as a director-major shareholder. As it is called, you have a 'substantial interest' in the company. Because you receive salary from the Ltd plus possibly have dividend paid out, you have to pay income tax and dividend tax on this. In addition, the Ltd must pay VAT and payroll tax on salary paid to the staff. This also applies to the salary of the director. The profits made by the Ltd are also subject to corporate tax.
If you set up a company that is expected to make less than € 80,000 in profit , it is more attractive from a tax perspective to establish a sole proprietorship than a Ltd. In a sole proprietorship, tax benefits apply that ensure that relatively little tax has to be paid at low profits. A Ltd does not have these advantages. If more than € 80,000 profit is made, a Ltd is more attractive from a tax point of view. This is because as a sole proprietorship there is a 52% income tax to be paid, while the dividend paid out of the Ltd. only requires 20-25% corporate tax.
Comparison Taxes from Sole Proprietorship and Ltd.
By way of illustration, a global calculation of the tax burden is made for a profit of € 75,000 for both a sole proprietorship and a Ltd of a 40-year-old entrepreneur. These calculations do not take into account an owner-occupied home and other income from work. An old-age reserve for entrepreneurs is included in the calculation of the sole proprietorship. In the calculation for the Ltd no self-administered pension accrual is calculated, but an investment of € 7,000 in an annuity savings account.
|Less: self-employed person's allowance||-7,200||Less: director's remuneration||-50,000|
|From: FOR||-7,350||Less: pension premium||-0|
|Less: 14% SME profit exemption||8,452||Profit net||25,000|
|Taxable profit (Box 1)||51,918||Corporation tax||5,000|
|Income tax + ZVW premium||20,475||Income tax + ZVW premium||15,675|
|Deferred income tax (FOR)||1,759||Deferred income tax (outgoing dividend and annuity)||6,361|
|Total tax burden||22,234||Total tax burden||27,026|
The example shows that the tax burden for the sole proprietorship is lowest. If arguments such as lower liability or the future high resale value of the business are ignored, the sole proprietorship is the most advantageous choice. From which profit the Ltd becomes more advantageous depends on several factors. Private deductions, such as mortgage interest and disability premium, are particularly influential. Other aspects that increase the costs of the Ltd. must also be taken into account. This includes payroll administration, corporate tax returns and having publication documents drawn up for the Chamber of Commerce. All these extra cost items have not been taken into account in the above calculation example.
One of the main reasons for choosing a Ltd as a legal form is limited liability. Directors are not liable with their private assets. However, a Ltd does not provide complete protection. Creditors sometimes see opportunities to successfully hold a director privately liable. To prevent this from happening to you, we will go into more detail about the way in which liability is arranged in a Ltd. It is recommended that you thoroughly understand this information before you start setting up a Ltd.
A Ltd has the same legal liability as a natural person. As a result, a Ltd, like the director of a sole proprietorship, can enter into obligations and is subsequently liable for them. The board of the Ltd is never liable in such cases. The only liability a director has is the liability for the shares he has in the Ltd; not for his private assets. This is called limited liability. However, this construction is not waterproof. There are conditions under which it is still possible to hold the board fully liable.
The limited liability will lapse if there is improper management. That is, the board is acting in a manner that endangers the Ltd. There are many examples of improper administration. Such as accounting errors, paying or receiving dirty money, favoring creditors, drawing an incorrect financial picture in the annual report, or acting in violation of the Ltd.'s articles of association. If a board is held personally liable, it is always a matter of 'own fault'. Because a board that acts on the basis of the principles of 'good administration' can never be held personally liable.
Passive shareholders can also be held liable, albeit to a very limited extent, for more than just their investment. Passive shareholders do nothing but invest in the Ltd and receive a share of the profits in return. They do not interfere with the day-to-day running of the company. Their only risk is that they have lost their investment. The only reason they can be held personally liable is in bankruptcy if it appears that the Ltd can no longer meet current obligations because of assets distributed to these passive shareholders.
Step-by-step plan for establishing a sole proprietorship
There is a lot to consider when starting your own business and establishing a Ltd. A trip to the notary, to the bank and to the Chamber of Commerce are usually part of this. But there is more to do. You should 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. In order to guide you smoothly in a structured manner based on the applicable rules We have made a step-by-step plan to turn an idea into a company.
The most convenient for you was probably making the decision to start your own business. But which legal form is most convenient for you. The most popular legal forms are the sole proprietorship and the private limited company, but the VoF may also be a good option. If you cannot decide for yourself which legal form best suits your situation, you can take a legal form selection test. If this does not yet provide a definite answer, it is wise to seek advice from a tax specialist. In the further step-by-step plan, we assume that you choose a Ltd.
