Summary

This thesis examines the question whether it is desirable to introduce a limited liability partnership for the benefit of SMEs and professionals in addition to the existing legal forms in the Netherlands. As a result of globalization and related growing integration of national jurisdictions, it becomes increasingly important to offer attractive company and partnership law. The competitive power and dynamism of companies and partnerships are directly dependent on a regulatory climate conducive to investment, innovation and entrepreneurship. Over the past decades, continuous growth of the international economy has called for a more intensive role for the law, and possibly for a different kind of law altogether. The choice of operating in one country and incorporating in another may become more attractive. This phenomenon of jurisdictional competition is also visible in the European Union. Competitive nations attract entrepreneurs and companies, strengthening their economie bases and increasing their national — and public — income. By offering a competitive jurisdiction, the state facilitates public welfare. The Netherlands can strengthen its attractiveness by increasing the flexibility of existing company and partnership law and deploying new legal instruments, thus becoming more responsive to the legitimate needs of entrepreneurs and professionals. In this process, the interests of third parties in the company have to be taken into careful consideration.

Proposals for legislative changes of company and partnership law in the Netherlands seem to focus mainly on reducing the administrative and incorporation costs of a company. However, this approach is too limited. Topical discussions relate to restricting or excluding the liability of the participants in small private and personal partnerships. Translating the results of these discussions into our company and partnership law deserves more attention. The nature of entrepreneurial activity, the role of directors, the position of voluntary and involuntary creditors and — to a lesser extent — the position of the employees play an important role. In choosing a liability regime (and the desirability of limiting liability), the key question is which criteria to use. At a higher level of abstraction, one cannot ignore the premise regarding expected behaviour of the abovementioned stakeholder groups. Is it reasonable to expect sufficiently careful risk-averse behaviour, or will maximizing the return on investment drive management behaviour? Or will the underlying motive of the company be to enable its employees to thrive, and will managers avoid behaviour that potentially damages their own reputations and job positions? In this area of tension between public interests and individual liberties, company and partnership law may give some direction without inhibiting economic efficiency or infringing upon individual interests. It may also be made available to small private partnerships in the form of limited liability. This principle should play a role in shaping the legal forms available to the entrepreneurial part of the state.

In the Netherlands, large companies are provided with legal forms that fit their objectives and are in alignment with their interaal relationships. Large companies also possess the financial power to obtain high-quality legal and economic advice, and have access to political decision makers through their networks to promote changes to legal structures. The link between company law and the needs of these 'large players' and their stakeholders, is therefore relatively tight. For small businesses and professionals, the situation is rather more complicated. This is due to the more personal nature of their (business) activities and the (more) personal relationship between the directors or partners and the invested capital. This 'personal' element is most prominent with the professional service providers, such as doctors, accountants, and lawyers. Their asset is their own knowledge and expertise and of those who work under their responsibility. These special features, to be clearly distinguished from large companies, make it difficult for SMEs and professionals to create a clear and simple corporate structure within the framework of Dutch corporate law. Practice shows that freedom in designing the corporate structure is often desirable. Furthermore, there is a need to limit personal liability if only for the actions for which the entrepreneur or professional cannot be held responsible. This is to ensure business continuity.

Traditionally, the professional service provider is a lone operator. His personal and professional qualities were the trademark on which he based his activities. Gradually, the independent professionals started collaborating. This collaboration had several reasons, such as business continuity, professional complementarity, capacity needed according to the size of cases, more efficient and effective management, shaping of staff. Partnerships and collaborative partnerships became the legal form for this cooperation. However, the personal nature of the professional remained central. He remained responsible for his own actions and accepted responsibility for shared business. Subsequently, a development towards shared responsibility occurred. In addition to providing individual services, professionals started collaborating with each other and with (their) employees. Financial interests, risks and the size of organisations increased accordingly. Parallel to this development, professionals managed less and less to call upon the nature of their activity: providing a best efforts obligation rather than the obligation of result. Errors which in the past could be ranged under the best effort obligations denominator, now increasingly lead to damage claims. These claims do not only involve the joint organization or partnership, but also privately affect the participants who are not responsible for the injurious acts. This has prompted professionals to look for legal structures in which they can operate onder the protection of their personal liability.

The legal forms available to professionals have developed in the realm of trade and industry. However, a great distance is felt (also instinctively) toward the world of professional service providers. The legal NV or BV form still does not feel right in relation to lawyers, doctors, architects. These forms are not felt to be suited to the personal nature of their activities, but more to a structure in which capital and labour are used for the production of goods and services, where the outcome is clearly defined. In that structure, the company drives economie activity, whereas in the case of the professionals, their personal efforts and skills are the central elements. Even when professionals collaborate in a larger context, it is still the service provider who personally enters into the spotlight rather than the organization.

