Setting up a VOF has both benefits and drawbacks

A general partnership (VOF – vennootschap onder firma) is a little-regulated company type which is not often used in Belgium. In practice, people usually opt for this company type because no financial plan is necessary at the time of formation, the company can be set up via private deed (i.e. you don’t need a notary) and because you don’t have to publish annual financial statements. So why aren’t we all setting up VOFs? Well, for a few reasons.

General features of a VOF

A VOF is a company established by partners who are jointly and severally liable and who wish to carry on a civil or commercial activity together. Unlike a public or private limited company, minimal capital is legally required to set up the company. In fact, you can set up a general partnership with capital of €1. Sounds great … but on the other hand, all partners are personally jointly and severally liable for all of the partnership’s obligations – without limitation. It gets worse – you can even be held personally liable for the actions of your fellow partner(s)! In other words, your private assets are not protected if something goes wrong – whether or not you were involved – which, of course, is not so great. But this kind of protection is obtained when you set up a public or private limited company[1], which explains why these types of company are so popular.

When setting up a VOF, contributions may consist of money, goods or labour. The latter in particular can be useful if one or more of the partners has insufficient resources to contribute to the partnership but wants a balanced distribution of the partnership assets. Preferably, this form of contribution should be clearly outlined in the founding document.

A VOF must have at least two founders. After being set up, if the partnership is ever left with only one partner, it must automatically be dissolved. The founders/partners do not have to be natural persons, so one or more legal persons (other companies, non-profit associations, etc.) could be partners in a VOF.

There are almost no legal limitations on the drafting of the Articles of Association for a VOF. The Articles of Association can therefore quite easily be moulded to the wishes of the partners. For example, the partners may make mutually-acceptable arrangements concerning an unequal distribution of profits, the transferability of shares, the dissolution of the partnership, the operation of the partnership, the decision-making powers of the business manager(s), etc.

VOFs have a number of useful benefits

The main reasons to choose this company type can be summarised as follows:

  • The partnership can be set up via private deed, which means you don’t need a notary
  • The Articles of Association can be prepared in accordance with the wishes of the partners
  • In principle, shares are not transferable to third parties without the prior agreement of the other partners, so that the private nature of the partnership can be preserved
  • The partnership does not have to publish annual financial statements, which is a significant benefit for those who wish to act with complete discretion
  • No minimal capital is required to set up the partnership
  • Although money or other goods can be contributed, the contribution can also consist of labour
  • No financial plan has to be drawn up at the time of formation
  • Contributions and quasi-contributions can be done much more smoothly than in a public or private limited company, since no contribution reports have to be prepared by an auditor
  • All partners must refrain from both lawful and unlawful competition with the partnership of which they are members; if they do not, any proceeds from that competition will belong to the VOF
  • A business manager may be appointed under the Articles of Association, who will be almost impossible to dismiss unless the Articles of Association provide for dismissal by majority decision
  • There is no legal provision for a special conflict-of-interest procedure
  • In principle, all decisions must be made with the unanimous consent of all partners
  • When the partnership is dissolved, no audit report is required from an auditor or external accountant
  • The partnership can be dissolved via private deed.

As you can see, the VOF can certainly offer a number of useful benefits which only apply to a lesser extent or not at all to other company types.

VOFs also have drawbacks

The main drawbacks of a VOF are:

  • All partners are subject to unlimited joint and several liability, payable from their personal assets, for the debts of the partnership
  • In principle, the bankruptcy of the VOF would result in the bankruptcy of all of the partners
  • After being set up, if the partnership was ever left with only one partner it would automatically have to be dissolved
  • A minimum of two shareholders are required
  • Because of the limited transferability of the shares, it’s more difficult for partners to withdraw from the partnership.

When is it best to choose a VOF, and when should you not?

First and foremost, the personal, unlimited joint and several liability of the partners is a good reason for caution, and means the VOF is definitely not suitable for the more risky kinds of activities. So setting up a transport or construction company in the form of a VOF is clearly not a good idea. But this company type may be suitable for an asset management company, or to allow you to keep working after you become eligible for the pension, without the risk of losing your pension if you want to moonlight as an independent contractor.

The benefit of there being no minimum capital requirement is an advantage, but should certainly not be decisive, since you can already set up a private limited company with paid-up capital of €6,200[2] if there are several partners or €12,400 if you’re the sole shareholder. That may seem like a lot to some people, but in practice you always need several thousand euros to start a business. Private limited companies also offer the significant advantage that, in principle, your personal assets cannot be touched. Unless, of course, you have to provide a personal guarantee in order to get access to funds.

In practice, VOFs are sometimes used by persons exercising a liberal profession such as doctors, who cannot escape their professional liability in any case by carrying on their activities through a public or private limited company. If they opt for a VOF, they don’t have to draw up a financial plan, which reduces the setup costs a bit. In theory, the cost of a notary can also be avoided, but in practice the Articles of Association will have to be drafted by an accountant or bookkeeper, which in reality probably costs just as much. At least, it does if the Articles of Association are drafted with any level of expertise.

Another advantage is that your partnership does not have to publish annual financial statements each year. But that can be a drawback too, because certain creditors would still like to have some idea of the financial situation of your company, and as a result will be less inclined to do business with your partnership. And all the while, they actually possess stronger guarantees of payment, since they can tap into your personal assets if the partnership fails to satisfy their claims. There’s a certain suspicion with regard to VOFs. Limited partnerships face similar problems.

A VOF may be eminently suitable as a form of cooperation between several natural persons or companies. For example, two companies can set up a joint venture in the form of a VOF without having to comply with so many formalities, and can mould the Articles of Association to suit their specific needs.

In practice, VOFs are not often suggested as the most suitable company type for starting a business. This is in large part due to the unlimited joint and several liability. But the fact remains that this company type can be useful in certain specific situations. You should certainly not allow yourself to be swayed by the lower costs involved in such a company, because if something goes wrong, this company type could turn out to be very expensive.

[1] Apart from founder's liability
[2] Or €1 for a "starter" private limited company

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