Choosing a business form

As a beginning business owner , there is a lot that comes your way. One important choice is the legal form of your business. Many business owners do not know how to make that choice, but face the consequences of their choice in bankruptcy.

Most businesses start as a sole proprietorship or general partnership, but a limited liability company is also a common choice. The choice between these and other (legal) forms is motivated by cost considerations, tax aspects and liability risk, but also simply the size of your business capital in relation to your private assets can be important. What carries the most weight is something each individual will have to decide for himself. The outcome is therefore quite different. To make the choice a little easier for you to understand, I provide a non-exhaustive overview of some of the salient differences between the various legal forms.

Together or alone?

In a sole proprietorship, the business owner is generally in control. However, when the business is run by several business owners, with or without different contributions, arrangements must be made for their mutual cooperation. The business owners enter into an agreement with each other and, on that basis, present their business together as a general partnership.

Segregated assets

Unlike sole proprietorships and general partnerships, the B.V. has legal personality under the law. This means that the B.V. can enter into obligations and has separate assets, from which creditors can recover, without having recourse against directors or shareholders. The situation is different with general partnerships and sole proprietorships. In that construction, the company often presents itself under a company name, but it remains the business owner that enters into obligations in its own name and at its own risk (and expense). Under the law, a business owner with a sole proprietorship or a general partnership is fully jointly and severally liable privately for every obligation that rests on his business; something that can weigh heavily if the business ever experiences downturns.

Flexibilization of limited liability company law

For more than a year now, it has become considerably easier to incorporate a B.V.. See also an earlier blog, in which my office colleague Erik Jansen wrote that the former minimum capital requirement no longer applies.

Coming back to the beginning business owner, however, it is not true that nowadays the choice automatically falls on a B.V.. Even with a B.V., you cannot do whatever you want. For example, the board of a B.V. - again on pain of personal liability - must block a distribution to the shareholders if this deprives creditors of recourse.

Conclusion for the business owner

In addition to the above, there are of course many other aspects to consider. However, do not focus on the (short-term) advantages and keep in mind that from a liability perspective the choice for a B.V. seems obvious in the longer term.