Switching to a legal entity: signals, timing and steps
Already trading in your own name, with a growing business? Find out when to switch to a legal entity, how to pick the right moment, what to do with your clients and which mistakes to avoid.
When your own name no longer fits
You already work as a self-employed person in your own name. Clients keep coming, turnover climbs, and one question arises. Is it time to switch to a legal entity? This guide addresses established traders. If you have not started yet, read our comparison of a sole proprietorship and a company instead.
In practice, a legal entity exists in law separately from you. The SRL (the Belgian private limited company) signs contracts, collects invoices and carries its own debts. You become its director rather than the direct holder of the business. This change needs preparation, since it affects your taxes, contracts and assets.
Five signals to switch to a legal entity
Some signs come up again and again among self-employed people.
- Your profit stays high for several years in a row.
- You do not need to draw everything you earn.
- Your activity exposes your assets to debts or disputes.
- Large clients prefer dealing with an incorporated business.
- A partner or investor wants to come on board.
On the tax side, accountants often quote a rule of thumb. Above an annual profit of EUR 45,000 to 55,000, a legal entity often becomes more attractive. However, this remains a common estimate, not a rule. Your costs, family situation and income needs shift that threshold a lot.
Why this benchmark? In your own name, all of your profit falls under personal income tax, which rises from 25% to 50%. About 20.5% of social contributions also apply. In a legal entity such as an SRL, profit kept in the business pays corporate income tax at 25%. Under conditions, SMEs even enjoy 20% on the first EUR 100,000. One condition is director's pay of at least EUR 45,000, or equal to taxable profit if that is lower.
SRL, SA or SC: which legal entity to choose?
Most self-employed people choose an SRL. It needs no minimum capital, but it does require a financial plan covering at least two years. A single founder is enough. Watch out, though, for founders' liability. It applies if the SRL goes bankrupt within three years with manifestly insufficient starting equity.
The SA (public limited company) requires minimum capital of EUR 61,500, which suits heavier projects. Still, a single shareholder is enough. The SC (cooperative) needs at least three founders and a genuine cooperative purpose. It therefore rarely suits a lone trader.
Choosing the right moment
Timing matters as much as the structure. Allow plenty of time between the first simulation and signing the deed. Starting the legal entity at the beginning of a quarter or financial year often eases the transition. It simplifies the accounting cut-off and the quarterly social contributions.
Do not stop trading in your own name too early, either. Until the legal entity has its enterprise number, keep invoicing in your own name. Then stop or amend that registration through your business desk.
For example, Nadia, a web developer, has earned a high and stable profit for three years. She invests in equipment and plans to hire soon. She drafts her financial plan in spring. She then signs the deed for a start at the beginning of the next quarter. Until then, she invoices in her own name.
Transferring your business to the legal entity, or not?
Your clients, equipment and any stock make up your business assets. You have three options.
In an SRL, a contribution in kind normally requires a report from a registered auditor on its value. A sale or contribution may also trigger a taxable capital gain. For VAT, transferring a whole business can, under conditions, take place without VAT. So have your accountant run the numbers before signing.
Finally, your contracts do not move to the legal entity automatically. Leases, vehicle leasing, insurance and client contracts stay in your name. Transferring them normally requires the consent of each other party. Also inform your bank and suppliers.
The steps in the right order
Here is the usual path when the legal entity is an SRL.
As director of the legal entity, you remain self-employed for social security purposes. The SRL also pays an annual contribution for companies. Our article on self-employed social contributions explains this. The FPS Economy website also explains registration with the Crossroads Bank for Enterprises.
What changes day to day
Once you operate through a legal entity, the SRL's cash no longer belongs to you. You pay yourself remuneration, which falls under personal income tax. Dividends require a double test: net assets and liquidity. Double-entry bookkeeping becomes mandatory. The annual accounts also go to the National Bank each year. Therefore, keep your private spending strictly apart from the SRL's.
Common mistakes when switching
- Switching to a legal entity with a profit too low to cover the costs.
- Taking money freely from the SRL's till as before.
- Forgetting to transfer client contracts, the lease or vehicle leasing.
- Contributing your clients without a serious valuation or auditor's report.
- Stopping your own-name activity before the legal entity has its number.
- Underestimating the financial plan, although it can make founders liable.
- Ignoring the possible capital gain on transferring the business.
Preparing your transition
A three-year forecast compares your net income in your own name and through a legal entity. It also forms the basis of the financial plan you hand to the notary. See also our guide to dividend taxation. Juristelo helps you build that forecast and track your legal entity year after year.
Work with your own figures
Juristelo builds your financial plan and business plan from your answers. You get a file ready for your bank.
See the Juristelo plans
