Sole Proprietorship versus Besloten Vennootschap (B.V.)

As a starting entrepreneur, you may face the issue of whether to start out as a sole proprietorship or a private limited liability company, a Besloten Vennootschap (B.V.). Even if you are already operating a business, it is still wise to evaluate whether your current form of business is the right one and whether it is properly structured.

In this article we will discuss the key advantages and disadvantages to the aforementioned ways of operating a business, plus share insights on possibilities to improve your current business structure.

Sole Proprietorship
A sole proprietorship is a type of business that is owned and run by one individual and in which there is no legal distinction between the owner and the business. Therefore, you have unlimited personal liability for all of the debts and legal liabilities of your business. Your personal assets, such as your home and personal bank account, could be at risk to satisfy unpaid debts, tax liabilities and other legal obligations of your sole proprietorship.
As a sole proprietor, all the business profits will be allocated to you directly and will be subject to income tax. In Curaçao we have a progressive income tax rate of 12% to 49% (2013). The highest income tax rate of 49% is applicable to all income over ANG 125,200.

Private Company with Limited Liability (B.V.)
You can also operate your business through a separate legal entity: the B.V. A lot of businesses are still operating under a naamloze vennootschap (N.V.), but to simplify things, the B.V. will be discussed here. Operating as a B.V., you would own shares in the company, so you and your business will no longer be viewed as one and the same. In order to legally represent and sign on behalf of your B.V., you will be its managing director and thus an employee of the B.V. It is not legally required for you to receive a minimum salary from your B.V. if you are also the managing director.

As a shareholder of the B.V., your contributed capital is at risk, rather than your other personal assets. Your financial capital contribution to your B.V. can be as low as ANG 1. However, as the managing director of your B.V., you may still be held personally liable for the debts and obligations of the B.V., in the case of misconduct and mismanagement.

In Curaçao, the taxable base of the B.V. is determined based on the total income minus all business expenses and charges necessary for the realization of the profit. In your B.V. you can also administer your future pension, whereby the pension provision reduces your taxable base for profit tax purposes.

In principle, the taxable profit realized by your B.V. is subject to profit tax at the current standard rate of 27.5% (2013). Retained earnings of your B.V. can be distributed to you as a dividend. This dividend income will be subject to income tax at a flat rate of 19.5% and should be reported in your individual income tax return. Therefore, profits realized by the B.V. and distributed to the shareholder are, in principle, subject to a combined and total effective tax rate of 41.6%.

Sole Proprietorship versus B.V.
The choice between a sole proprietorship and a B.V. is largely determined by the manner in which you can be held personally liable for the debts and liabilities of your business and the applicable tax burden. The B.V. might be the best option if you are entering a business endeavour with risks that will not be covered by personal liability insurances. In that case, the B.V. will help you protect your personal assets such as your house and personal bank accounts in the unfortunate situation of bankruptcy or legal claims.
From a tax perspective, the B.V. becomes more attractive when the expected business profits increase as the business grows; the rule of thumb is when the taxable profit of your business exceeds ANG 125,000 per year. If you are expecting low business profits, or even losses in the start-up phase, you might prefer sole proprietorship; however, you will still have to accept the risk of personal liability. The choice between which type of business to choose for your company all comes down to your personal situation and the personal taxable deductions you have in income tax, such as the interest on your mortgage. Therefore, it is best to carefully evaluate the advantages and disadvantages of sole proprietorship versus a B.V. in order to determine which is best given your personal situation. If you have a sole proprietorship at the moment and realize that the B.V. will be more appropriate for you, the Curaçao tax laws provide you with the possibility to transfer your sole proprietorship into a B.V. without triggering income tax if certain conditions are met.

The Holding Structure
There is a saying that when it comes to a B.V., one equals none. This implies that you are better off having two B.V.s, instead of just one. Therefore, whether you are already operating a business through a B.V. or are planning to do so in the future, it is important to also consider the incorporation of a second B.V. as a holding company (or ‘holding’).

At first glance, the term ‘holding’ has a complicated ring to it. It sounds like something that only multinationals with companies all over the world would need. However, this is a common misconception. Even for the small business owner, it is important to realize that the use of a holding structure is an asset protection planning strategy that helps to further limit liability in your business structure. It also offers several tax advantages.

Terrence Melendez

In Curaçao, entrepreneurs often carry out all their business activities through one B.V. (or N.V.). Even though they are, in principle, not personally liable for debts and liabilities of the B.V., in the worst-case scenario they can still lose all the property attributable to the B.V. itself. As a shareholder and business owner, you could still end up losing your company car, business properties, retained earnings and accrued pension entitlements in your B.V. This could be avoided by implementing a holding structure.

In a holding structure you will have two B.V.s instead of one. One B.V. will be used for the day-to-day business activities, which bears all the business risks. This B.V. will be the operating entity that engages in all the contracts with the clients, employs all the personnel and owns the business assets and inventory. To the outside world, this B.V. will be considered the business operating company.

The shares of the operating company will be held by a second B.V., the holding. As sole shareholder of the holding, you can use this B.V. to accrue your pension entitlements and to own valuable assets, such as real estate, developed trademarks and retained earnings. That way, if the operating entity goes bankrupt, these valuable assets are safe in the holding, as the holding cannot be held responsible for the debt of the operating company.

Besides asset protection, the holding structure also offers several tax advantages. For example, you can accumulate your retained earnings ‘tax efficiently’ in the holding, while you decide whether to reinvest or to distribute these funds. More specifically, you can distribute the retained earnings of your operating company to the holding without paying any additional profit tax by applying the participation exemption. This way you will avoid making dividend distributions to you personally and will, therefore, delay the payment of the aforementioned 19.5% income tax. Applying the participation exemption also makes the holding structure perfect for ensuring a tax efficient transfer of the operating company to your children and grandchildren when you want to take a step back and let the next generation take over the business.

If at one point the holding sells the shares in the operating company, possible capital gains realized with this sale of shares may be exempt from profit tax in the holding company. This is another tax advantage, which enables you to use these proceeds to reinvest in a newly, to-be-incorporated, operating company, without having to pay any profit tax on the capital gains. Without the holding structure, capital gains on the sale of shares would immediately be subject to income tax at the rate of 19.5%.

If you are already operating your business through a B.V., but without a holding company, it is not too late to set up a holding structure. Provided that certain conditions are met, you can transfer your shares in the operating B.V. to a newly incorporated holding company, without triggering income tax.

Regardless if you are planning to start a new business, or are already operating one, you can take the aforementioned information into consideration when deciding your next step. As illustrated in this article, how you operate your business and design your business structure can have a significant impact on your financial situation in both the short and long term. In the short term, you can possibly limit your yearly tax expenses by choosing the right form of business. In the long term, by making sure you have the right business structure in place, you can benefit from certain tax regulations, for example when you sell your business. Please take into consideration that each situation has unique characteristics and circumstances that require specific tax advice for an optimal result.

This article was written by PwC partner, Zuleika Lasten, and assistant manager, Terrence Melendez, at PwC Dutch Caribbean. PwC Dutch Caribbean helps organizations and individuals create the value they desire. For 75 years, our 170 partners and staff are committed to delivering quality in assurance, tax, advisory and accounting services out of our offices in Curaçao, Aruba, St. Maarten and Bonaire. PwC Dutch Caribbean is a member of the PwC network of firms, with offices in 157 countries and more than 184,000 employees. Tell us what matters to you and find out more by visiting us at www.pwc.com/dutch-caribbean.

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