If you started your own sole proprietorship a few years ago and things are going well, you may come to the realization: “I need to switch to a BV!” But then what? How does this work? What should I keep in mind? If you want to transfer your sole proprietorship to a BV, it can sometimes be a complicated process. It’s not as simple as shutting down your sole proprietorship and starting a new BV.
The main reason lies in the key difference between a sole proprietorship and a BV, legal entity. The sole proprietorship is what is called transparent, while the BV has legal entity. This means that you are the sole proprietorship or at least personally responsible for all obligations and debts, while the BV, because it has legal entity as an entity, enters the obligations.
When you want to convert your sole proprietorship to a BV, the business that is operated in your sole proprietorship is transferred to a third party, the BV. You become a shareholder in the BV, but the BV is still a separate entity. Therefore, the tax authorities assume that in a conversion, the business is alienated, so that you as an entrepreneur make a profit on the conversion. This is called cessation profit.
This fictitious cessation profit is basically taxed. This is of course undesirable because you must pay taxes on a profit that you did not actually make. Fortunately, the legislator has also seen this and that is why the silent conversion has been created. This method ensures that you can convert the sole proprietorship to a BV without having to pay taxes.
You only have to pay taxes when the business has a value and a fictitious profit is therefore made. In case this is not the case, other methods of conversion such as the asset-liability transaction or the noisy contribution may be better.
The asset-liability transaction is the simplest method to convert a sole proprietorship to a BV. Here, (part of) the assets and liabilities of the sole proprietorship are transferred to the new BV.
This not only includes physical assets such as laptops but also intangible assets such as brand names, websites, bank accounts, and invoices yet to be paid or received.
As mentioned earlier, in the asset-liability transaction, you will have to pay taxes on the cessation profit. This cessation profit consists of roughly two parts. You have the hidden reserves on the assets and liabilities. For example, if a car is owned by the business with a book value of €10,000, but, it is worth €15,000, you will have to pay taxes on the difference, which is €5,000.
Additionally, you will encounter goodwill. Goodwill is essentially all the value that is present in a business but intangible. This can include the business’s network, reputation, etc. taxes must also be paid on this value in the asset-liability transaction. Everyone who terminates their business has the right to cessation relief once. This is a discount on the cessation profit of €3,630. If your cessation profit is relatively small, it may be interesting to opt for the asset-liability transaction.
When opting for a conversion with retroactive effect (also known as a “noisy conversion”), the tax on cessation profits must be paid, just like in an asset transfer transaction. However, unlike the asset transfer transaction, the conversion with retroactive effect has a retroactive effect.
This means that you can enjoy the benefits of a BV (limited liability company) for the whole year, even if the BV is only established in September. For example, if you see in March that your business is doing so well that you need to switch to a BV, you can still switch to the BV as of January 1st.
Because tax on cessation profits must be paid in a conversion with retroactive effect, losses from previous years can be deducted from this profit. So, if you suffered losses in the first three years of the business and then switch to a BV, gains made from cessation can have losses from earlier years deducted. This can be very interesting.
As we will see shortly, the silent conversion requires that the shareholders’ ownership ratio in the new BV must be the same as the ownership ratio of the sole proprietorship before the conversion. This requirement does not apply to the conversion with retroactive effect. If you plan to attract co-partners, it may be more convenient to choose the conversion with retroactive effect.
If you use the silent conversion, the valuations of the assets and liabilities remain the same as in the sole proprietorship. As mentioned, no tax is paid on hidden reserves and goodwill. Especially regarding the continuity of the business, this is desirable since tax would otherwise have to be paid on unrealized profits, which can lead to liquidity problems. The tax claim on the hidden reserves and goodwill is transferred to the BV. This claim does not disappear. If you later sell the BV, you will still have to pay tax. The tax authority is not left empty-handed.
The silent conversion also has a retroactive effect, which is even longer than that of the conversion with retroactive effect. You can still decide to switch to a BV later and still enjoy the benefits of a BV for the entire year. The deadline is September 30th, and the BV does not even need to be established until March 31st of the year after the conversion.
Of course, the legislator sets a number of conditions for the silent conversion. The most important are:
• After the conversion, the shareholders must be entitled to the same proportion of the assets as the owners before the conversion;
• You may not have the intention to dispose of the shares in the BV within three years of the conversion;
• Formal requirements that mainly relate to the submission of documents. Of course, we can help you with this.
In the above, I have always assumed that a sole proprietorship was converted to a BV. However, the same applies to a partnership that is converted to a BV structure.
Not your regular financial advisor. Unlock your financial potential
and get your money to work!
✔️ Always available for all your questions
✔️ Customized advice for your business
✔️ For long-term relationships
Spaarndammerstraat 27Hs,
Amsterdam
06 11734637
willem@suijkerbuijk-co.nl
