Establishing legal entities
Choosing the right legal vehicle is just as important as selecting a company car
Business people often go about the task of choosing themselves a company car with a great deal of pleasure, dedication and wisdom, spending hours determining the pros and cons of the various options. The choice of which legal vehicle to use for a business generally receives a great deal less attention. Not very sensible!
Business people tend to focus on action and very often legal and administrative chores end up piling up somewhere in a corner of their desks. They put up with the accountant because they’re required to have one and someone has to do the figures. In many cases the lawyer only gets called in when something has already gone wrong. This reactive approach from business people, who are generally proactive, can be costly both financially and in terms of missed opportunities.
Small and medium-sized businesses in the Netherlands have several different business structures to choose from: a sole trader (with or without staff), a general partnership (V.O.F.) or trading partnership (maatschap), in both cases still involving personal liability for business debts, a limited company (B.V.) or a cooperative association with excluded liability (coöperatie UA). This list of legal vehicles is not exhaustive, but in practice these structures are most commonly used.
A business often starts out as a V.O.F. or sole trader as this has tax advantages in the early stages and after this no further consideration is given to the matter. If, years later, a difficult economic climate should result in insolvency, the owner of the business will suddenly discover that he or she is personally liable for all the debts of the business. A situation that can easily be prevented.
For almost every small or medium-sized business there is a stage, either right at the start or after the business has been established, when it is advisable to dispense with the V.O.F. form and set up a B.V. In many cases this change is never made, which is a missed opportunity. The introduction of the Flex B.V. is an attempt to make it easier for small and medium-sized businesses to obtain effective legal protection. This is intended to give business people the confidence to be more enterprising, with positive results for Dutch business in general.
As increasing numbers of people are working freelance (as sole traders or “zzp’ers” as they are known in the Netherlands), joining forces in a cooperative association with excluded liability, which allows freelancers to work together without taking on employees, can be an interesting alternative for professionals who want to be able to focus on their trade. This makes it possible to limit business risk and still expand and offer professionalism within an organisation. The option of choosing a legal form tailored to the owner’s personal wishes and situation is not exercised nearly often enough.
Many problems that arise at a later stage can be prevented by entering into a tailor-made V.O.F. agreement or having a well-drafted shareholders’ agreement, adapting the articles of association to correspond if necessary. When a business is first set up, the costs involved are often considered too high to justify making proper arrangements in this area. This is understandable, but businesses often end up paying a much higher price for this mistake later. We would strongly advise ensuring, certainly once your business begins to grow, that you have a good V.O.F. or shareholders’ agreement in place that has been tailor-made for the specific business and the business partners involved.