General partnership (VOF)
If you want to set up a company together with a number of other persons, the general partnership (VOF) is an option. In a general partnership, the necessary capital is invested by the owners. There are therefore no external parties. The risk rests entirely with the owners, so if there are debts, the owners are liable for them. The company itself is also not a legal entity. As a result, if the company goes bankrupt, you as a former owner are still obliged to pay off the debts to the creditors.
Who is the 'entrepreneur' at the VOF
To familiarize you a little with the different terms that are used within the legal form of a general partnership, first the following. The partners with whom you set up a company are called the partners or partners. In principle, these persons all have the same degree of responsibility. Before you start with the company, you must document a few things well. This is possible in a cooperation contract. You can draw up this yourself together with the other partners, but if you are not completely familiar with the matter, it might be wise to call in the help of an external expert.
The tax authorities determine
With a general partnership, it is sometimes somewhat confusing who exactly is seen as an 'entrepreneur', especially by the tax authorities. Regarding VAT, the VOF is considered as a whole as an entrepreneur. But when it comes to income tax, each partner is seen as an entrepreneur. If the company hires personnel, the VOF is again the one that must pay the payroll taxes. That distinction is sometimes difficult. Realize that a VOF is not a legal entity and that you as a partner are responsible for the financial ins and outs of the company. As a partner you can make use of various business schemes .
For the sake of clarity, here is a simple example. Suppose you set up a general partnership with five people. Then the company is seen by the tax authorities as a company that has to pay VAT. Even if staff are hired, the tax authorities see the company as the entrepreneur who has to pay wage tax. This is different for income tax. In that case, all five partners are each considered an entrepreneur by the tax authorities. The company is thus an entrepreneur for VAT and payroll taxes, and the partners are entrepreneurs with regard to income tax.
Even if you want to set up a business with your life partner, you can opt for the company under a partnership as legal form. For these so-called male-female firms, the same rules apply as for a 'normal' VOF. The condition is that both partners meet the requirements set for entrepreneurship. In that case, you are both entrepreneurs for the tax authorities when it comes to income tax. You can therefore both use the entrepreneur schemes. The company is also not a legal entity at the male-female firm. Both partners are each liable for the total debts of the firm with their personal assets.
There is a catch in the male-female firm when it comes to meeting the conditions for entrepreneurship. Unlike a 'normal' VOF, a male-female firm sometimes has a so-called 'unusual collaboration'. In other words, one partner performs support activities for the other. This is the case if, for example, a medical practice is set up, in which one of the partners is a doctor's assistant. These support activities do not count towards the hours criterion set for an entrepreneur. As a result, you run the risk that one partner may not make use of (part of) the business schemes.
Advantages of a VOF
A general partnership has many advantages. It is a legal form that is very easy to establish. There are no minimum requirements for invested capital and you can benefit from the input of other people. You can hire staff at a VOF. There are also various tax benefits that you can use: the self-employed person's allowance, starters' allowance, SME exemption and the small business scheme. As a partner you are also entitled to AOW when you have reached retirement age. Later in this article, we will go into more detail about the benefits of a VOF.
Disadvantages of a VOF
There are two drawbacks to a company under partnership. First, you are fully liable when there are debts. This also applies to male-female firms, unless prenuptial agreements have been drawn up. The disadvantage is sometimes that you have to adhere to agreements with other partners. These are made when the VOF is established and relate to the way in which cooperation takes shape, liability, distribution of income and losses, etc. You are committed to these agreements for years, so pay ample attention to them. It is wise to draw up a corporate contract together with a legal adviser or an accountant.
As stated earlier in this article, you as a partner must pay income tax. The VOF is seen by the tax as an entrepreneur for the payment of VAT and payroll taxes (if staff are employed). As a partner, you only pay income tax yourself, but because you are an entrepreneur, you can make use of a number of deductible items. The most well-known are the self-employed person's allowance and the starter's allowance. Less well known is the SME exemption. We will take a closer look at the various deductible items.
Self-employed person's allowance and starter's allowance
Self-employed person's allowance is intended for self-employed persons who spend at least 1225 hours per year on their business. Those who are eligible for the self-employed person's allowance can also receive a starter's allowance. The conditions for this are that you did not receive the self-employed person's credit more than twice in the previous five years. Another condition is that you have not had another business for at least a year in the past five years. People who are incapacitated for work can also get a starter's allowance. Then you only have to work 800 hours a year in your company.
There are no conditions or special guidelines attached to the SME income tax exemption. Any self-employed person can make use of it, but you must calculate carefully how high the SME exemption is. The SME exemption is a percentage that you can deduct from the taxable profit. The taxable profit is the profit minus the self-employed person's allowance and the starter's allowance. So after the SME exemption, part of the profit remains. Tax must then still be paid on that part.
