Limited partnership (CV)
As a legal form for a company, a limited partnership (CV) resembles a general partnership (VOF) in many ways . In a limited partnership, a company is also set up by two or more persons who manage it. The difference with a VOF is that silent partners are also involved in a limited partnership. These are people who contribute money to the company and benefit from the financial benefits. They do not or hardly interfere with business operations. A limited partnership is an ideal solution for entrepreneurs who want to set up a general partnership, but who themselves have few financial resources.
Who is the 'entrepreneur' with the CV?
A limited partnership has two types of partners. The company is managed by the so-called managing partners. Those are the ones who founded the company. They bear full responsibility. If the company goes bankrupt, they are jointly and severally liable and there is a good chance that they will also go bankrupt themselves. The silent partners only invest capital in the company. They are not responsible for business operations, nor are they liable in the event of bankruptcy. The only risk they run is that they will lose their own investment.
The managing partners are therefore the actual entrepreneurs. In principle, they all bear equal responsibility. It is recommended that before the start of the company, it is well documented in a cooperation contract which agreements apply. This can be done in a limited partnership contract. The agreements with the silent partners are also recorded in writing in this agreement. With such a contract, it can be prevented that problems arise in the long term because partners are no longer exactly aware of the agreements that have been made.
Limited partnership contract
A limited partnership contract is not mandatory, but it is highly recommended to draw up such a document when starting a limited partnership. Such a contract contributes to clarity, even if the company has been active for a number of years. Then you can read again what was already agreed. The limited partnership contract specifies how long the company will continue to exist, the contribution of the various partners, how profit and loss will be divided and who has representative authority. With such a contract, the chance is much greater that the company will make a smooth start.
The limited partnership and the tax authorities
As with any legal form, it is good to study the status of the different participants before the tax. This determines which and how much taxes you have to pay and which deductions you can make use of. In a limited partnership, the managing partners are regarded by the tax authorities as the entrepreneurs. The silent partners are not. Still, both have to pay income tax on the profits. The company itself is not a legal entity, but it must also pay tax. This concerns VAT and - if personnel are employed - wage tax. We will go into this in more detail.
What tax does the managing partner pay?
Because the managing partner is given the status of entrepreneur by the tax authorities, he can profit from various tax advantages. These are deducted from the wage tax. The most important is the self-employed person's allowance. In the first five years you are also entitled to a starter's allowance. You are eligible for this if you are entitled to self-employed person's allowance. After deduction of the self-employed person's deduction and the starter's deduction from the profit, it may be interesting for a general partner to make use of a third tax advantage: the SME exemption.
The condition for the self-employed deduction is that entrepreneurs can demonstrate that they spend at least 1,225 hours on their business every year. Those who are eligible for the self-employed person's allowance can also get a starter's allowance. The conditions for this are that you did not receive the self-employed person's allowance more than twice in the previous five years. Another requirement is that you have not had another business in the past five years for at least a year. People who are incapacitated for work can also get a starter's allowance. Then you only have to work 800 hours per year for your company.
There are no conditions attached to the SME income tax exemption. Every self-employed person can make use of it, if he qualifies for it. You must first calculate carefully how high the SME exemption is. The SME exemption is a percentage of 14% 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 still be paid on that part.
What tax does the silent partner pay?
The silent partner is not considered an entrepreneur by the tax authorities. He cannot, therefore, make use of the self-employed person's allowance, the starter's allowance and the SME exemption. However, a silent partner can make use of an investment deduction. This works as follows. A silent partner has to pay tax on the profit he gets from the company. He may deduct the amount he has invested from that profit. This leaves a lower profit. He has to pay tax on that. A silent associate can also take advantage of arbitrary charges. Business assets are then depreciated more quickly, leaving a lower taxable profit.
What does the limited partnership pay in tax?
The limited partnership is regarded by the tax authorities as the enterprise. He must pay VAT. If staff are employed, wage tax must also be paid. That VAT payment can provide tax benefits, but then your company should not be too big. This deductible item 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 characteristic of a limited partnership is that all managing partners are fully liable. This means that, in the event that the company does not fulfill its obligations, the liability lies with each of the managing partners, even if the obligations were entered into by another partner. If this results in the company going bankrupt, the managing partners will also go bankrupt. If no prenuptial agreement has been drawn up, the partners of the managing partners will also go bankrupt. Creditors can claim the private assets of the managing partners.
