The legal structure of a business does not only have an influence on the liability of the entrepreneur, the daily business management and the distribution of the powers within the business; it also impacts the taxation of investments made, the income generated and distributed or the losses incurred by the business, if any.
The level of taxation differs depending on the legal business form:
Every person planning to set up a company must therefore take into account the tax characteristics which will depend on the legal form of business chosen and which will determine the company form best suited for the entrepreneur's needs:
The sole trader carries out the business activity in his own name.
He has to take decisions on his own and only he is responsible for the financing of his business.
He must take full responsibility with regard to third parties (debts of the company) and pledge his personal assets.
The income and profits of the business belong to one person only: the sole trader himself.
A transparent company is not taxable as such. The income of the business is directly taxable at the level of its partners.
No withholding tax is applicable.
These conditions apply to:
The income of the capital company is taxable at the level of the company: the shareholders are only taxable when the profit is distributed.
We speak of a distribution of dividends with a withholding tax rate of 15 %, unless a more favourable rate applies (convention, parent/subsidiary directive, etc.).
These conditions apply to:
A sole proprietorship has no tax status.
It is not considered to be a taxable person under tax law. The operator of the business is the taxable person: he has to submit his personal tax return and pays income tax based on his commercial activity.
A partnership has no tax status.
Capital companies have different tax obligations and a tax status which is separate from the one of its shareholders.
Business profits in a transparent company are taxed at the level of the operator/partners.
The profit is added to the other taxable income of the operator/partners (in proportion to their contribution) and each of them is liable for income tax (impôt sur le revenu - IR) on their cumulated income.
Business operators may not deduct the following from their income tax:
Profits generated by opaque companies are theoretically taxed twice:
However, certain tax exemptions allow for the elimination of this double economic taxation:
The company may namely deduct the following from corporate income tax:
Communal business tax (impôt commercial communal - ICC) is paid by the operator.
Communal business tax is borne by the company.
Net wealth tax does not apply to sole traders as they are natural persons.
Net wealth tax does not apply to partners who are natural persons.
However, if the partner/shareholder is an opaque company, they are liable for net wealth tax in proportion to their contribution.
Net wealth tax is borne by the company.
A sole proprietorship and its owner are deemed to be one and the same legal entity, and their investment in the business is not to be seen as the level of their contribution.
It is in fact considered a change in allocation of the owner's assets, or more precisely, a transfer from the entrepreneur's private assets to his working capital.
The legal personality of the company is separate from that of any person who decides to contribute or withdraw an asset.
Therefore, the contribution may be defined as the allocation of an asset to the business in exchange for shares in the company (or where applicable a hidden contribution).
Whenever an entrepreneur withdraws assets from his business, for personal or any other use (not linked to the business), we speak of private withdrawal.
The withdrawal will be treated as a distribution and will follow the tax logic applied to the distribution of dividends (or where applicable a hidden distribution of profits).
Losses are borne by the business operator/partners and can be offset against their other income. Possible losses during business start up will reduce the operator's global taxable income.
In the event of lack of funds to compensate for the losses, the losses can be carried forward indefinitely and charged against the global future income.
Losses do not impact the partners and may not be charged against their other income. The losses incurred during start up will have no impact on the taxable income of the partners (natural persons).
However, the company will not pay tax and the losses can be carried forward indefinitely to be charged against future financial years.
Taxation of reinvested profits is higher for sole proprietorships and partnerships than for opaque companies.
As a matter of fact, sole traders (in sole proprietorships) / partners (in partnerships) are subject to personal income tax based on the business profits and personal income tax has a higher tax rate than corporate income tax.
Taxation of reinvested profits is lower for opaque companies than for sole proprietorships and partnerships.
The opaque company is only liable for corporate income tax (lower than personal income tax) on business profits.
Profits are reinvested and distributed later and are therefore not subject to personal income tax which normally only applies in the case of a distribution of dividends.