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. A well-developed business plan is also useful for yourself, because you are forced to write down the products and services to be delivered in a clear manner. Also think carefully about the purpose of your company, the statutory name, the articles of association and the location of the company and the division of responsibilities in the organization.
Step 2: Establish a personal holding company
One Ltd is not a Ltd take two. That is a joke, of course, but it does indicate that many companies have a need for more than one Ltd. over time. In order to prepare for this, it is wise to set up a holding company prior to the establishment of the first Ltd. A holding company is nothing other than a Ltd which has shares in one or more Ltd's. As an entrepreneur you have shares in the holding company. The holding company again has shares in the actual Ltd (your new company).
So, to start with, set up two Ltd's in a so-called holding structure. Then you are sure that you can make use of tax benefits and your liability is well protected. It is strongly recommended to set up the holding company immediately. If that still has to be done at a later time, it will take a lot of effort. Moreover, you will then have to deal with unnecessary costs. You can then have a draft deed of incorporation drawn up via an online questionnaire. This will take you to the notary to sign the deed and then you will receive all formal documents at home.
Step 3: Establish a Ltd.
After the holding company has been established, it is time to set up the Werk-BV. This is done in the same way as setting up the holding company. The work BV is the organization within which the activities of the company are carried out. Establishing a work company takes about a week. There are tax advisers who can simultaneously set up a holding company and a Ltd for you.
Step 4: Registration in the Trade Register
Once the holding company and the Werk-BV have been established, your new company must be registered in the Trade Register. This is done at the Chamber of Commerce. Registration costs a lot of paperwork. You can also have this done by a notary. Once the registration has been completed, the extract from the Chamber of Commerce is available.
Step 5: Opening a business bank account
For a business you need a business bank account . First of all, this is essential to keep business and private administration separate. But it is also mandatory to have a business bank account . If, as in this step-by-step plan, you have set up a holding company and a work BV, both the holding company and the work BV must have their own business bank account . It is advisable to pay close attention to which bank you open an account with. Smart shopping can save a lot of money.
Step 6: Lowering the salary of director-major shareholder
A Ltd. is obliged to pay a director-major shareholder (you) a salary of € 45,000 per year. It is obvious that a new company does not generate enough turnover for this in the first years. To prevent the Ltd from being held to this obligation, you can send a letter to the Tax Authorities requesting that your salary be reduced. It is wise to send this letter immediately after the formation of the Ltd. This prevents income tax from having to be paid on salary that you may not even have received.
Step 7: Drawing up contracts
In a structure with a holding company and one or more Ltd's, agreements must be contractually recorded. In this way it is legally established how the mutual relationships are. The Tax and Customs Administration in particular attaches great value to such contracts. At least four types of agreements must be drawn up.
Management agreement between the holding company and the Ltd
The management agreement sets out the relationship between the director-major shareholder (you), the holding company and the working BV. The holding company is the director of the work BV. But that is a paper legal entity that cannot carry out management tasks itself. The holding company therefore lends the director-major shareholder to the Werk BV to perform management tasks there. In this agreement, the management fee for those tasks is established. The holding company invoices that fee to the Werk-BV.
A current account agreement states that all money and debts that two parties have on each other are automatically settled. Such an agreement must be made between the holding company and the director-major shareholder. In practice, it will regularly happen that small amounts are advanced back and forth for the other. Consider, for example, the costs of a business dinner. Drawing up a current account agreement prevents the tax authorities from seeing these small amounts as gifts, on which tax must be paid. For the same reason, there must also be a current account agreement between the holding company and the working BV.
Employment agreement director-major shareholder
An employment contract must also be drawn up between the director-major shareholder (you) and the holding company. After all, the holding company is the employer you work for as an employee. The holding company instructs you to work as a manager at the Werk-BV. If the Werk-BV goes bankrupt and there would be no employment contract, all wages paid will be considered an undue payment. This means that as a director / major shareholder you have to repay all wages to the working BV. This is prevented with an employment contract.
If the Werk-BV has several shareholders, it is necessary to draw up a shareholders' agreement. This contains the agreements between the shareholders. How is conflict between shareholders dealt with? What happens if someone is disabled for a longer period due to illness? How are competing activities of a shareholder dealt with? How is it done if a shareholder wants to sell his shares? A shareholders' agreement proposes solutions for situations that are not regulated in the articles of association or by law. This can prevent lengthy expensive procedures from arising.
Step 8: Register your trademark
As an entrepreneur you supply products and services under a brand name. Customers will then recognize the products better and faster. In fact, a brand ensures that your products and services have an identity. The brand is the proof of identity. It is important to record this immediately at the start of the company. If a trademark is not registered, you will not receive legal protection from trademark law. It does not matter whether you have supplied the product or service for years. In this sense, trademark registration is a protection for your company.
