The BV Paradox

Many starting entrepreneurs opt for the private company (BV) almost automatically. In corporate and tax law, we see that this choice is often made at a very early stage, sometimes even before sales are generated. In doing so, the BV seems to have become a kind of standard solution: a professional legal form that limits liability, would be fiscally attractive and suitable for growth and investments.

However, this knee-jerk choice deserves nuance. Indeed, in practice, it appears that not every company has the same needs in the start-up phase. In fact, automatically opting for a BV can in some cases involve unnecessary costs and complexity.

Two types of start-up companies

In practice, we see that starting companies can be roughly divided into two segments. This distinction is important because the nature of the company often determines which legal form is most appropriate in the initial phase.

The first segment consists of entrepreneurs who can offer a product or service to the market relatively quickly and can thus generate turnover almost immediately. For example, entrepreneurs who develop a software tool that can be launched immediately, but also consultancy or advisory services, marketing agencies, IT service providers, design studios or other companies where the value lies mainly in the knowledge, skills or work of the entrepreneur himself. In these situations, there is often no need for a long-term development phase before the company can generate income. The company can usually be started with limited resources and then gradually grows by attracting customers.

The growth of this type of company is usually organic. First, an initial customer base is built up, then turnover grows and possibly investments can be made in expansion, staff or further product development. External investors usually do not play a central role in this phase; the company is often financed from own resources or from the generated turnover. The risks are usually relatively clear in the initial stages and the company often remains small and flexible organizationally. For these types of entrepreneurs, speed, low costs and agility are often key. A heavy legal structure is usually not necessary in this phase to operate the company.

The second segment consists of startups where a product, technology or platform must first be developed before there can even be turnover. We see this, for example, in medical innovations, biotech companies, deep-tech startups, hardware developments or complex technological platforms. In such cases, the development phase can take several years and often require significant investments before the product can actually be brought to market.

For these companies, external financing is often essential. Developing a technology, conducting research, obtaining patents or completing certification and testing processes requires considerable resources. Venture capital, angel investors or other forms of venture capital therefore often play an important role here. As a rule, investors will only participate via shares in a company, where clear agreements can be made about control, share relationships, investment rounds and exit scenarios.

In addition, this type of company often involves greater risks. Innovative developments involve a considerable degree of uncertainty: a product may fail technically, market acceptance may fail, or additional funding may prove necessary. In this context, the corporate structure of a BV offers a legal framework in which investors can participate and where risks can be better organized and distributed.

The distinction between these two segments is therefore legally and fiscally very relevant to the choice of legal form. While for capital-intensive startups, a BV structure is often a logical and sometimes even necessary choice, for entrepreneurs who can offer their activities directly to the market, a simpler legal form in the initial phase can actually better suit the nature and development of their company.

When a BV makes sense

For the second segment, the capital-intensive startup, the BV is often a logical and sometimes even necessary choice. Investors (subject to exceptions) only enter via shares in a company. In addition, the BV offers a structure for share issuance, investment rounds and governance agreements between founders and investors.

In addition, risk diversification plays a role. Innovative developments involve uncertainty and can involve significant financial risks. The BV structure makes it possible to separate these risks from the founders' private assets and offers a legal framework that is in line with venture capital financing.

For this type of company, the additional costs, such as incorporation costs, accounting fees and legal advice, are often a necessary part of the growth model.

When a BV comes too early

This is different for the first segment. Entrepreneurs who can start delivering a service or product immediately often do not need external investors and are gradually building their business from their own turnover. By the way, this does not mean that a BV is always immediately necessary for startups in the second segment. Even for companies that are still developing a product or technology, a simple legal form may sometimes be appropriate in the first phase, for example as long as the activities are still limited to research, development or preparation of the company. This is especially true when the development phase is still relatively small and does not (yet) require substantial capital. Only when external funding, investment rounds or a more complex governance structure come into view does the BV structure often become truly relevant.

However, they also often opt for a BV directly. In many cases, however, this is not necessary and sometimes even unfavorable. This is because a BV involves high and fixed costs: incorporation by notarial deed, administrative obligations, possible accounting costs and, if the entrepreneur becomes a director and major shareholder, the usual salary. These costs can be a relatively heavy burden at an early stage.

