You want to start a project and wonder which legal form is most suitable for your business? It is necessary to understand the differences between the existing legal forms to make a choice that fits your project and long-term ambitions. It is not always easy for a starting entrepreneur to make sense of the many and sometimes conflicting pieces of information. Below, we attempt to make a simple yet clear comparison between the various options regarding the choice of a legal form for your business. Here, we will focus on the sole proprietorship and the Private Limited Company, as these are the two main choices for a starting entrepreneur.
What is the legal form of a company?
The legal form of a company is its legal structure. The choice of legal form has a significant influence on the operation and future structure of your business.
Natural person or legal entity?
The first question you need to ask yourself is whether you want to be self-employed as a natural person or whether you want to establish your own company (i.e., a ‘legal entity’). As a self-employed person, you indeed have the option to operate in two ways: as a natural person or as a legal entity (i.e., as a company).
Your choice depends on various factors such as: what project you are going to start, what is the initial capital and necessary resources, what financial responsibilities there are, what level of freedom you desire, to what extent you are comfortable with administration, etc. It is difficult to give a clear answer without knowledge of the context at play. Below, we quickly outline the main differences between the two.
The sole proprietorship (as a natural person)
A sole proprietorship, also known as a business as a natural person, offers numerous advantages for those who want to start a business quickly and cost-effectively. With minimal administrative hassle and without the need for initial capital, you can launch your activity in just a few clicks. This makes the sole proprietorship an attractive option for aspiring entrepreneurs who want to try out their ideas without committing to complicated structures or high start-up costs.
One of the greatest advantages of a sole proprietorship is its simple operation. As the sole owner, you autonomously make all decisions, without the need to be accountable to other stakeholders. This flexibility allows you to act quickly and adapt to changing circumstances, which is especially valuable in the initial phase of your business.
Another advantage of the sole proprietorship is that it offers a low-threshold way to test your ideas. By dipping your toe in the water, you can explore the viability of your business without major financial or legal obligations. If your business doesn’t take off, you can easily dissolve the sole proprietorship and explore new opportunities elsewhere. On the other hand, if your business grows rapidly and you need more structure, you can always consider transitioning to another corporate form.
However, the concept of the sole proprietorship also brings some important disadvantages, particularly in terms of personal financial liability. As the sole owner, you are personally responsible for all debts and obligations of your business. This means that there is no legal separation between your personal assets and the assets of your business. In the event of financial difficulties, creditors of your business can thus go after your personal belongings to cover the debts, posing significant risks.
Another point of consideration with a sole proprietorship is the tax burden. Profits are taxed in personal income tax, which often leads to higher tax rates than corporate taxes. Especially for self-employed individuals working having their registered business as a side-hustle (so people working as employee at least half time and having the sole sole proprietorship), profits can quickly end up in the highest tax bracket, where rates of up to 50% apply. It is therefore important to carefully consider these tax implications when choosing the right corporate form for your business.
In short, while a sole proprietorship offers numerous advantages for starting entrepreneurs, it is important to also consider the potential risks and limitations when making this important business decision.
The company (legal entity)
- Tax advantageous: the profits of your company are subject to corporate tax, which is generally lower than personal income tax. As a self-employed person (with a sole proprietorship), the entire profit of your activity is subject to personal income tax. Depending on the profit, you can quickly end up in higher tax brackets, meaning that as a sole proprietorship, you will have to give up a larger portion of your profit to the government.
Protected assets: with a company, your personal liability is limited, provided that the company is well managed. This way, you protect your personal assets.
You pay significantly less taxes: a company pays much less taxes than a natural person. As a company, you pay a maximum of 25% (under some conditions but 20%) on your profit. What is also interesting is that the salary you pay yourself as a director is considered a cost and is therefore deductible. You as an individual are of course taxed on that salary in your personal income tax.
You start a business with multiple people: of course, you can start a company completely alone, but it is not possible to start a business with multiple people under a sole proprietorship (the name says it all in the end). You can then opt for simple corporate forms such as a partnership or a general partnership. But not all of these forms have limited liability.
What are the different types of companies in Belgium?
If you choose to establish a company, you still need to choose the most suitable legal form. Since the new corporate laws in 2019, there are 6 forms of companies.
