From sole trader to company: when and how?

When you first become self-employed and don’t have any employees, you often start out as a sole trader. But it’s also possible to set up a private limited company on your own. When is it better to switch from sole trader to company? Each has its advantages, disadvantages and obligations. In some situations, however, it’s worth making the move.

What’s the difference between a sole proprietorship and a company? 

There are various types of companies, such as: 

A private limited company (SRL in French or BV in Dutch) is the most common type of company.  

When you set up a company, you create a new legal entity. A sole proprietorship is exactly what it sounds like: a business consisting of one sole individual, i.e. a natural person in the legal sense. In this case, there is no separate legal entity.

Sole proprietorship: easy to set up 

Setting up a sole proprietorship is easy: you register at the business counter and apply for your VAT number. Your administration is also fairly straightforward: simple accounting is sufficient, and you can take all decisions alone

In a sole proprietorship, you act in your capacity as a natural person. You, the business owner, set up the business and have full liability for everything that happens to it.  

This is also the disadvantage of a sole proprietorship: there is no separation between your private assets and the assets of your business. If your business accumulates debts, creditors can seize any private property, for example, your house and all its furniture, your car, your bicycle, etc.

Company: limited liability and advantageous corporate tax

As an individual, you can also set up a private limited company (SRL or BV). You don’t need to have any associates.  

However, setting up a private limited company is complex. For example, you need to draw up a financial plan in which you prove you can cover the first two years with your initial capital. You also need to draw up the deed of incorporation of your company at a notary, which can easily cost around €1,500. 

On the plus side, your liability in a private limited company is – as the name indicates – limited. In this case, it’s the company, not you, that is the legal entity. If your business amasses debts, creditors will have no right to any of your personal assets

Another advantage is that the corporate tax rate is much lower than the personal income tax on your profits as a sole trader. The corporate tax rate is between 20 and 25%

When should you switch from a sole proprietorship to a company?

Switching to a private limited company makes sense in the following two cases: 

Higher risk 

The more your business grows, the greater the level of risk. You make bigger investments, accumulate more stock, buy a company car, etc. If your turnover falls short of your forecasts, you don’t want to have to sell your house to pay off your debts. With a private limited company, you’re not personally liable for your company’s debts. 

The lower corporate tax rate

The higher your turnover, the higher your taxable income. In a sole proprietorship, this means more of your personal income being taxed at a rate of up to 50%

In a company, you pay corporate tax of up to 25% on profits. You also pay personal income tax on the amounts you transfer to your private account, but the rate is much lower than in a sole proprietorship. Setting up a company, therefore, means paying less in tax

This attractive tax rate is definitely one of the advantages of setting up a company. But remember that a company also means more costs than a sole proprietorship. Generally, accountants recommend setting up a limited company when your annual turnover exceeds about €80,000. However, there’s no hard and fast rule. 

Support with setting up a public limited company

Have a chat with your accountant about what’s best for your business: to operate as a sole trader or as a company. You can also turn to Accountable’s partner accountants for advice.

Whatever choice you make, you’ll always get the best possible accounting and admin support with Accountable. Try our app and see for yourself.

Valesca Wilms, Content Manager
Updated on

As a Content Manager at Accountable, Valesca offers her readers an exciting and engaging content experience. Given her own experience as a freelance content marketeer & copywriter, Valesca knows the ins and outs of tax returns for the self-employed. It’s her goal to provide you with easy and understandable solutions to handle your tax returns stress-free with Accountable.

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