As a result, a BV structure that is too early can even put pressure on the continuity of a young company. In a phase where flexibility, low costs and fast decision-making are important, a lighter legal form can better match the reality of the company. In addition, a sole proprietorship or VOF is relatively easy to set up. Unlike a BV, this does not require a notarial incorporation and there are no formal incorporation requirements. In practice, registration with the Chamber of Commerce is sufficient, after which the entrepreneur can immediately start developing activities. This accessibility makes it possible to start quickly and let the company grow before opting for a heavier corporate structure.

The role of liability

A frequently mentioned argument for the BV is the limitation of liability. From a legal point of view, it is true that the BV has separate assets. In principle, creditors can only recover from the company's assets.

In practice, however, this protection is less absolute than is often thought. As a director of the BV, you fall under the regime of directors' liability. Under article 2:9 of the Dutch Civil Code, directors must perform their duties properly. In bankruptcy situations, a director can be held personally liable under article 2:248 of the Dutch Civil Code if there is manifestly improper administration.

In addition, personal liability can also arise outside bankruptcy, for example when obligations are entered into when the board knew or should have known that the BV would not be able to comply with them. This can be the case, for example, when there are inadequate or poorly maintained records.

The legal form alone therefore does not offer complete protection. A good legal structure, including clear contracts, general terms and conditions and liability restrictions, remains essential regardless of the legal form chosen.

The often underestimated governance of the BV

What is also often underestimated is that a BV is not only a different legal form, but also involves a complete legal governance framework. A BV has a formal separation between different bodies, each with their own powers and responsibilities. For example, the board of directors is responsible for managing the company, while the shareholders make certain decisions and supervise the board through the general meeting.

In practice, we see that many starting entrepreneurs are not sufficiently aware of this. The BV is then set up because it feels “professional”, but then the company is actually still managed informally, as if it were a one-man business. Legally, however, this can be problematic.

Indeed, within a BV, important decisions must be formally made and recorded, for example in board decisions or shareholder decisions. Examples include entering into certain obligations, paying dividends, appointing or firing directors, or changing the company's strategy. In addition, the board has a legal obligation to keep proper records and the board must prepare annual accounts. These financial statements must then be adopted by shareholders, for which, in principle, a shareholders' meeting should be held and shareholders summoned in good time. The adopted financial statements must then be filed with the Chamber of Commerce.

Failure to comply with these governance obligations can have legal consequences. Not only can this lead to internal discussions between shareholders and directors, but in certain situations, it can also play a role in assessing directors' liability.

The BV is therefore not a mere fiscal or administrative form choice, but a legal structure with clear rules about decision-making, responsibility and supervision. Especially for companies that are still in a flexible and experimental phase, this formal structure can outweigh often previously estimated.

Tax considerations

Tax motives also often play a role in choosing a BV. The lower corporate tax rates are regularly mentioned as an advantage. For starting companies, however, this is far from always decisive.

This is because entrepreneurs who are active through a sole trader or partnership (VOF) benefit from various income tax facilities, such as the self-employed deduction, the starter deduction and the SME profit exemption. However, this theme deserves attention again in the coming years, as various tax facilities for IB entrepreneurs are gradually being phased out.

In the start-up phase, where profits are often limited or even losses are incurred, a transparent legal form can therefore (currently) be more fiscally advantageous than a BV.

The BV as the next step

However, this does not mean that the BV would be unreachable or undesirable. On the contrary. The legislator has created various facilities that make it possible to switch to a BV relatively easily later.

For example, under certain conditions, a company can be silently inserted into a BV, deferring taxation on the hidden reserves. In addition, there is even the possibility of a silent return to income tax if the BV structure later proves inappropriate.

This makes it possible to first build a company in a simple legal form, and only switch to a BV when the size, profitability or investment need actually require it.

A sober choice for the legal form

The choice for a legal form should therefore not be driven by the appearance of the BV or by the idea that it is the only professional structure. The right choice depends on the phase of the company, the financing needs and the nature of the activities.

For capital-intensive startups, the BV can be the right structure from the start. For many other entrepreneurs, a one-man business or VOF can actually provide a solid and flexible basis for building the company.

In this sense, the BV is often not the starting point of entrepreneurship, but the logical end point of a company that has first been given the space to grow.

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