For the production of goods and services the availability of sufficient capital is important. This can be provided by the entrepreneurs themselves or by outsiders. Directors who are not also investors need a certain degree of independence in order to be able to perform their managerial duties. Investors who are not involved in managing the company are entitled to protect their own interests. This situation calls for rules that impose a specific division of powers and create a framework for the corporate structure. Company law governing NVs and BVs sets forth such rules. Applying these rules, which are based on the separation of powers, to companies without external investors results in a less than perfect situation. In these organizations, management autonomy (which is `necessary', according to company law) and the separate rights of shareholders converge in one or more individuals. Entrepreneurs seeking a legal form that provides them (to a certain extent) with limited liability are bound by the currently available legal forms and the associated rules that are based on relations which in reality do not exist. Partnership law provides rules that enable the participants to shape their relations according to their needs. However, the downside of this legal form is its unlimited liability.

The external liability of partners in a partnership can be partly covered by insurance. However, the possibility to mitigate personal liability is limited by both the premium that has to be paid and by the sum that can be insured. Above a certain premium, the proportionality to the insured sum is no longer rational. Furthermore, negligence and liability due to damage causing actions cannot be insured. Therefore, an optimum between what can be insured and the extent of liability of the individual participants and co-participants needs to be found. In Dutch company and partnership law, this optimum has yet to be found.

Currently, SMEs prefer not be exposed to the increased liability risks they are facing today. The BV form, which is actually not quite appropriate, is rather chosen as a safe haven in light of the protection it offers through limited liability.

As previously indicated, an appropriate legal form for professionals and entrepreneurs who are both investors and directors is lacking. This has already resulted in Dutch entrepreneurs choosing to incorporate as an English LLP. This legal form combines the personal aspect within the partnership with limitation of liability in particular for any (negligent) actions of the other partners. Additionally, the LLP enables customization of interaal and external responsibilities. The use of the English LLP by Dutch organizations is a sign that there is a gap in our company and partnership law for small businesses and professionals. The government's opinion is that this gap will be filled by the future OV/OVR and flex-BV. In this thesis, I assen that these forms are inadequate for that purpose. In the OV/OVR construction, the element of liability protection is lacking, and the flex-BV remains essentially a regular BV which is as a legal form inappropriate for collaborating professionals or entrepreneurs who are both directors and investors.

In the United States and the United Kingdom, legal forms have been developed to meet the needs of SMEs and the professional service providers. Therefore, a combination of limited liability, flexible design of the corporate structure and the desired tax classification is available. For the latter, an attempt is made to create an environment in which the choice of a legal form is not tax driven. Consequently, other motives, such as economie improvement and linking the legal form to the desired entrepreneurial activity, may be better serviced. In the United States, this legal innovation is particularly encouraged by interstate jurisdictional competition. This process is facilitated by the common language of the United States and the high degree of cultural and political homogeneity. On the other hand, SMEs and professional service providers had no harmonized rules for legal forms at their disposal - reasons to choose to incorporate in another state. It is not surprising that UK company and partnership law is undergoing extensive modernization. It is strongly focused on the United States, resulting in stronger cultural ties with the United States than with continental European countries. And yet, this has not led to US legal forms being copied. The specific design of the LLP in the UK reveals the influence of the legal systems of the European continent.

Since World War II, the Netherlands have also focused more and more on the Anglo-Saxon tradition. This is partly due to the fact that multinationals such as Shell and Unilever are British-Dutch, the English language is becoming more widespread in the Netherlands at the expense of French and German, and for a long time, it was socially not appreciated to indicate an interest in (developments in) Germany. Membership of the EU did not materially change this. In the field of company and partnership law, the Union forms a hindrance rather than a stimulation to innovate this law. The EU has mainly focused on economic competition between global economic power blocs. A robust open intemal market was intended to ensure that Europe would stand its ground in that competition. In terras of the legal forms, this has led to harmonization of company law and the introduction of European companies. The question is whether the choice for uniform company law has had the intended effect. The boundaries created by differences in language, culture and social structures are not diminished by uniform legal structures. The opposite is rather the case. Uniformity does not encourage investigation into the question whether other jurisdictions of the European Union are (potentially) more favourable. More-over, seeking harmonization in company law hampers alertness to legal innovation customized to the needs of businesses. And even if such a need is recognized, the structure of the European Union frustrates dynamic amendment of the regulation. For large businesses this can lead to emigration to a jurisdiction of one of the other major economic power blocs. SMEs and professionals will have to deal with the company and partnership law of the member state in which they operate and incorporate. Or do they?

