Sole proprietorship or company?
What are the advantages and disadvantages of a sole proprietorship?
In daily language, the term ‘one-man business’ or ‘sole proprietorship’ refers to the type of business that, contrary to a company, does not have its own legal personality. As such, there is no specific separation between the private assets of the owner and that of the business.
- Decisions can be made in a quick and less formal way
- Since all the profits of the one-man business are taxed to the individual person/entrepreneur, the credit balance after taxes goes to that same individual person. You can decide yourself if and how much of this balance you invest in the business.
- Limited administrative and accounting obligations.
But there are also disadvantages
- No specific legal structure. You have unlimited liability and are accountable with your full personal assets for the commitments of the business.
- Succession and take-over: working out a preventive succession arrangement has the most chances to succeed when the company has taken a legal form.
- Income taxes: all revenue of the business is taxed through the income tax return of the individual owner. There is no separate income tax return or tax assessment for the sole proprietorship.
What are the advantages and disadvantages when I opt for setting up a company?
The definition of a company according to the Belgian Code of Companies (free translation):
A company is set up by means of a contract in which two or more persons agree to bring together resources with the purpose of carrying out one or more precisely defined activities and with a view to giving the business partners direct or indirect capital gain.
In the cases defined in this Code of Companies, the company can be set up by means of a legal transaction starting by one person who allocates goods to one or more precisely defined activities.
According to the same Code of Companies, the act of establishment can determine that the company is not set up with the purpose to bring direct or indirect capital gain to the partners.
Choosing to set up a company brings advantages and disadvantages.
- Legal personality: the company has its own rights and obligations.
- Limited liability for specific types of companies.
- Taxation: The taxable income is taxed under the corporate taxation scheme. For small and medium-sized companies there is a reduced tax rate. The fiscal advantage of a company is not so much in the reduced rates but in the possibility to strive for an optimisation of the income. The income of the company and the individual owner can be organised in such a way that in total the least possible taxes are paid resulting in a stable income for years to come.
- All commitments between the partners that work together in the company are clearly put in writing.
- A company offers a number of interesting possibilities to figure out an optimal succession arrangement prior to death.
- Formal decision making and procedures.
- More legal and administrative obligations so more costs. Setting up a company is a lot more expensive for most of the legal forms because of the different legal obligations than setting up a sole proprietorship.
- Accounting obligations.