Starting up a sole proprietorship
When you start as a self-employed person, you have to choose a company form. Note that a sole proprietorship is by far the simplest form, with very few starting conditions.
What is a sole proprietorship?
In short, a sole proprietorship is a form of business in which one person is in all respects responsible for the company. A sole proprietorship is the economic activity of a natural person who runs the business.
It’s also the most common company form among starters, precisely because it’s very simple and inexpensive to set up:
- You don’t need a separate legal entity
- You don’t need start-up capital
- You thus act as a natural person
- You can set it up alone
In other words, there is effectively no distinction between you and your business.
Setting up a sole proprietorship
You can find out how to set up a sole proprietorship and what the pros and cons of a sole proprietorship are compared to a company under 'Choosing between a sole proprietorship or company'
Costs of setting up a sole proprietorship
The only cost you incur is for the registration of your business in the CBE. A Securex Business Counter does it for you and it costs on average of €105,50. Activating your VAT number costs €60 (excl. VAT) and is also done by the Business Counter.
Tip: If you are a small business with an annual turnover of €25,000, you can benefit from the so-called exemption scheme. This means that you don’t have to charge VAT, and therefore you don’t have to refund it to the government. Just remember that you won’t be able to deduct VAT.
In addition, you will also incur costs for your bank account, joining a social insurance fund, taking out insurances, but these are independent of whether you opt for a sole proprietorship or a company.
You can start your sole proprietorship and be legally fully compliant from €249 thanks to our starter packs.
Sole proprietorship: no start-up capital required
As mentioned, one of the great advantages of a sole proprietorship is that you don’t need a minimum start-up capital. As opposed to other company forms, you don’t need to draw up a financial plan with basic capital to bridge the first two or three years.
Extra costs for a sole proprietorship
Sole proprietorship and social security contributions
Since you start as a self-employed person, you must also join a social insurance fund as the manager of a sole proprietorship. This affiliation is free of charge, but from then on you will pay social security contributions. Read all about paying social security contributions as a self-employed person.
Sole proprietorship and accounting
In the case of a sole proprietorship, simplified or single-entry bookkeeping is sufficient. In theory, you can do this yourself, but our advice is to always work with an accountant. Experience has shown that having an accountant on board having an accountant on board greatly increases your chances of success.
By way of example, simplified accounting includes:
- A diary of your finances (chronological overview)
- A purchase ledger (invoices from suppliers)
- A sales ledger (invoices from customers)
- An inventory ledger (an annual overview of the financial situation of your business)
What about sole proprietorship and taxes?
In the case of a sole proprietorship, the profit of your sole proprietorship will be taxed as personal income tax. So there is no separate tax return and assessment for your business. In the case of a company, there is a distinction and this gives you many more options to structure your taxable income as optimally as possible.
A little reminder: personal income tax builds up progressively and has 5 rates, of which the lowest rate is 25% and the highest 50%.
Please note: Municipal tax needs to be added to personal income tax due (usually about 7%).
Rates assessment year 2023 (revenue 2022):
- Under €13,870: 25% tax rate
- Between €13,870 and €24,480: 40% tax rate
- Between €24,480 - €42,370: 45% tax rate
- From €42,370: 50% tax rate.
Sole proprietorship and professional expenses
You can deduct a number of professional expenses, also as a sole proprietorship. The tax is levied on the profit of your business, not on your turnover.
Tip: If you practise a liberal profession, you can choose to deduct your actual professional expenses, or opt for fixed professional expenses.
The tax authorities will only accept the deduction of expenses if they are incurred or borne in order to acquire or retain taxable income. It’s also important for you to be able to prove the authenticity and amount of the expenses (by means of invoices or receipts), and that they are reasonable in relation to your work. In other words, you can certainly put in an occasional dinner with customers, but you probably won't get away with a few thousand euros in restaurant receipts.
Advantages and disadvantages of a sole proprietorship
A sole proprietorship has a number of major advantages, but also some major disadvantages. These can be found in 'Choosing between a sole proprietorship or a company'.
In short, the most important advantages are:
- It’s simple and inexpensive to set up on your own
- You decide how much profit you reinvest in your business
- You have limited administrative and accounting obligations
The main disadvantages are:
- There is no distinction between business and personal assets: your liability is unlimited
- Income is subject to personal income tax
- Arranging succession or takeover is more difficult
Sole proprietorship or company
You can read about the differences between a sole proprietorship and a company in 'Choosing between a sole proprietorship or a company'.
However, that doesn’t always say enough about why you would choose one or the other.
A sole proprietorship is the best choice for you if:
- You have little start-up capital
- You run/take few risks
- You have no idea yet about your income
In other words, you want to start in an administratively simple and low-cost manner. Many freelancers, who run little risk of making significant mistakes in their profession, therefore choose to start as a sole proprietorship. Once the business does well, they can always switch to a company at a later stage.
A company is the best choice for you if:
- You have sufficient start-up capital
- You run more/increasing risks
- You want to make major investments
Switching from a sole proprietorship to a company
If you achieve a good turnover every month, it may be interesting to consider switching to a company, such as a bv.
- For tax reasons, because corporation tax is, after all, more advantageous than personal income tax and you have many more tax planning options.
- For legal reasons, because you want to better protect your private assets. Think of the ‘founder's liability’ because, with a company, you are responsible for handling your company's capital carefully and responsibly.
- For economic reasons, if you want to borrow additional financial resources to invest. With a company, the bank has a better insight into your financial situation and you have a greater chance of a positive response.
