When is it a good idea to switch to a private limited company?

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Most self-employed people in Belgium start their activity as a natural person sole trader. While some start out being self-employed in a secondary occupation, others go all in and become self-employed in a primary occupation straight away. Whatever the path, everyone faces the same dilemma sooner or later: remain a sole trader or switch to a private limited company? 

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

Although there are other forms of company, the private limited company (‘société à responsabilité limitée’ (SRL) in French or ‘besloten vennootschap’ (BV) in Dutch) is the most common. In this article, we look at what distinguishes the status of natural person sole trade from the SRL/BV and the main characteristics of each.

Natural person sole trader: flexibility, but unlimited liability

You’ve decided not to create a company to start your activity? In the eyes of the law, you are then automatically considered a natural person sole trader.

Concretely, this means that your business does not have a separate legal personality. Or more simply: there is no separation between your personal capital (such as your home or savings) and your business assets.

So, your private assets serve as collateral for the commitments you make with your company. If you go bankrupt as a sole trader, your personal assets will be used to repay creditors.

However, the status of natural person sole trader presents many advantages for those starting out: 

• The start-up procedures are simple, and the status is flexible and fiscally advantageous. 
• It comes with few administrative and accounting obligations and allows decisions to be made more quickly. 
• It does not require the submission of a financial plan.

SRL/BV: stricter rules, but limited liability

Before the reform of the company code, this legal form was called an SPRL/BVBA. Today, the name has changed, and so have the rules. Whereas in the past, you needed to have partners, it’s now possible to create an SRL/BV alone. 

No start-up capital is required, although your financial plan should demonstrate that you have enough funds for your first two years of business.

The creation of an SRL/BV also requires the establishment of a deed that needs to be notarised and a register of shares (‘registre des titres’ or ‘aandeelhoudersregister’).

When should you switch from natural person sole trader to SRL/BV?

The risks you take as an entrepreneur and your taxes will increase proportionally as your business grows. Are you a self-employed sole trader and your business is doing really well? In this case, it’s worth considering switching to an SRL/BV.

Less risk

The more profitable your business is, the more risky it is to have unlimited liability. When you're starting out, the risks are negligible in the event of bankruptcy. But later, you risk having to sell personal assets like your house to pay off your debts. 

However, the owner of an SRL/BV is not responsible for the company’s debts. So if you go bankrupt despite having followed all the rules, in principle you will not lose more than what you invested in your private limited company.

Reduced taxes

Another advantage of an SRL/BV: taxation is different. In the case of a private limited company, you pay two kinds of tax: on the one hand, you pay corporate tax on your company’s profit and on the other hand, you pay income tax on the profits paid into your private account. But what’s interesting is that you can choose to leave part of your profits in your company and thereby avoid paying tax on it.

In reality, there’s no golden rule to determine whether it’s time to abandon the status of natural person sole trader in favour of a private limited company. But keep this general principle in mind: the status of natural person sole trader is fiscally advantageous for young businesses with a low profit margin. As soon as your profits increase, an SRL/BV is more interesting because you have the possibility of leaving a part of your profits in your company.

Are you currently a self-employed sole trader? Make sure you optimise your business expenses and, as a result, your taxes. Accountable helps you do exactly that.

Have you created an SRL/BV? Accountable supports you throughout the growth of your company, giving you complete peace of mind.

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Author - Alexis Eggermont

Alexis is co-founder at Accountable. He is passionate about leveraging data, AI, technology, and entrepreneurship.

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