In four previous articles I have tried to explain which three options there are for converting your eenmanszaak (a sole proprietorship, hereafter EZ) into a BV (a private limited company). This last article on this subject provides a brief summary and a ‘what-if’ analysis that may be applicable to your business.
There are three ways to contribute an EZ to a BV: by means of an ‘asset-liability transaction’ (A), a ‘smooth contribution’ (B) or a ‘silent contribution’ (C). The differences between these methods have been discussed in previous articles. If you’re not sure which of these methods is best for your business, answer the following questions. With these questions, I assume that you have an EZ or VOF (a general partnership) and that you plan to convert it into a BV. All within the Netherlands and within Dutch corporate law.
Question 1
Does your EZ have few assets, such as computers, machines, real estate and supplies, not too much money in the bank and few outstanding debtors? Then option A is the best. The lower the value of these assets, the lower the discontinuation profit, which is favorable with option A.
Question 2
Does your EZ have little goodwill? Even then option A is the best. In short, goodwill is the market value of your company. It is a calculation of the expected revenues of your company in the future that is made possible by the existing knowledge, your current customers, the brand and the staff in your company.
Question 3
Has your EZ made sufficient use of the investment deduction and have you not built up a fiscal old age reserve (FOR)? Even then option A is the best. The tax benefits are greatest in the first three years of the existence of an EZ, after that the benefits gradually decrease.
Option A is obvious if you can answer questions 1 to 3 positively. If your EZ still has a decent value, such as accrued reserves, goodwill or real estate, or if you have not yet made full use of the investment deduction or if a fiscal old age reserve (FOR) has been built up, option A is not a good choice and you might consider options B or C. Then ask question 4.
Question 4
Do you plan to sell the newly established BV within three years? Then you can consider option B.
Question 5
Are you NOT planning to sell the newly established BV within three years? Then only option C remains. You will then not have to deal with discontinuation profits and you can fully pay up your shares with your EZ to be dissolved.
Two examples:
You have a small business with little value. There are hardly any assets, you have only a small number of customers and your company name is hardly known. There is less than € 1000 in the bank and you have used up all the tax benefits of an EZ. However, you want to continue as a BV with a fresh start. In that case, option A is best for you.
You have a growing business and you have big plans. The value of the EZ is already considerable, but you want to continue in the coming years with other shareholders in the form of a BV; you have also used up all the tax benefits of the EZ and it is time to take bigger steps. To avoid discontinuation profit, option C is best.
This was the last article about the choices you can make when converting your EZ into a BV. I have tried to explain in clear terms what is involved in such a conversion and what you may have to deal with. Of course, no company is the same and every company needs a suitable solution; that requires careful consideration to make the best decision.