Tax benefit on VAT
Most tax benefits are related to income tax. But you can also make use of tax benefits on the VAT payment. This is called the small business scheme. This is calculated on the basis of the VAT you have to pay per year. If that amount stays below € 1,883, you will have to pay less VAT and sometimes even nothing at all. A male-female firm can sometimes also be beneficial. Both partners are seen by the tax authorities as entrepreneurs, and that can sometimes result in double tax benefits.
Affiliation and departure of associates
In the vast majority of cases, a general partnership is created when two or more entrepreneurs decide to set up a business together. But it can also happen that a partner joins later. If you plan to join a VOF, you must prepare yourself very well. Because a partner who later joins a VOF is automatically liable for debts. Even if they arose before he became a partner. You can check this by taking a good look at the financial situation of the VOF. This can be done by asking about all papers.
Partners who join later automatically agree to the agreements that the previous partners have made together. As a new partner, you can also ask for other agreements, especially if there are existing debts. Such a new agreement may mean that you, as a new partner, will be financially compensated in the event of a claim by the other partners. If you want to leave as a partner, this does not mean a release from the debts. You remain liable, even after your departure, for debts that have arisen during your presence. Of course, agreements can also be made for this situation with the other partners about the division and compensation of the debts.
VOF compared to a sole proprietorship
There is not much difference between a VOF and a sole proprietorship . In fact, a VOF is nothing more than two or more sole proprietorships that decide to work together. Just like a sole proprietorship, a VOF can be set up without the need for a notary to be involved. However, it is a company, and it is therefore mandatory to register the company in the trade register at the Chamber of Commerce. It is not mandatory, but it is highly recommended to draw up a cooperation contract in advance. Such a partnership contract is the biggest difference with a sole proprietorship.
Agreements with the other partners are recorded in a partnership contract. It will state who the partners are and what their contribution is, how long the company will last and what exactly are the liabilities of the participating entrepreneurs. It is also recorded how profit and loss are divided and how the company is represented. It is also sensible to include a procedure for dealing with disputes or unforeseen events such as incapacity for work, the resignation of one of the partners or the termination of the firm. Below are a number of subjects that can be included in the partnership contract.
Keep in mind that it is quite difficult as a VOF to attract debt. The capital of a VOF consists of the contributions of the partners. Only creditors can claim it. Due to the lack of security, external financiers usually have little enthusiasm to make money available. External capital must be obtained through bank loans , mortgage loans or supplier credit. You can include agreements about this in the partnership contract.
A characteristic of a general partnership is that all partners are fully liable. This means that in the event that the company does not meet its obligations, the liability lies with each of the partners. This is also the case if the obligations have been entered into by another partner. If this results in the company going bankrupt, the partners will also go bankrupt. In that case, creditors can make a claim on the so-called separated capital. That is the investment of the partners, which is used to operate the company.
If the segregated capital is not sufficient to meet the debts of all creditors, they can claim the private assets of each of the partners. Please note: it is therefore possible that creditors deposit the entire debt with one of the partners. You can have a record of how such a situation is dealt with in the partnership contract. For example, you can record in an agreement how the debts will be settled afterwards. Given the broad liability of the partners, it is recommended to do this carefully. With a man-woman VOF this is often done with a prenuptial agreement.
A major advantage of a VOF compared to a sole proprietorship is that management tasks can be divided. So you agree on a division of tasks. This makes it possible to benefit more from the expertise of the partners. The risk of division of labor is that conflicts may arise between the different partners. This can be prevented by recording agreements in this regard in a company contract. It can also be agreed how a solution can be sought in the event of differences of opinion.
Progress on unforeseen events
If you decide to set up a company together, you assume that this is an agreement that will last for years to come. But a partner can always drop out. Due to illness, death or because he no longer wants to be part of the company. In a partnership contract you can make arrangements about how this will be handled. A frequently used solution to cover financial risks in the event of death is that the partners take out life insurance on each other's lives. This means that the equity share can be paid out to the heirs, without the VOF being the victim of this.
As indicated earlier in the partnership contract, it has been agreed what the contribution of each partner will be. A difference with the sole proprietorship is the balance. In addition to the business account of the VOF of each partner, the balance of the company includes a private account. If this account has a negative balance on the balance sheet, it means that the associate in question has a debt to the firm. If the account has a positive balance, there is a claim from the associate against the firm. The assets of the firm plus the balance of the private account together therefore represent the invested capital of the partners. A balance sheet of a company with two partners can look like this.