Step 9: Limiting Liability
Now that the company has been established, it is important to keep the holding company and the working BV legally healthy. Over time, many agreements will be made, for example with employees, freelancers and interns, for general terms and conditions, cooperation agreements with other companies, etc. To ensure as an entrepreneur that all legal aspects of the company are in good condition it is recommended to sit around the table with a lawyer on a regular basis.
Step 10: Set up an administration
There are two reasons why you need to have adequate records and books. Firstly, this is required by the tax authorities. The Tax and Customs Administration has the right to request company details for 7 years. But it is also in your own interest to always have the administration and accounting in order. Because a good insight into the state of affairs is of great importance for operational management. Many Ltd's do the accounting with an online administration and accounting package. There is nothing wrong with that, but to be on the safe side, always make copies of receipts and invoices and keep them in a folder.
Step 11: Arrange insurance
Even if you have established a Ltd; as an entrepreneur you always run risks. You can take out a number of insurance policies to protect yourself against financial setbacks. For example for directors' liability, damage due to business conflicts or disability of employees.
Step 12: Draw up internal procedures
In practice, situations will arise that must be handled by you. It is not useful if you are going to solve this on the spot each time. It is better to think in advance how you will act in those situations. Examples of situations for which procedures can be drawn up are: how to act if a customer does not want to pay, how can you terminate someone, how can you obtain financing. By thinking about this in advance, you will grow as an entrepreneur into a director who leads a well-organized company.
As a director and major shareholder you are an employee of the Ltd. Based on that position, you may exercise all legal rights covered by social insurance legislation. There are some conditions for this. You and your spouse may not cast more than 50% of the votes at the general meeting of shareholders. You and your family may also not own more than two thirds of the shares. A final condition is that you must be able to be fired against your will. Anyone who does not meet these conditions must themselves take measures against incapacity for work and make provision for medical expenses.
Other important features of a Ltd
A term that regularly comes up when it comes to a Ltd is the obligation to publish. This disclosure requirement means that a Ltd is obliged to share and disclose its annual accounts and balance sheet. This is done via the website of the Chamber of Commerce. Interested parties can request and view the documents there. Much value is attached to the timely fulfillment of the publication obligation. It must also comply with current formal guidelines. Most Ltd's employ legal advisers to produce these documents.
The organizational structure of a Ltd has already been extensively discussed in this article. Here's another summary. The shares represent the capital of a Ltd. These are owned by one or more shareholders, who together form the general meeting of shareholders. They are the supreme power within the Ltd. The day-to-day management of the Ltd is in the hands of one or more directors. Sometimes their functioning is supervised by a supervisory board. In small Ltd's, the director is usually also the sole shareholder. He is then referred to as the director-major shareholder (DGA).
A tricky issue with Ltd's is the amount of wages paid to a director-major shareholder. Many starting entrepreneurs believe that this is much too high for a start-up company. The usual wage for a director-major shareholder has been set by the government at € 45,000 or 75% of the wage from the most comparable employment in a comparable company. This high amount is used to prevent entrepreneurs from trying to avoid the high income tax rate in box 1. This can be done by paying a low wage and having the rest paid out as a dividend, which is taxed much lower. Incidentally, the Tax and Customs Administration is prepared to grant an exemption from that high wage on the basis of good arguments.
In summary: why would a starter choose a Ltd?
In this article all the advantages and disadvantages of a Ltd. as a legal form for a company have been discussed. The main arguments for choosing a Ltd are the limited liability and the tax benefits in the case of large profits. For the sake of completeness, we have listed all the reasons for choosing a Ltd as a starter.
A Ltd has a better image in society than a sole proprietorship. As an entrepreneur, your professionalism is estimated to be higher. This can help when applying for funding .
Setting up a Ltd is simple and the structure is easy to adapt afterwards. This makes a Ltd. suitable for individual entrepreneurs as well as for forms of cooperation.
Power is protected
In a Ltd a shareholder is only liable for his own contribution to the capital. His personal assets are protected.
Low corporate tax
The corporate tax payable on dividends is 20-25% in a Ltd. That is much less than the 52% that is charged at a sole proprietorship. That lower rate becomes profitable with higher profits, when deductions at the sole proprietorship no longer outweigh the lower tax rate.
Quick and easy to set up
Establishing a Ltd is a fast, simple and affordable procedure, which is comparable to establishing a sole proprietorship. It is advisable to thoroughly familiarize yourself with the structure to be chosen in advance. Working with a holding company in particular offers a great deal of extra flexibility and protection.