You have decided to start your own business. The first thing you need to do is choose the most suitable legal structure for your projects. In effect, you have two options for exercising your self-employed activity:
- Sole proprietorship (self-employed individual);
- Company (with or without legal personality).
How to choose between sole proprietorship or company? Each formula come with its own of advantages and disadvantages, and your choice will have a significant impact on the life of your business. Several key factors come into play when making this decision, including:
- The nature of your intended business activity;
- The number of individual involved;
- The available capital;
- The financial contribution of the partners;
- The most appropriate tax regime;
- The foreseeable development of the activity, etc.
Choosing either of these two options requires thoughtful consideration, and it must be adapted to your business project. Don't hesitate to ask for advice from a notary, lawyer, business consultant, accountant or tax expert.
The Main Characteristics of a Sole Proprietorship and a Company
Incorporation and Operation
A sole proprietorship is the simplest way to perform a self-employed activity:
- It does not require the drafting of articles of association, nor a minimum starting capital;
- The costs of incorporation and operation are low;
- You can start your business quickly;
- You are the only one in charge and you can make the decisions necessary for the exercise of your activity without having to consult other partners;
- Generallt, the accounting requirements are simplified.
The incorporation of a company may require the following steps:
- The intervention of a notary;
- Minimum capital;
- A financial plan;
- The drafting of articles of association;
- An auditor's report (e.g. in the case of a contribution in kind).
In addition, there are also costs associated with the termination and liquidation of a company.
A company may have a separate legal personality which confers on it its own rights as well as obligations.
The operation of a company differs significantly from that of a sole proprietorship:
- The volume of administrative work, formalities and legal obligations is bigger;
- There are more accounting obligations (in general, maintening full accounts, filing annual accounts with the National Bank, etc.);
- The bodies of the company (the board of directors, general meeting, etc.) must be taken into account, without which no important decisions can be taken.
The Responsibility of the Entrepreneur
In a sole proprietorship, there is no separation between the assets allocated to the professional activity and the private assets of entrepreneurs.
Entrepreneurs are therefore fully liable with all their assets for the commitments of their company. This is not without risk, for example in the event of bankruptcy of a major client. The entrepreneurs’ debts may be recovered from all of their assets, whether movable or immovable, present or future, unless those assets, amounts, sums and payments pertaining to their bankruptcy filing have an origin subsequent to that bankruptcy (XX.110, § 3, subparagraph 2 of the Code of Economic Law).
The assets of the spouse may also be used to pay the company's debts, unless a matrimonial agreement provides otherwise.
Protection of the Main Residence of the Self-Employed Person
The risk regarding the home of the self-employed person has been somewhat mitigated by a measure allowing them to protect their home by having it declared exempt from seizure in certain circumstances. The protection only applies to the self-employed person's main residence, i.e. the place where they live for most of the year.
The protection is not automatic, the self-employed person must file a declaration of non-seizability before the notary of their choosing.
The protection only relates to debts pertaining to the professional activity subsequent to the declaration of non-seizability. Therefore it will not apply to private debts.
The self-employed person can, of course, waive the protection by filing a new declaration. It will also end if the self-employed person changes status or dies.
For more information on this legal provision, please contact a notary. You can consult the directory of notaries on the website of the Royal Federation of Belgian Notaries.
In a company, there is a separation between the assets of the business and the assets of the entrepreneur. Part of the assets can therefore be exempted from the entrepreneurial risk.
In limited liability companies (SA, SRL, SC), the shareholder is only liable for the debts of the company up to the amount of their contribution. This implies that the creditors of the company cannot make a claim on the personal assets of the entrepreneur. The personal assets of the entrepreneur and the shareholders are therefore protected.
In certain cases, however, liability may be invoked. This is the case in particular if the company is declared bankrupt within three years of incorporation and if the initial capital or the capital contribution was clearly insufficient to ensure the normal functioning of the company for two years.
In unlimited liability companies (SNC, SComm), the partners (with the exception of the limited partners) put their own assets as collateral for the possible debts of the company. If the company is unable to honour its debts, its creditors may pursue the payment of their claim on the private assets of the partners.
The Tax Regime
The profits of a sole proprietorship are subject to personal income tax. This tax is progressive, which means that large profits are taxed more heavily.
A company is subject to the corporate tax system, which is lower and less progressive. If the profits are substantial, it will be more advantageous tax-wise to be taxed under this regime.
Call for Funds
A company requires financial resources. However, an individual's possibilities are usually limited in this respect. A company offers precisely the legal possibility of attracting partners who wish to invest venture capital in the company. These lenders therefore participate in the company's future profits and losses.
Cooperation with One or More Partners
The structure of the company makes it possible to attract partners who, in addition to their capital contribution, can also actively be involved in the company. Company law makes it possible to legally define cooperation with one or more partners. The articles of association stipulate the agreements entered into with regard to management, development, etc.
Continuity of the Company
The continuity (or survival) of the company is an important factor, especially in family businesses. Problems can arise when founders want to sell their business or if they die.
In a sole proprietorship, ownership and management of the business are one and the same. If the entrepreneur dies, inheritance law provides that assets can be divided among multiple heirs. This situation can create a great deal of uncertainty for an heir who was already involved in the management of the business prior to the death of the entrepreneur-owner.
In a company, ownership and management can be separated. The founder and their company are legally separate persons. As a result, the existence of the company is not in jeopardy if the founder dies. The shares that represent the company's assets simply change ownership.
More information?Federal Public Service Justice
Service des droits économiques
Boulevard de Waterloo, 115
Tel.: +32 2 542 65 11
Website: Federal Public Service Justice
Royal Federation of Belgian Notaries
Rue de la Montagne, 30 - 34
Tel.: +32 2 505 08 50