Setting Up Your First International Brand: Sole Proprietorship vs Limited Liability Companies

Many business owners who want to expand internationally will actually start another firm in an overseas territory in order to grow their brand. While said firm might still have the same name and trademarks that their domestic ones will, it’ll have to be registered in another nation as an independent firm. This is often a scary proposal for small business owners, since there’s a good chance that they might never have opened a business outside of their own region of the world.

When doing so, however, they can significantly reduce the problems related to starting one by slashing the number of choices they’re working with. Most countries have some form of limited liability company and almost all nations with market economies allow sole proprietorships as a type of incorporation. Since these are the two most basic types of registered firms you’ll normally find, it’s best to stick with them. Many business owners will start with a sole proprietorship and then switch over to a private limited liability company over time. Others, however, like to start with one of these from the get-go.

Benefits of Incorporating a Limited Liability Firm

A simple one-person operation is going to have to deal with some unique legal challenges. An owner of a sole proprietorship is always, in legal terms, jointly and severally liable for all actions of that sole proprietorship. If your sole proprietorship goes bankrupt, then you have to pay for the debts privately. This is different for those who run limited firms. If they go bankrupt, then in principle you will not be affected in your private assets.

There are a few ifs and buts here. If, for example, you actually go bankrupt, it will always be investigated whether the general principles of good administration have been complied with, again in legal terms. Simply put: it is investigated whether you have also acted recklessly or excessively. If you are demonstrably guilty of the bankruptcy of your firm, then you might still run into some legal hiccups but these are reduced over those of a sole proprietorship.

Different countries have different forms of limited firms, but they’re more or less the same from a hard legal standpoint. In Germany and Austria, the GmbH/GesmbH (Gesellschaft mit beschränkter Haftung) somewhat resembles the LLC (Limited Liability Company) common in the United States. Japan’s GK (Gōdō Gaisha) is essentially the same in many ways as well, as is the canonical Ltd. (Limited) manner of incorporation in the United Kingdom.

That alone should help to improve your situation when it comes time to incorporate a firm. You won’t have to worry about dramatic differences between various overseas markets regardless of where your initial company was based to begin with. Naturally, there are starkly different laws between countries and you’ll want to ensure that you aren’t falling afoul of any of these. Nevertheless, you should be able to single general path to incorporation regardless of where you want to take up shop.

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Starting a Business in a New Market

Take the Netherlands, for instance, which has a somewhat restrictive business policy but should serve as a general guide for how limited liability firms are incorporated in most continental Eurozone countries. A company incorporated as a BV firm (Besloten Vennootschap met beperkte aansprakelijkheid) will have the same advantages that most limited liability companies do elsewhere. Owners of a BV experience major positive tax consequences.

For example, with a BV you fall under corporate income tax, and no longer under personal income tax. If you make a sizable profit – the tipping point is around 150k euro profit – then you will be left with a lower taxation with a BV than with a sole proprietorship. So, if a business is booming with a sole proprietorship, then you’ll want to more than likely set up a BV or whatever your local comparative example is.

Keep in mind that a business like this would constitute a person, even though a business isn’t usually a person. In addition to joint and several liability, there are many more differences between a private limited company and a sole proprietorship. What is important for entrepreneurs who have doubts between whether they want to start a limited firm or a sole proprietorship. The limited company traditionally offers the stature of authority and commercial trustworthiness. Private companies are considered to be professional companies and not hobbyists. The status of BV, LLC or GmbH gives customers the signal that a company is serious, can be trusted and will not suddenly disappear.

In short: this stature can be used for getting in new clients. Another advantage that you have as owner of a limited firm is that you can issue shares and transfer the company partly or fully to someone else. The company can therefore easily be transferred from father to son, for example. You can also issue shares to family members, friends or associates with whom you have a close relationship to obtain funding or give them a slice of the company’s profits. All this is impossible at the sole proprietorship in an overwhelming majority of jurisdictions.

This is especially confusing for those who are attempting to manage a firm in the United States.

Different Models of Incorporation

Various jurisdictions in the United States have their own way of managing sole proprietorships, but the actual incorporation of LLC companies is more or less the same. While there are still regional differences, the problems aren’t necessarily as complex as they might be with a traditional company. Conversely, if an American was going to open up a company in foreign markets, they could take advantage of the situation as well. 

Granted, setting up a private limited company (and eventually also closing one) is more work than a sole proprietorship. You can arrange a sole proprietorship at the Chamber of Commerce in an hour. You can even use your private bank account if you wish. It all works differently whether you’re starting up a BV, GmbH, GK or LLC. Once the company is created by the execution of a deed of incorporation, you need to register the UBO and company with the Dutch trade register, if you’re starting a BV firm. Other jurisdictions have their own related policies, though these are normally quite similar.

To be able to set up a company like this, you must first notify a company formation specialist of this. On the basis of your input a deed of incorporation will be drawn up. This makes it known that a limited is getting started. Once the company is created by the execution of a deed of incorporation, you need to register things with the local trade register. For this the company formation agent will take care at the Chamber of Commerce. This step does not take more than a day. The capital can be paid in both before and after execution of the deed of incorporation.

That capital contribution can sometimes cause confusion. In the past (before 2012), it was the case that €18,000 had to be deposited in the Netherlands and many other European countries as minimum share capital, either in money or in possessions (such as a building). However, this threshold has been lifted since 2012, and in principle a funding of one cent is sufficient. So, you can know for yourself how much capital you deposit in your firm. Likewise, proprietors from the Eurozone will find that cash payments to start an American brand have decreased at least somewhat over the years.

You’ll still want to take a look at the costs involved before you make any hard decisions, however.

Pricing for a Limited Firm

The capital contribution is not a serious, compulsory cost item for setting up a firm. The visit to the notary is of course: take into account a few hundred Euros in wages. Also take into account the mandatory audit of legal entities such as the BV in the Netherlands. If you meet two of the following three conditions, you will have to engage an accountant:

• A balance sheet total of more than €6,00,000
• A net turnover exceeding €12,000,000
• More than 50 employees

Similar laws are in effect in Germany and Austria. The registration with the Chamber of Commerce of a BV would cost somewhere around €50. Furthermore, there are actually no mandatory costs, but most of the costs will be in business expenses. Think of the purchase of machines, hiring staff, arranging a business premises or car and other costs related to the actual business.

Keep in mind that online-only firms can avoid many of these costs since you won’t have to buy a vehicle or anything like that. This is good news for budget-strapped firms that don’t want to increase their upfront investments any more than they have to when they’re moving into another market.

Setting up a private limited company has therefore become a lot easier and requires less cash since the mandatory deposit of 18,000 euros was abolished in 2012. You will go a long way with two thousand euros, although in practice you will often need more, especially if you have to make real investments. Because as every entrepreneur knows: in order to make money, you first have to invest money.