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Written by Tim Carapiet-Petit, Lisette Oosterveen and Bart Dreef
One of the most challenging tasks when starting your startup is the legal structuring. To address, here are some key do’s and don’ts for structuring your business, focusing on the sole proprietorships (eenmanszaken) and the general partnership (VOFs). A separate blog will be focussing on the limited liability company (Besloten Vennootschap, or BV), since in practice, nearly all startups that aim for growth will soon need a BV structure in the long run for reasons like limiting liability, attracting investors, or setting up a proper holding structure.
But before reaching that stage, every startup with a single founder will, by default, start out as a sole proprietorship. Legally and financially, a sole proprietorship does not exist: there is no distinction between the founder and its business, it offers no liability protection and is not suitable for attracting investors. The only difference is that you can get a registration as the trade register (KvK) and a VAT number. Then again, with that you can start right away with minimal red tape. Sole proprietorship generally also has some financial benefits over limited companies if revenues are not so high yet (~EUR 150k or less).
Startups with multiple founders will start out as a VOF (Vennootschap Onder Firma). Contrary to a sole proprietorship, the VOF is recognised by law. Up- and downsides are similar to the sole proprietorship: it offers a simple, cost-effective and flexible structure that works well in the early phase of a startup, especially when two or more people start working together before there’s enough revenue or investment to justify forming a BV, similar financial benefits apply when revenue levels are still relatively low, but on the other hand each founder is jointly and severally liable (hoofdelijk aansprakelijk) for the VOF’s debts, including those which have arisen under the management of prior partners – all creditors may address each partner individually for collection of the full amount of the VOF’s debt.
Being a partnership, the legally defined VOF can come into existence automatically even without a written agreement, just because of the fact that two or more people start working together with the intention to make a profit. Although there is a legal framework for VOFs in place, that framework leaves enough uncertainty to rely on. It is therefore highly recommended to put the terms of your collaboration in a written VOF agreement to prevent discussions.
What to include in the VOF agreement?
A solid VOF agreement is essential. It sets out what each founder contributes, how profits are divided, and how to deal with exit scenarios, liability, and decision-making. Without it, founders may face legal or financial surprises down the line. The agreement should at least provide rules on the following topics:
- Contributions by each partner
Partners may contribute cash, time, equipment, etc. How much is everyone contributing, and how does this translate to the allocation of profit and debts? Contribution can also be dynamic (e.g. by applying the Slicing Pie model)
- Profit and debt distribution
The allocation of profit and debts does not necessarily follow pace with each partners’ contribution, as long as multiple partners (versus a single partner) share in the profits. By contrast, one partner may carry all debts of the VOF.
- Authority to represent the VOF
Each partner is fully authorised to sign everything on behalf of the VOF. Partners may agree otherwise, and register joint authority with the Trade Register.
Termination clauses and exit arrangements
If nothing is arranged, the VOF will cease to exist when a partner steps out. All operations then need to be ceased, and all assets need to be distributed. Generally this is not desirable, so partner better arrange for a mechanism that ensures continuity of the business if one of the partners wants to stop.
Although not legally required, we strongly recommend drafting at least a basic VOF agreement from the outset. It helps prevent misunderstandings and protects both parties, until the time comes to transition to a BV structure. By then it is possible to convert your VOF into a BV, with the assistance of the civil law notary and sometimes your lawyer.
When do you want to transition into a BV structure then? Financially and legally there may be different trigger moments. It may be financially interesting to maintain your sole proprietorship or VOF until approximately EUR 150,000 revenue is generated. Legally, as a BV generally shields you from liability, you should ask yourself whether you are willing to take the financial business risks with the sole proprietorship or VOF: does that new contract you are signing with your customer carry with it a potential liability that you can and are willing to cover from personal funds, or can you get it insured? Or do you prefer to have that liability land with the BV if needs be? Also, converting your VOF into a BV becomes more challenging if the value of the business increases. Lastly, since financially speaking the distinction between the company and the partners in a sole proprietorship or VOF is near to none, investors tend to not be very willing to invest in anything other than a BV.
Please reach out if you want to discuss your situation on the best way to structure your startup!