Forms of companies with limited liability:
- Private Limited Company (Ltd.)
- Public Limited Company
- Cooperative Company
In addition, there are three forms of partnerships. Note, however, that with these forms, there is no limited liability.
The Private Limited Company (Ltd.) (with limited liability)
The Ltd. is a popular choice among entrepreneurs in Belgium. This form of company offers several advantages and flexibility that make it attractive for small and medium-sized enterprises (SMEs).
One of the key features of a BV is its separate legal personality. This means that the BV can conduct independent legal acts, such as entering into contracts, owning property, and being liable for debts and obligations. Shareholders are generally not personally liable for the debts of the Ltd.; their liability is limited to their contribution to the capital of the company.
Another important aspect of the BV is the flexibility in structuring the capital. Unlike some other forms of companies, such as the public limited company, there is no minimum capital required to establish a Ltd. This allows entrepreneurs to start with modest capital and increase it later as the business grows. However, at the time of incorporation, it must be demonstrated that there are sufficient own resources to conduct business activities.
Establishing a Ltd. requires several formal steps, including drafting a notarial deed. This deed contains, among other things, the articles of association of the company (bilaws), the names of the founders, the registered office, and the purpose of the business. In addition, a detailed financial plan is mandatory, which helps demonstrate the viability of the business and reassure potential investors or financial institutions.
A Ltd. must also comply with various administrative obligations, such as maintaining accurate double-entry bookkeeping according to legal requirements, holding annual general meetings, publishing certain information, and complying with tax obligations.
It is worth noting that a Ltd. can be established by one person as well as by multiple people. This gives entrepreneurs the opportunity to operate alone or to collaborate with partners or co-owners. This flexibility makes the Ltd. a suitable choice for various types of businesses, from startups to family businesses.
Overall, the Ltd. offers an attractive balance between flexibility, limited liability, and formal structure, making it a popular choice for entrepreneurs in Belgium.
The Public Limited Company
This is a common legal form for large companies. The PLC is a capital company, which means that it primarily focuses on the contribution of capital by the shareholders. This legal form requires a minimum starting capital of 61,500 euros at incorporation. The administrative burden is quite heavy.
The Cooperative Company
A cooperative company is a special legal form where the main goal is not to maximize profit for individual shareholders, but rather to serve the interests of the members. This form of entrepreneurship is based on principles of cooperation, democratic decision-making, and community focus.
In a cooperative company, all members have equal voting rights in decision-making, regardless of their financial contribution. This means that the interests of all members are represented and that important decisions are made based on consensus and participation.
Another feature of cooperative companies is the limitation of profit distributions. Instead of distributing all profits among individual members, a portion of the profits is often reserved for common goals, such as investing in the cooperative itself, creating employment, or supporting local initiatives.
Cooperative companies can operate in various sectors, including agriculture, energy, finance, and services. They offer an alternative approach to entrepreneurship, focusing on social and environmental sustainability alongside financial profit.
The different forms of partnership
In addition, there are three forms of partnership in Belgium. These legal forms do not have limited liability.
- The partnership: A partnership is a simple form of cooperation between two or more persons, where they contribute their knowledge, labor, or goods with the aim of jointly making a profit. It is a flexible and informal legal form, for which no notarial deed is required for establishment. Each participant, or ‘partner’, contributes to the assets and activities of the partnership, with profits and losses typically being divided according to pre-agreed proportions.
- The general partnership (GP): A general partnership, abbreviated as GP, is a form of business organization in which two or more individuals manage and operate a business in accordance with the terms and objectives set out in a partnership agreement. Each partner is personally liable for the debts and obligations of the business.
- The limited partnership (LP): A limited partnership is a form of partnership similar to a general partnership, except that it has two types of partners: general partners and limited partners. The general partners have unlimited liability and are responsible for managing the business, while the limited partners have limited liability and do not participate in management.
Choosing the right legal form for your business is a crucial decision that can have a major impact on the future growth and success of your company. In Belgium, there are several options available, each with its own advantages and disadvantages. Whether you opt for a sole proprietorship or a private limited company, it is essential to carefully consider the specific needs and objectives of your business before making a final decision. If you are unsure where to start or if your situation is complex and you need advice or coaching to start your entrepreneurship, do not hesitate to contact us.