Starting your own business is a dream for many, but done by few! With some healthy nerves while taking the first steps, many questions arise. Below are a few of the most frequently asked questions:
– What do I need to consider when starting my own business?
– What specific financial products are required when I start my own business?
– Which legal form best fits my type of business?
– What kind of help and guidance is available when starting your own business?
In addition to some healthy nerves, enthusiasm and passion there are some less exciting parts of starting a business. You need to look into the administrative, legal and tax matters involved in starting your business. This of course includes registering with the Chamber of Commerce (Kamer van Koophandel).
Before registering your company it might be good to consider the risks of owning your own company. It is quite important to have certain things in order and sorted out before you actually start your own business. For example, do you have sufficient starting capital? What is the impact of having your own company on your current or future mortgage? What are the consequences for my life partner when starting my own business? Which financial products or business insurances need to be in place when the company is founded?
When determining the financial products that are applicable and interesting to your business, your personal situation must be taken into account. It can be quite difficult to calculate the amount of money and/or external capital required to start a business. Requesting the help of an expert can make this process far less complex. Besides offering our help with the financial decisions involved with your company, we can also assist on the much needed insurances for your type of company and industry. Whether they be basic insurances (such as an unemployment insurance), a liability insurance, or more industry specific or niche-related insurances (such as an inventory & goods insurance), we can offer our expertise.
Apart from your industry, sector and personal situation, the need for financial products also differs based on the legal entity you have chosen. For example, the type of insurance for freelancers may differ from that of a private limited company. Before investing a great deal of time and money in your future business, it’s important to identify the following: what kind of business do you want to start, what are the risks and what is your ultimate goal?
Sole proprietorship, freelancer, joint-stock company, private limited company or general partnership. These are all legal forms under which you can start your business. Your choice for the type of legal form can hold major consequences for the future of your company. Below you can see the advantages and disadvantages in each legal entity.
At first, many entrepreneurs choose to start their business as a sole proprietorship. As a legal form, this is essentially the same as doing your business as a “freelancer” or “self-employed”. However, this doesn’t mean you can’t employ people; on the contrary as a self-proprietor or freelancer in the Netherlands, there is no limit to the number of people you can employ!
With sole proprietorship, there are certain tax advantages to be gained. In the Netherlands, there are a few major tax advantages associated with sole proprietorship, such as: self-employed tax deduction, starter tax deduction and SME profit exemption. There are also certain tax credits to be claimed.
As a sole proprietor, from both a financial and fiscal standpoint, there are a number of things that need to be considered. For instance, you are privately liable for any debts your company incurs. From the moment of registering your own business, there will be no difference between your private assets and the business assets. This means that any business creditor will have a claim on your private property. For this reason, it is very important to look into the risks of starting any business venture, big or small.
Self-employed deduction is subject to a number of conditions in the Netherlands, most of which are valid for most sole proprietorships. One precondition is that you can prove (in administration) that you’ve spend more than 1,225 hours per year on your own company. With fewer hours, for example if you are self-employed only part-time, you are not entitled to sole proprietor tax deduction. If you do qualify, you can deduct a fixed amount of € 7,280 from the profit, before the income tax is calculated. So, this sums up to a substantial reduction in your tax assessment!
As a start-up entrepreneur in the Netherlands, you may apply for “Starter Deduction” three times in the first five years after the registration of your sole proprietorship. If you apply for the start-up allowance, you can increase the self-employed deduction with an additional budget (e.g. in 2018: €2,123).
Therefore in most cases, we advise you not to make use of this deduction in the first year that you start your business. In the first year, profit is often not very high because of investment and the search for new customers/clients. Therefore, we advise that it’s often wiser to make use of this benefit in a year in which more profit has been made.
Then there is the Dutch SME profit exemption; an additional (direct) tax deduction from profit. For some years now, this SME profit exemption has been set at 14%. This offers you a 14% reduction in taxable profit; meaning you owe less tax! Good to know: there is no requirement in the minimum of hours worked per year to receive the SME profit exemption.
Finally, there are a number of tax credits that you, as a sole proprietor, can apply for in the Netherlands. The most important of these is the general tax credit and the labour credit. Employees as well as entrepreneurs are equally entitled to this tax credit.
As a sole proprietor, you are obliged to contribute to the Dutch national insurance plan. These are the “Algemene Ouderdomswet” (AOW), the “nabestaandenuitkering” (Anw) and the Wet langdurige zorg (Wlz), as well as the Algemene Kinderbijslagwet (AKW). As a sole proprietor, 5.65% of your profit (up to a limit of €54,000 premium) goes to the Healthcare Insurance Act.
Lastly there is the old-age tax reserve – “Fiscale Oudedagreserve” (FOR). This is a reservation of the annual profit, as reserved for your pension. This reservation is then postponed from the tax you have to pay on that part of the profit. So, in the short term this gives you a tax advantage. It is advisable to keep this amount reserved from you other gains, as it is not freely disposable within the company. The tax benefit is forfeited if you close your business before you reach retirement age.
Similar to a sole proprietorship, a limited liability company also has various tax benefits. One major advantage is that a private limited company (or “Besloten Vennootschap” in Dutch – B.V.) is a legal entity and therefore a stand-alone entity. In practice this means that not you, but the company, is liable for any debts or charges. Therefore, you are not privately liable to any debt the company may face.
Furthermore, the capital of the private limited liability company is divided into shares and the power of a public limited liability company lies with the shareholders. However, this does not necessarily mean that the shareholders are also responsible for day-to-day operational activities. For most small(er) limited liability companies, the director is also the sole shareholder.
In addition to registering your company at the Dutch Chamber of Commerce, a private limited company must also be registered with the civil-law notary. The tax rates of a private limited company are often slightly lower than those of a sole proprietorship. On the other hand, the costs also tend to be somewhat higher.
Are you having doubts about the right legal form for your new business? We‘re always willing to help and advise, feel free to contact us for an introductory meeting.
In a general partnership (in Dutch: a vennootschap onder firma – or vof), you share the business with one or more partners. Each person who joins you in the foundation of the company becomes a partner within the organization and has to contribute in some form. This can be a monetary contribution (cash), but also can come in the form of labour or goods. One of the advantages of a general partnership (or “vof”) – is that the partners must only pay income tax after the profits have been distributed among them.
Please keep in mind, when setting up a general partnership firm, that the debts of all partners are equally distributed and jointly liable. It is therefore possible that you can be held privately liable for debts incurred by your partner, despite the fact that you haven’t incurred any debt yourself.
In the event of debt, a company’s assets are taken into consideration first. If these assets are insufficient to cover the debt, all partners will be privately liable. For this reason, we always advise our clients to draw up clear agreements with all partners in an official company contract. This prevents possible problems and disputes in the future.
KR Financieel Advies has many years of experience in setting up new businesses, changing the legal form of an existing organisation and the tax implications that come with it. We can help you with any venture challenge you may face. Contact us today for an introductory meeting (no obligations). Our qualified advisors are more than willing to answer any questions you may have!
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