The business may be set up in the form of a sole proprietorship or company (in the case of a company, the business can be set up in the form of a capital company or partnership). This is an important decision, as the tax burden weighing on the profit of the business shall depend on its legal structure. Entrepreneurs are therefore justified in their desire to set up their business in a legal form that will minimise the tax burden.
However, in addition to the tax consequences on its financial result, the legal structure chosen for a business also has legal consequences in terms of, inter alia, the management method and the liability of partners. The legal form chosen for the business can therefore not be based solely on tax criteria.
Summary of the tax criteria
Looking only at the tax considerations, however, the different taxes applicable to the different legal forms can be summarised as per the following table:
|
Sole proprietorship or partnership |
Capital company |
|---|---|
|
Managing partner’s remuneration is not tax deductible |
Managing partner’s remuneration is tax deductible |
|
Remuneration of the spouse of the managing partner is not tax deductible |
Remuneration of the spouse of the managing partner is tax deductible |
|
Interest on capital contributed by the partners themselves is not tax deductible |
Interest on capital contributed by the partners themselves is tax deductible |
|
Single but direct taxation of results at the level of the partner |
Economic double taxation: direct taxation of corporate profits and 50 % taxation of the dividends when paid |
|
Business manager directly liable for the business' losses |
Partner not liable for the company’s losses |
|
Higher taxation of the profits reinvested |
Lower taxation of the profits reinvested |
Capital duty that was previously payable on capital when it was subscribed was abolished on 1 January 2009.
Reinvestment of profits or distribution of dividends
Among the different tax criteria, one criterion seems essential: taxation of the business' profits. The founder of the business generally has a long-term outlook where the majority of the annual profit is reinvested in the business to ensure its development. For this type of entrepreneur, it is recommended to resort to the form of capital company, as this legal structure increases the capacity for self-financing because the non-distributed profits are not subject to personal income tax.
|
Operations |
Self-financing |
Transparent company or sole proprietorship |
|---|---|---|
|
Pre-tax profit |
100 |
100 |
|
Corporate income tax |
(21) |
0 |
|
Communal business tax |
6.75 |
6.32 |
|
Corporate profit after tax |
72.25 |
93.68 |
|
Personal income tax (39%) |
(0) |
38.00 |
|
Net income |
72.25 |
55.68 |
|
Reinvestment |
72.25 |
55.68 |
If, on the other hand, the entrepreneur fears start-up losses, he should carry out his activity in the form of a sole proprietorship or a partnership. In this case, the business manager is directly liable for the business' losses and they can be offset against other income earned.
Example: the founder of business C receives annual rental income of EUR 100,000. He also wants to set up a sports shop. Because of the existing competition, he expects start-up losses of EUR 70,000 in year 1 and EUR 30,000 in year 2.
If he chooses to set up his business in the form of a sole proprietorship or partnership, his taxable income will be EUR 30,000 (= 100,000 – 70,000) in year 1 and 70,000 (= 100,000 – 30,000) in year 2.
If he chooses the form of a capital company, his personal taxable income will be EUR 100,000. Since the capital company has sustained losses, it will not pay taxes; the losses, however, do not affect the partner. Nevertheless, tax losses are carried forward indefinitely over time at the level of the capital company.)