Although EU company law has been harmonized, it does not prohibit member states to develop new legal forms. The UK LLP is a good example. The Netherlands are very reluctant to innovate by introducing new legal forms for SMEs and professionals. The changing needs of this group are met with amendments to existing structures. The question is whether this is enough to keep our country attractive as a place of business. Moreover, even if it does not really matter, innovation of our company and partnership law can be recommendable. With the introduction of a limited liability partnership, the Netherlands could give a strong signal that it is important to follow the dynamics of entrepreneurial and professional activity with tailored legal forms. The government aims at innovation of the industry for the benefit of economic competition. There is no good reason why the government should not at the same time adequately innovate the (availability of) legal instruments. By introducing a limited liability partnership, the Netherlands can show that within the EU, a properly functioning intemal market does not necessarily require harmonized company law. A limited liability partnership is attractive as a signal because at face value the instrument will not have a major impact on the mobility of companies within the EU. The challenge would be to design a limited liability partnership that eventually will provide a jurisdictional competitive advantage as a result of which SMEs and professionals have a reason to (re)incorporate in the Netherlands. The question is whether the Netherlands can leam something from the Anglo-Saxon developments in company and partnership law. This seems to be the case in the field of, in particular, SMEs and professional service providers. Developments in the United Kingdom and the United States are an information resource for possible implementation of such a legal form. I used the insights gained from comparative research as a reference when designing my proposal for a Dutch limited liability partnership: the OVBA.

In my proposal, the OVBA will be part of the future Title 7.13 which is still before the Senate. It is therefore an agreement-based partnership governed by rules of non-mandatory law. This means that the relationships between partners can be shaped as they wish with the possibility of using standard contracts. In the absence of special agreements, the provisions of Title 7.13 are prevalent. Incorporation is preferably without notarial deed, but this depends on the statutory requirements of the OVR. The current legislative proposal Title 7.13 still contains the obligation to engage a notary. However, the substantive goals the legislature has planeed for will not be reached through the notarial deed. The forma! aspects which where envisaged with the notarial deed can also be guaranteed by compulsory registration with the trade register. The OVBA acquires legal personality in order to profit from property law benefits. In addition to the formation of a new partnership, the OV, OVR and BV can convert into an OVBA. This is accompanied by safeguards for partners who do not agree to the conversion and for the creditors of the partnership. The nonmandatory nature of the legislation allows partners to design the structure of the partnership at their discretion. Partners of the OVBA are protected from claims in tort, malpractice and breach of contract committed by their fellow partners. Partner liability continues to exist for their own actions and the actions of employees who work under their supervision. Besides the limitation of external liability, the partners will have no interaal liability. This means that they are not required to contribute to the losses of the partnership resulting from the external liabilities for which their personal liability is limited. The limitations of liability (external and interaal) can be amended by mutual agreement. By registration with the trade register it is publicly known to creditors that the partnership is an OVBA, and the (specific) liability regime is made visible. Through contract negotiations, a special payment rule, the doctrine of piercing the corporate veil and an obligation to take out insurance, the OVBA is surrounded by sufficient safeguards for the interaal and external interests of its stakeholders.

The possible introduction of the OVBA immediately raises the question of its fiscal classification. The classification of the OVBA is not obvious. Legislative history of the corporate tax law shows that the criteria for fiscally transparent and non-transparent forms are not a guideline for a possible classification of the OVBA and have not been applied consistently over time. Moreover, the tax classification method of foreign entities developed by the State Secretary of the Ministry of Finance gives no unambiguous answers. It is, however, clear that many criteria are used such as the degree of liability of partners, whether or not partners directly share in the profits and whether or not the partnership has ownership of separated capital. Application of these criteria to specific cases will lead to different results. Positively interpreted, the fragmented picture of government policy with respect to fiscal classification of legal forms gives reasons for tailor-made decision-making. In the background veiled political and budgetary considerations undoubtedly play a role. The flexibility of this new legal form (the OVBA) offers the chance to break with tradition and to follow an innovative and transparent path, even in fiscal terras.

My thesis shows that the income of an entrepreneur or a professional somewhere in the range between 50,000 and 250,000 Euros may reach a turning point at which it will be more attractive to have a non-transparent classification. The OVBA aims to provide a legal form for which SMEs and professionals have a need, namely to be able to operate and to preserve the personal character as an entrepreneur or professional while limiting personal liability. The aim of the government is to design tax law in such a way that the choice of legal form in which economie activity is exercised, is not tax driven. This can be achieved for the OVBA by giving the OVBA itself the choice which fiscal classification is desired. Until then, profits will have to be attributed to the partners, resulting in the imposition of income taxation.