Establishing Your First Dutch Company: Sole Proprietorship vs BV

When you start a business, a legal form shall be chosen. In many countries, the most enticing prospects will exist of a sole proprietorship and limited liability company. To compare the two options, a more detailed look will be given into the situation in the Netherlands. A small country located in the EU and since the Brexit very popular for the set-up of trading companies.

A lot of business owners looking to establish a business in the Netherlands first start with a sole proprietorship (eenmanszaak in Dutch).  It’s a very convenient and hassle-free option since all you have to do is pay a visit to the Chamber of Commerce and your company is right there, all ready for you. However, in a variety of cases, a sole proprietorship may not always be the most viable solution. This is mainly why many entrepreneurs choose to make the switch from a sole proprietorship to a private limited liability company: a BV.

Many entrepreneurs even choose to forego a sole proprietorship altogether and simply start with a BV. But what exactly is a BV? What does it entail and what factors should be considered when deciding to set one up? Most importantly, what are the costs and fees associated with establishing a BV?

What is a BV?

The abbreviation BV is used to describe a private limited liability company (Besloten Vennootschap met beperkte aansprakelijkheid in Dutch). A BV is among the most preferred legal entities among entrepreneurs in the Netherlands. Compared to other entities like foundations and association, a BV is mainly centred around business operations, making it the perfect choice for entrepreneurs. 

A BV usually features one or more directors who are authorized to act on its behalf.  This way, the BV can be considered a legal person which can enter into agreements and perform other actions even while it is being represented by a director and other roles. 

What are the differences between a limited liability company and a sole proprietorship?

This question allows us to directly address some of the most prominent differences that come with the simple one-man business. In legal aspects, a person with a sole proprietorship is always jointly and severally liable for all actions related to it. This means that in the case of your sole proprietorship going bankrupt, you will have to bear the responsibility for privately settling all related debts. In the case of a BV, this is often different.

If your BV ends up going bankrupt, your private assets will remain unaffected.  Of course, there are some ifs and buts when it comes to this. For instance, if you actually do end up going bankrupt, there will be an investigation regarding the honouring of the general principles of good administration. In simple terms, this means that they’ll see if you were involved in any recklessness regarding the BV. If found responsible for the bankruptcy, you may be held liable. Due to these reasons, it is important to ensure that you manage your BV carefully and responsibly.

There exists another general limitation regarding the advantage that a BV owner is not jointly and severally liable. Such limitations are most prominent when you are just starting out on setting up your private company and require funds for being able to make investments. In cases like these, banks and financial institutions generally only provide loans if you personally act as a guarantor. That keeps you jointly and severally liable (at least to some extent) during the initial years of establishing your BV.

Liability aside, a sole proprietorship and a private limited company have some other stark differences as well. Entrepreneurs having doubts between the 2 entities should know this: a BV generally provides a more solid stature of repute, commercial trustworthiness and authority. Private companies tend to be seen as professional companies and not hobbyists. The BV status helps ensure your clients that the company is reputable, responsible, trustworthy, and won’t vanish into thin air overnight. This can significantly boost your credibility as a company and even facilitates the expansion of your clientele by attracting new clients.

Another advantage available to BV owners is that they can issue shares and can partially or completely transfer their company to somebody else for example, from father to son. Shares can also be distributed among close friends and family members to give them a small chunk of the profits while obtaining funding as well. These perks are non-existent with a sole proprietorship.

‘The tipping point for going from a sole proprietorship to a private limited company is around 150k euro profit’

Finally, a BV brings (usually positive and favourable) tax consequences. For example, BV owners fall under the umbrella of corporate income tax instead of personal income tax. In case you’re making considerable profits of up to 150K Euro or more, you’ll be subject to a lower tax rate than that which comes with a sole proprietorship. So, if your business is doing really well and you have a sole proprietorship, then making arrangements to establish a BV would be a very sensible move.

Dutch company formation: How is it done?

One thing is clear: it takes more effort to create and register a company in the Netherlands (and eventually closing it down) than a sole proprietorship. A sole proprietorship can easily be arranged at the Chamber of Commerce in about an hour. If you feel like it, you can even use your private bank account for the whole procedure. With a BV though, things are done differently.

The first step in setting up a BV involves you informing a company formation specialist of this intention. Based on the details you provide; they will draw up a deed of incorporation for you. This document is a declaration that a BV is now being created. After the company has been established by executing a deed of incorporation, you will need to register the UBO and company with the Dutch trade register. Company formation agents usually take care of this task on their own at the Chamber of Commerce, and the whole procedure is usually completed within a day. Capital is payable either before the execution of the incorporation deed or after it has been done.

Capital contributions can become a cause for confusion sometimes. Before 2012, the rule was to deposit 18,000 euros, which could be cash or material possessions having the same value. This condition has been revised and it is now possible to simply make a deposit of 1 cent. This allows you to decide exactly how much you’d like to deposit for your BV.

You can start carrying out other important affairs regarding your BV even if the incorporation hasn’t been completed. For this, you will be acting on behalf of a BV in formation (in oprichting). You can simply inform your business contacts that you are carrying out affairs on behalf of a future BV. You will have to assume complete personal liability for any obligations, deals, or contracts you participate in, but you won’t be wasting any time by waiting around for the incorporation to complete. If you need to arrange a website or property for your company, you can easily do so.

What are the costs associated with setting up a BV?

The initial capital contribution isn’t a very serious major expense for a BV setup, but notary visits are important and can have costs. Usually, it is safe to set aside a few hundred euros for this.

Mandatory audits for legal entities (like a BV) are also something to be mindful of. These have their own costs, and if you fulfil any 2 of the 3 conditions mentioned below, you will have to hire an accountant:

1. A total of more than € 6,00,000 on your balance sheet.
2. A net turnover exceeding € 12,000,000
3. 50 employees or more.

BV Registrations with the Chamber of Commerce generally come with a price tag of €50. Generally, there aren’t any mandatory costs. However, your business expenditures can rack up. When thinking of business costs, be sure to consider essential elements such as staff, machines, equipment, arranging business premises, transportation and other relevant costs.

Ever since the 2012 rule of depositing 18,000 Euros has been scrapped, it has become much easier and more affordable to establish a private limited company. A few hundred Euros can help you go a long way in your Dutch business journey; however, it’s always advised to be mindful of other business expenses, which there will probably be a lot of. Actively making real investments will also require you to have some capital on hand. However, that should be no surprise because every entrepreneur is well aware of the idea that: in order to make money, you first have to invest money.