June 1 2010 saw the official introduction in Belgium of the starter public limited liability company (S-PLLC). This new form of corporate entity was part of the legislature's response to the economic crisis and was intended to encourage new entrepreneurs with limited financial resources, offering them a home-grown alternative to the so-called 'light vehicles' available abroad, such as the UK limited company and Germany's 'mini-Gmbh'.
Over 18 months after it was unveiled, the new vehicle has had relatively few takers. Data from the Federal Public Service for the Economy(1) reveals that in the year following its introduction, only 844 entrepreneurs chose to establish an S-PLLC; most of these entities were established in the Brussels region, closely followed by the Flemish region.(2) In July 2011 the number of monthly incorporations of new S-PLLCs fell to an all-time low, whereas the figures for new foreign light vehicles - which the S-PLLC was designed to replace - have remained almost constant. Has the S-PLLC failed or do both entrepreneurs and banks need more time to become accustomed to it? It is arguable that its limited advantages fail to outweigh its many disadvantages.
The S-PLLC's main advantage is that start-up entrepreneurs enjoy limited liability without having to meet the PLLC requirements for subscribed and paid-up capital. An S-PLLC can be incorporated with capital of between €1 and €18,549 without having to relinquish its limited liability. However, considerable conditions are imposed in return for this advantage:
- An S-PLLC must comply with special regulations regarding creditor protection. It must use at least 25% of its annual net profit to establish a legal reserve (compared to 5% in the case of PLLCs) and it cannot reduce its capital while it enjoys S-PLLC status.
- An S-PLLC's shareholders bear additional liability. After three years they are jointly and severally liable to interested parties for any difference between the €18,550 threshold and the amount of subscribed capital.
- Only natural persons can establish an S-PLLC or own its shares, and an individual can establish only one S-PLLC, on penalty of becoming jointly and severally liable for the obligations of any further S-PLLCs.
- An S-PLLC's share capital must be increased to at least €18,550 if it employs (the equivalent of) five full-time employees.
- S-PLLC status is temporary. Within five years of incorporation, the company must increase its capital to at least €18,550, which triggers the loss of start-up status. This temporary nature means that the S-PLLC's articles of association must be amended within five years of its incorporation, which incurs additional costs.
- Profits cannot be paid without losing the benefit of the reduced company tax rate (24.98% instead of 33.99%). Since one of the eligibility requirements for the reduced rate is that no more than 13% of the paid-up capital be paid as a dividend, paying dividends is theoretically impossible with a capital of €1.
A further significant drawback of the S-PLLC is the requirement to obtain the services of a registered bookkeeper, an external accountant, a statutory auditor or an approved agency or organisation to devise a financial plan. The fees charged by these experts will add considerably to an S-PLLC's financial burden. Without taking into account the legal's fees for preparing the articles of association, the average fee for drawing up a financial plan is €500 and a notary public generally charges €1,000 for incorporating an S-PLLC. As such, the idea of establishing a company with a capital of €1 is a fantasy - in general, the minimum start-up capital required is €3,000. However, a study has shown that around 35% of all S-PLLCs have been established with a capital of €1.
The practical disadvantages of the S-PLLC structure seem to explain why so few start-ups have chosen to use it. However, the problem could be at least partly psychological - entrepreneurs may be understandably reluctant to choose a corporate vehicle which requires them to include the word 'starter' in all of the company's communications. A reassessment of this new corporate entity would be welcome.
For further information on this topic please contact Adriaan Dauwe or Carine Van Regenmortel at ALTIUS by telephone (+32 2 426 1414), fax (+32 2 426 2030) or email ([email protected] or [email protected]).
Endnotes
(1) A Department of Statistics and Economic Information study, based on data from the Crossroads Bank for Enterprises.
(2) From a study conducted by Graydon Belgium.
An earlier version of this update first appeared in De Tijd.