Founder liability: what every startup entrepreneur needs to know
Starting your own business is a dream that becomes a reality for many entrepreneurs. You're bursting with ideas, ready to conquer the market, and may have even thought of a name for your venture. But did you know that establishing a company not only offers exciting opportunities but also entails serious responsibilities?
One of those responsibilities is founder liability – a topic you'd rather not think about, but which you absolutely must understand. Because how do you ensure that your dream doesn't end in a nightmare where your personal assets are at stake?
Founder liability can have far-reaching consequences for the entrepreneur's private assets, especially in the event of bankruptcy where you are held jointly and severally liable.
It is crucial for entrepreneurs to be well-prepared and have an understanding of the risks before establishing a company.
Don't panic! In this blog post, we'll explain exactly what founder liability entails, the risks involved, and – more importantly – how you can protect yourself. Read on and get started with your entrepreneurial dream with peace of mind!
Unlimited liability refers to a situation where the owner of a business is personally responsible for all the debts and obligations of that business. This means that if the business cannot pay its debts, creditors can pursue the owner's personal assets (such as their house, car, and savings) to recover what they are owed. This is common in sole proprietorships and partnerships.
Unlimited liability means that a business owner is held personally responsible for the debts of the company. In cases of unlimited liability, such as with a sole proprietorship or a general partnership, the business owner can be forced to use their private assets, such as savings or real estate, to meet the company's debts. This can happen, for example, when there is a clear overvaluation of the business figures (unrealistic figures).
Starting entrepreneurs who wish to protect their private assets therefore often opt for a private limited company (bv) or a public limited company (nv) to benefit from limited liability.
Welke ondernemingsvormen bieden beperkte aansprakelijkheid?
The private limited company (bv) and the public limited company (nv) are popular legal forms for entrepreneurs wishing to limit their risks. Shareholders are only liable for the capital for which they own shares and not for their private assets.
For a private limited company (bv), the founder is only liable for the capital corresponding to the issued shares, provided they meet all statutory requirements. Nevertheless, the founder can be held liable if it can be demonstrated that the initial capital was “manifestly insufficient” to finance the normal operation of the intended business activities in the initial years.
Is a private limited company always limited liability?
Although a private limited company typically offers limited liability, there are exceptions where the founder can still be held jointly and severally liable.
This can happen, for example, if the company goes bankrupt and it transpires that the founders failed to create an adequate financial basis when establishing it. A judge can then decide that the founder is jointly and severally liable. This occurs in situations where the capital upon establishment was clearly insufficient to support the intended business activities, or if there has been fraud, overvaluation of assets, or incorrect information provided by the founders.
How many social contributions do you have to pay as a self-employed person?
As a self-employed person, you generally pay a percentage of your net taxable income. Provisional social security contributions are paid quarterly and are based on the taxable income from three years prior. If your actual income turns out to be lower or higher, a recalculation will follow later. New self-employed individuals usually pay a provisional contribution equivalent to the minimum, unless they expect a higher income.
Founders' liability
Founder liability means that founders can be held personally liable if the company goes bankrupt within two years of its incorporation. The main criterion for this is whether the initial capital was “manifestly insufficient” to allow the business to function normally.
If a bankruptcy is declared and the judge determines that the initial capital was insufficient, the founders can be held personally liable for the company's debts. In some cases, a trustee can hold the founders jointly and severally liable.
How to avoid founder liability.
There are various measures that entrepreneurs can take to avoid founder liability:
Financial plan
A good financial plan with a realistic projection of expected income, turnover and profit and loss statement is essential. This plan must include at least the following elements:
- An accurate description of the intended business activity.
Expected profitability and cash flows for at least two years.
A summary of anticipated expenditure and funding sources.
External expert
Engaging an external expert, or a setup platform like Bizantium, can help with the drafting of a solid financial plan. An objective assessment increases the credibility and feasibility of the plan.
Accurate accounting and forecasting
Keeping correct records and making detailed financial forecasts demonstrate that the establishment was well-founded and responsible.
What role does a financial plan play?
A financial plan plays a crucial role in avoiding director's liability. It not only provides insight into financial expectations but can also serve as evidence that the incorporation was well-considered and solid.
A good financial plan must contain realistic estimates of business activities, profitability, and the expected income statement for at least two years. In the event of bankruptcy, a judge can use this to assess whether the initial capital was sufficient.
Is the accountant liable for their client's founder liability?
The accountant is not jointly and severally liable for his client's founder liability, unless he knowingly participated in unlawful practices such as misleading creditors or erroneous valuations.
However, an accountant has a duty to advise the client based on correct and complete information and to ensure that the accounting complies with all legal requirements.
What are the consequences for my personal assets if I am held liable?
When a founder is held liable, this can have serious consequences for their personal assets. If the court rules that the initial capital at incorporation was insufficient, creditors can claim against the founder's private assets.
This means that personal assets, such as savings and real estate, can be used to satisfy the company's debts.
A hassle-free incorporation via Bizantium
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Bizantium gathers all information in an intuitive flow, generates the necessary documents, including the financial plan, and keeps all parties informed with real-time updates. Once the file is complete, the incorporation is completed at the notary with a digital power of attorney.
- Collecting data
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- Incorporation by notary
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