When starting up a new business it is very important to look at the legal aspects which will influence the company in the future. In this part of the information file there will be the most important legal aspects for running a student company. First there is the selection of business form, in which there will be a compairison between the different possible forms. Afterwards a description of how the student company will work with contracts and partners. And finally there is an explanation of the typical dutch legal aspects such as profit tax and dividend.
Most important before starting the actual business is to compare the different possible legal business forms to make sure that it suits the intentions of the entrepreneurs. First the expanation per legal form will be given and afterwards a choice will be made for the student company itself.
There are three basic legal business forms which can be chosen when starting up a new company: sole proprietorship, partnership and corporation. Each will be described shortly and afterwards the form of the student company will be given.
The sole proprietorship is the oldest, most common, and simplest form of business organization. A sole proprietorship is a business owned and managed by one person.
The prevalent characteristic of a sole proprietorship is that the owner is inseparable from the business. Because they are the same entity, the owner of a sole proprietorship has complete control over the business, its operations, and is financially and legally responsible for all debts and legal actions against the business. Another aspect of the “same entity” aspect is that taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In other words, a sole proprietorship does not pay taxes separately from the owner.
A sole proprietorship is a good business organization for an individual starting a business that will remain small, does not have great exposure to liability, and does not justify the expenses of incorporating and ongoing corporate formalitie.
Partnership is a business association of two or more persons. These “persons” can include individuals, groups of individuals, companies, and corporations, therefore partnerships are highly adaptable in form and can vary in complexity. Each partner shares directly in the organization’s profits and shares control of the business operation, making it very profitable for the owners when times are good. But in bad times the consequence of this profit sharing is that partners are jointly and independently liable for the partnership’s debts
A corporation is a business entity which is owned by an individual or group of individuals and they run a business that legally exists. A corporate body is formed to regulate and manage business.
People work as a unit in a corporation and produce the value that will generate income. A lot of employment is generated by corporations and they have now a big impact on economic growth and the social development of any country that operates in the free market system.
A corporation has rights and responsibilities just like people have, and can also be liable to the processes of law just as an individual can. The characteristics of a corporation are the limited liability of shareholders, management being delegated to a board of directors, ownership by shareholders, transferable shares and that it has a separate legal personality.
Relevance to Student company
Because of the fact that the student company will sell shares and therefore will be owned by the shareholders, the student company will be a corporation. Big advantage of this legal form is the spreading of the potential business risks because of the large amounts of shareholders. Disadvantages for the entrepreneurs is the limited power within the company because of the “voice” of the shareholders and sharing the possible profit with the shareholders. Within shareholder meetings important decisions or problems will subject and together with the entrepreneurs the business strategies are set.
Contracts with other parties
Because the student company will be a trading company it is very important to make clear arrangements with the suppliers, customers and the entrepreneurs itself. This will split the the risks of the entrepreneurs as well as the business partners in the buying cyclus.
Because it is still not clear what kind of product or service the student company wil sell, this will be researched later on in the market research.
Laws and taxes
When somebody wants to start up a company within the netherlands this person should notify the Inland Revenue as soon as they know when their company plans to start business. If this person starts as sole trader, a partnership, a limited partnership or a partnership under common firm, he or she can register the company for the Inland Revenue and the trade register at the same time. This can be done at the Chamber of Commerce.
It is to your advantage to provide this information at an early stage: new companies which have made investments in their business often receive money back following their first VAT return (Value Added Tax). This is because a new business often pays more VAT in the beginning than it has actually charged.
Businesses may have to deal with three kinds of taxes:
Value added tax (VAT)
It is almost always compulsory for businesses to charge clients VAT (BTW).
Businesses are nearly always liable to charge value added tax to their clients. The rate is 6% or 19% depending on the type of product or service.
The VAT which a company receive from the client must be paid to the Inland Revenue. The VAT which the company has paid out itself to the suppliers can be offset against this.
Value added tax is paid either monthly or quarterly, depending on the type of business and the level of turnover.