Balance sheet profit distribution as at 31-12
|Business premises||$ 250,000||Partner capital 1||$ 275,000|
|Inventory||$ 75,000||Shareholders' equity 2||$ 190,000|
|Debtors||$ 10,000||Mortgage||$ 75,000|
|stock||$ 20,000||creditors||$ 20,000|
|Private partner 1||$ 25,000||Rack. current||$ 10,000|
|Partner capital 1||$ 150,000||Private partner 2||$ 15,000|
|Shareholders' equity 2||$ 65,000||Profit||$ 65,000|
|$ 650,000||$ 650,000|
Agreements are formulated in the corporate contract about the distribution of the profit. This is partly influenced by the invested capital of the partners. Part of the profit is characterized as 'wages', compensation for the hours that the associate has worked for the firm. There is also often an interest payment on the invested capital. If any profit remains after payment of those amounts, it will be divided among the partners on the basis of agreements made in advance. Losses are usually divided according to the same key.
Summary of the content of the company contract
You have been able to see which agreements you can include in a partnership contract. For the sake of clarity, we have listed the various components for you.
- Duration of the agreement
- Names of the partners
- Address / (trade) name / purpose of the company
- Representative authority of the partners (registration with the trade register)
- Contribution (labor, capital and / or real estate)
- The division of profits or losses
- Retirement and affiliation scheme of partners
- Dispute settlement
- Continuation arrangement
- Dissolution scheme
It is good to register these agreements in the Trade Register. Then the partners know where they stand and moreover, that radiates certainty to potential lenders. If a partner violates the agreements in the partnership contract, he himself is liable. By explicitly including this in the contract, the risks of joint and several liability are considerably reduced.
Advantages and disadvantages of a VOF compared to a sole proprietorship
- Division of tasks between the partners
- Survival does not depend on one person
- Attracting debt is easier due to more certainty than with a sole proprietorship
- Risks are borne by several people
- Personal liability, including for associate acts
- Slower decision-making than in a sole proprietorship due to consultation with several people
- Bankruptcy of the company is automatically also bankruptcy of the partners
- Financial risks in the event of the death of one of the partners
Social safety net and risks
One of the consequences of setting up a sole proprietorship is that you can no longer make use of employee insurance. Part of the social safety net is therefore no longer accessible. This can have serious consequences. If you go bankrupt and become unemployed, you are not entitled to unemployment benefits. The same applies to benefits for incapacity for work and illness. You can insure yourself against them to limit these risks. The national insurance schemes, to which everyone is entitled, will also remain accessible to you. This concerns the Surviving Dependents Act (ANW), the special healthcare costs (AWBZ), the child benefit (AKW) and the old age law. As the owner of a sole proprietorship, you will therefore also receive an AOW pension when you reach retirement age.
Setting up a general partnership in five steps
Starting a general partnership is generally the same as starting a sole proprietorship. The big difference is that you set up the company together with one or more other entrepreneurs. You must also pay due attention to this in the preparation. If you use the following step-by-step plan, you will prevent things from being forgotten.
Step 1: making a business plan
A business plan is not a formal document. It is not mandatory for starting entrepreneurs to set aside time for this. But it is wise to entrust your ideas about your business to paper. That forces you to come up with solutions for all kinds of practical matters. A business plan therefore helps you to form an idea of what your company will look like in the future and what all comes your way in daily practice. Your company then begins to live, as it were. You can already see yourself walking around it and you can better imagine what it looks like and what it means. Isn't too much rent being charged for the property you have in mind? How will you sell your products and to whom? How expensive should your products and services be compared to the competition?
The business plan contains all the details of what your business entails. All kinds of questions are answered. Such as what is most useful, how do you want to manage your finances, which products are you going to bring to the market first, and how do you want to market them? As you formulate your thoughts about your business, all kinds of unexpected things come up. In fact, creating a business plan ensures that your ideas about your business are clearly written down. You don't have to come up with a business plan yourself. There is a wide variety of templates available on the Internet. Based on that, it is not that difficult to make a good description of your company.
Step 2: Company contract
You and your co-partners have already chosen to set up a VOF. On the basis of the business plan you can now make agreements about how you want to implement this together. Remember, when starting a business, people are on the same page, but this can change over time. Over time, agreements about the distribution of ownership or income may fade into the background. This can lead to unpleasant situations. It is nice if there is a company contract , in which all this can be read again. Do not hesitate to have such an agreement checked by a lawyer.
Step 3: Registration in the Trade Register
If the cooperation agreement has been approved by everyone, the company can be registered in the trade register at the Chamber of Commerce. This can be done online via this link . Remember that just sending the data does not mean that your company is already registered.
Step 4: To the Chamber of Commerce
For a definitive registration, you must visit a branch of the Chamber of Commerce with the other partners to pay a registration fee of $ 50 and to identify yourself. The Chamber of Commerce will invite you to do so as soon as all data sent has been processed. The company data is automatically passed on to the tax authorities, which issues a VAT number.
Step 5: Start doing business
This completes the formal part of the establishment of your VOF. You can now look for a commercial property, open a bank account and start looking for staff and start the business.