In the event that you have decided to incorporate a a Dutch limited liability corporation (BV), more specifically with one of more business partners, it is important to learn how a BV works and what needs to be arranged.
Organization of the BV
- Activities of the BV
When setting up a BV, the best start is to find agreement among the business partners on what the scope of activities of the BV shall be. Will there be a business plan or does it need drafting?
- Share-capital & funding
Before starting, you will have to determine the amount of share-capital: how many shares will be issued and for what nominal value? In addition, you might want to determine what future financing of the BV will look like. Will existing shareholders be obliged to fund additional capital at a certain moment? In which cases do you want to look for an external investor? What are the critical financial moments when taking such steps?
- Memorandum of association & statutes
The statutes form the constitution of your BV. In order to incorporate a BV, a notary has to pass a memorandum of association.* As the statutes contain specific rights and duties of both directors and shareholders, it is advised to consider such topics prior to incorporation. Other important matters that need consideration are the location of your BV and a description of its purpose and activities. In addition to the statutes, it may be advisable to draw up a shareholders’ agreement in which you lay down more detailed agreements on matters related shareholding and management.
* The terms memorandum /articles of association and statutes are used interchangeably in our posts.
The (Board of) directors is/are charged with the day-to-day management of the BV. A director may, under certain conditions, represent the BV and is therefore authorized to sign contracts in the name of the BV with third parties. It is necessary to consider who will be appointed director, what the division of tasks will be in the event of a board of directors and what competences the directors of the BV shall have (shared and/or individual).
Despite all good intentions, a collaboration sometimes just does not work out. What if your business partner wants to quit the business, while you thought you would work together for a long time? This situation can be prevented by, for example, agreeing on a lock-up period that states that the shareholders are not allowed to sell their shares to third parties for a certain period of time.
- Restrictive covenants
Sometimes, business partners agree to dedicate all their time and energy exclusively to the BV, but it is also possible that one wants to carry out other work-related activities or explore other entrepreneurial opportunities. Depending on the situation, such could be disadvantageous for the BV, as time spent on other activities eats away time for the BV. Especially if the other activities compete with the activities of the BV,it is wise to discuss certain situations. What work-related activities are acceptable and which not? Depending on your situation, you can agree on a competition and/or relationship clause, with or without applying a penalty clause.
- Shareholders leaving the BV
It is possible that one day, one of the shareholders wishes to leave the company and do something else, or a group of shareholders decide that it is time for one of the other shareholders to leave the company. Whatever the reasons of the departure are, good agreements reduce the chance of (escalated) conflicts in this kind of situations. In what situations do you want to oblige a shareholder to sell his shares? And how to set a price or settle payment-related issues ? Also, please remind to work with confidentiality arrangements so you can make sure that data is returned upon departure.
What to do when a conflict arises? Do you want a judge to decide on your case? Or do you prefer mediation or arbitration? All options have their advantages and disadvantages, however, providing clarity on what is supposed to happen before it actually happens, is at all times advisable. If only to prevent the conflict on how a conflict is to be resolved..
- Profit distribution
Upon adoption of the annual accounts by the shareholders, they are authorized to take a decision on the destination of profit. Beforehand, you can think about these destinations and make agreements about it, for example whether you reverse or pay-out the profit (dividend payment) and how you decide on this (what type of majority?) It is also possible to agree that there will be no dividend payments in the first 5 years of the BV to build up reserves.
How are you going to arrange the administrative obligations of the BV? Make sure that the bookkeeping is well organized and that you will meet other obligations such as publishing annual statements with the Chamber of Commerce.
In need of advice on setting up a joint venture, or breaking it down while avoiding conflict? Please feel free to contact Claws for further guidance and advice.