Relevance to Student company
As a student company led it flow will also have to deal with the VAT. This VAT will be added to the products before they are getting sold, downside of these measures are that the products will become more expensive for the buyers making it possibly harder to sell.
Income tax/wages and salaries tax
If the Inland Revenue considers a person as an entrepreneur, he or she can benefit from a number of tax allowances. They will then pay less income tax. Entrepreneurs who pay turnover tax are not always liable to pay income tax. When deciding if an entrepreneur has to pay income tax, the Inland Revenue will look at the following:
the extent of the work performed
the level of turnover and profit
the time spent in the business
the presentation to the market
the number of clients
the presence of debtors’ risk.
If the entrepreneur is liable to pay income tax, he can take advantage of a number of tax allowances. Employers have to make wage deductions and pay these to the Inland Revenue. Declaration and payment is usually done on a quarterly basis.
Relevance to Student company
Because the entrepreneurs of the student company will not pay the turnover tax, they will be forced to pay income tax. The reason for not paying the turnover tax is because the possible profit of the company will be spread over the shareholders, in other words the shareholders get the profit minus the turnover tax. The entrepreneurs will pay tax over their income.
If the company is a private company with limited liability, the owners will be liable to pay corporation tax. Corporation or corporate income tax is levied on companies established in the Netherlands (resident taxpayers) and on certain companies not established in the Netherlands, which receive income from the Netherlands (non-resident taxpayer). In this context, the term “company” includes companies with a capital consisting of share, co-operatives, mutual insurance and credit companies, foundations and other legal persons incorporated under civil law, when they administer an enterprise, funds for common account, and most publicly-controlled industrial and commercial undertakings.
Basis of assessment
Profits in the widest sense, with a number of additions or deductions. The determination of the taxable profits corresponds largely with the determination of profits taxable under personal income tax, including the deductibility of losses from other years.
Legal persons whose activities are of a social or charitable nature or otherwise in the public interest are exempted from corporation tax. Exempted categories of profit are those corresponding to the relevant exemptions under personal income tax. Furthermore the participation exemption applies to all dividends, gains and losses related to the holding of at least 5% of the shares in a subsidiary. This rule, preventing economic double taxation, is in general equally applicable to dividend deriving from domestic and foreign subsidiaries. The loss related to the winding-up of a subsidiary is, under certain conditions, deductible by the parent company. The deductibility of interest paid on non-functional loans and loans related to a reshuffle of participations within the group is restricted to certain circumstances. Another amendment permits companies to depreciate loss-making participations of 25% or more during the first five years after acquisition.
Fiscal unity: a company which holds 100% of the shares in a Dutch subsidiary may request to be qualified as a “fiscal unity”. However, certain conditions apply. It is possible for a fiscal unity to be consisted of more than two companies. The subsidiaries are considered to be absorbed by the parent. As a result, negative results of companies belonging to the unity can be compensated horizontally with positive results of the others. Interest paid to a group company in respect of the acquisition of shares in Dutch operating companies cannot be set off against the profit of these operating companies.
Regime for investment funds: provided that all current income is distributed to shareholders and a number of other conditions are met, an investment company or fund is entitled to add capital gains on securities and real property to a reinvestment reserve and to a rate of nil per cent on the (remaining) profit.
Annual assessment by the tax department on the basis of the taxpayer’s declaration. If no such declaration is submitted, the amount due is assessed directly by the tax department.
Rate (last update 3 January 2008)
2008: 20% over the first € 40,000, 23% over the next € 160,000 and 25.5% over the rest
2007: 20% over the first € 25,000, 23.5% over the next € 35,000 and 25.5% over the rest.
2005: 27% over the first € 22,689, 31% over the rest
2006: 25.5% over the first € 22,689, 29.6% over the rest
Dividends are currently taxed at a rate of 15%
Relevance to Student company
Because the student company is not privately owned by the entrepreneurs, the corparate tax does not have to be paid. Another tax which is important for the company is the dividend tax, because these have to be paid before the shareholders get their money.
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