Silent partners are hardly ever commercially liable. They can only lose their investment. There is one exception to this. If a silent partner acts like a managing partner, he can be held personally liable. A lot of misery can be prevented by laying down in a cooperation contract how such a situation is dealt with. For example, you can agree on how the debts will be settled afterwards. Since the liability of the partners is quite high, it is strongly recommended that great care be taken in this regard. Legal help can be helpful in this regard.
Social security and insurance
If you set up a limited partnership, you are assured of AOW as a general partner and as a silent partner as soon as you have reached retirement age. This is because you pay income tax. You help to build up the state pension from the national insurance contributions. Nevertheless, it is advisable to take out supplementary pension insurance. As a partner, you are no longer entitled to employee insurance schemes, where everyone who is employed by a company as an employee. This concerns in particular the various schemes for unemployment, incapacity for work and illness. If you still want some security, you will have to insure it yourself.
Termination of a limited partnership
It is regulated by law that a limited partnership is automatically terminated if one of the partners leaves the organization or dies. That can be prevented. In that case, you must have it stipulated in advance in the cooperation contract that the other partners may continue the company after the death or termination of one of the partners. In order to prevent the base under the organization from becoming too narrow to guarantee business operations or to maintain sufficient financial scope , it is possible to have one or more new partners join.
A limited partnership can also be terminated on the initiative of the partners. If there are debts on termination, they will be paid by the company. If there are insufficient financial resources for this, the managing partners must pay the remaining debts together. The silent partners do not have to contribute to this. As soon as all debts have been paid, any residues are distributed among all partners. For this situation too, it is recommended to lay down the guidelines for this in a cooperation contract in advance.
Differences between the Netherlands and Belgium
A limited partnership is a legal form that also exists in Belgium. But there are some differences with the Dutch variant. In order not to run into problems if you want to do business in Belgium, it is good to use the designation of the different parts consistently. The silent partners are also referred to as the limited partners. The managing partners are referred to as the mandated partners. It's only a small difference, but it can cause confusion. Because the latter is authorized to act and act on behalf of the company and as a silent or limited partner you do not want that.
In Belgium, a distinction is made between an 'ordinary' limited partnership and a limited partnership with shares. No start-up capital or a notarial deed is required for the establishment of an ordinary limited partnership. There are also few publication obligations. The abbreviation is a comm.v. The limited partnership limited by shares comm.va is almost the same as a limited liability company but with a warranted partner in the lead. The rules for an NV must be complied with. This means that a notarial deed is required upon incorporation and that the shares are registered. Unlike in the Netherlands, the limited partnership has legal personality in Belgium.
Positive aspects for the managing partners
The limited partnership has quite many advantages for the managing partners. The organization is easy to set up, without the need for start-up capital. As a managing partner, you do not need to have a lot of capital, because that is contributed by one or more silent partners. By working together with several managing partners you can benefit from the knowledge and skills of the others. This offers the possibility to divide tasks within the company, so that you can specialize as partners.
Financially there are also the necessary benefits. Because you are considered as an entrepreneur as a managing partner, you can make use of the self-employed person's allowance and starter's allowance. You must meet a number of conditions for this, but if that is the case, this can lead to a deduction of just under $ 10,000. The SME exemption may also be used. This means that no tax has to be paid on 14% of the taxable profit. Finally, it is also possible to claim under the small business scheme under certain conditions. You will only benefit from the latter financial benefit after you retire, because then you are entitled to AOW.
Disadvantages for the managing partners
Against the many advantages, there are some significant disadvantages. The most important is the very high degree of liability. This is comparable to that of a sole proprietorship. If the company gets into trouble, you are fully privately liable as a managing partner. If you have not had a prenuptial agreement drawn up, your partner is also personally liable. If the company goes into bankruptcy due to financial problems, this almost always leads to a personal bankruptcy of the managing partners. Another disadvantage of a limited partnership is limited freedom of action. You must adhere to the agreements you have made with the other partners.
Advantages and disadvantages for silent partners
A limited partnership also has many advantages for silent partners. This legal form is easy to establish, without the need for start-up capital. As a silent partner you can use a certain amount of co-determination over the company. From a financial point of view, you benefit from the company's financial results without running much risk. Because as a silent partner you are not liable for any debts. You can also take advantage of tax breaks. Because you can make use of the investment deduction and of benefits through arbitrary depreciation of investments. It is also nice that you are entitled to AOW after your retirement.
The disadvantages for a silent partner remain fairly limited. The only financial risk you run is that you could lose your investment in the company if it gets into trouble. In that case, it can be annoying that you have virtually no opportunities to exert influence, due to the limited degree of participation. Don't fall into the trap of interfering with business. Then you run the risk that you will be regarded as a managing partner and that means that you can be held personally liable.