Which legal status to choose for your French company?

Legal status choices
Choosing a legal status is a necessary step to create your company in France. Basically, it allows you to define a general framework for your business, under which your company will evolve in accordance with the law. While all of this sounds incredibly complicated, it’s really not that bad once you break down the choices available to you.

Legal status options for companies in France

Choosing a legal status is a necessary step to create your company in France. Basically, it allows you to define a general framework for your business, under which your company will evolve in accordance with the law. While all of this sounds incredibly complicated, it’s really not that bad once you break down the choices available to you.
After all, no matter what your business is about, you’ll have to start by choosing between the following:

  • The sole proprietorship
  • The company

 

Summary

  1. The basics of the Sole Proprietorship
  2. The basics of the Company
  3. The criteria you should take into account to make your choice
  4. And what if you aren’t ready to start your business yet?

 

The basics of the Sole Proprietorship

If you choose this structure, as far as the law will be concerned, you and your company will be one single entity.

 

  • This structure grants you incredible freedom: As the only member of the board, you don’t have any responsibilities in terms of how your business should be run.

 

  • However, the law will consider that your personal assets and the assets of the company are one and the same. This means that all of the debts of the company are in fact your own, and as such, creditors are legally allowed to seize your belongings if you become unable to pay back your debt. If you’re married, this does include the assets purchased by your spouse.
    Thankfully, this doesn’t make you completely defenseless: not only does the law protect your main residence from creditors, but you’re also able to make a “declaration of non-seizability” and submit it to a notary. By doing so, you can protect any of your assets that aren’t used professionally.
    If you’re interested, don’t hesitate to check the specifics of this declaration by checking the official website of the French administration right here.
    If you’re an individual entrepreneur, you could also opt for an “EIRL” which stands for “Individual Entrepreneur with Limited Liability”. This allows you to separate your professional assets from your personal assets, and as such, creditors would only be able to seize your professional assets in case of payment failure.

 

  • In the case of the Sole Proprietorship, your company will always bear your name; but you can always add a business name if you so desire.
    For example: Jean Dupont Company, the Great Workshop.

 

  • The profits of your business should appear in your personal income statement, in the category corresponding to your activity. They should either appear in the BIC Category (industrial and commercial profits) if you are a trader or a craftsman, or in the BNC Category (non-commercial profits) if you exercise a liberal profession. As such, the tax that will apply won’t be the corporate tax, but the income tax.
    If you choose the EIRL structure, however, the option of the corporate tax remains open to you.

 

  • In terms of social regime, you will be treated as an Independent Worker, the status for those who aren’t salaried. However, choosing additional optional insurance will allow you to gain equivalent, or sometimes even better social protection than the employees.
    If you are under the micro-company tax system, you will automatically benefit from the simplified micro-social regime. You will then be a so-called “micro-entrepreneur”.

 

  • The paperwork for creating a Sole Proprietorship is also greatly reduced. All you need to do is to declare your activity at one of the following, depending on the nature of your activity:
    1. The chamber of Commerce and Industry if you are a craftsman,
    2. The Chamber of Artisanal Craft If you’re an artisan,
    3. The “Ursaff” if you exercise a liberal profession.
      Furthermore, nowadays, all of this paperwork can be done online.

 

  •  If your spouse works with you, he or she will have to choose between the status of employed spouse or collaborating spouse.

 

  • Of course, the option to recruit employees is always open to you.

 

The basics of the company

By choosing this structure, you will essentially create an entirely new legal entity, or “Legal person”.

  • Your business will have its own assets. As such, unless you are accused of serious misconduct as the leader of the company, your personal assets will be safe from creditors.
    Be careful, however! This does not apply to absolutely every type of company. If you want to learn more, don’t hesitate to consult a table comparing the different types of companies

 

  • If you use your company’s property for personal uses, you may be sued for the misuse of corporate property.

 

  • The company will be a new “legal person”. As such, it will be required to have a name in the form of the company name, a domicile in the form of the registered office, as well as a minimum amount of equity to ensure it will be able to face its expense.

 

  • As the company director, it is not on your behalf that you will act when meeting third parties, but on the behalf of the company. As such, there will be certain stipulations you will be required to follow when making important decisions, and you will periodically be required to report to your associates.

 

  • Depending on the structure of the company, either you will be forced to accept the corporate tax, or you will have the choice between the corporate tax and the income tax. Again, you can learn more by consulting this table.

 

  • Your social status will depend on the chosen legal structure. If you are the sole member of the board of an “EURL” (Unipersonal Company with Limited Liability), or the manager of an LLC and own more than 50% of the company’s shares, you will be attached to the self-employed regime. Otherwise, you will depend on the general Social Security regime (system of assimilated employees).

 

  • The creation of your company will lead to additional paperwork: You will thus have to register the by-laws of the company with the Tax Department, to appoint the company director(s), and officially announce the creation of your company in a specialized newspaper.

 

  • If your spouse works with you, he or she will have to choose a status: partner, manager, employee or collaborator.

 

The criteria you should take into account to make your choice:

   The nature of the activity

Some activities require a certain structure, albeit very few of them. This is the case, for example, for tobacco outlets, which must be operated as a sole proprietorship or as a partnership. As such, you might want to contact one of the organizations concerned, to know of any such obligation, or to find information on the activity.

  The desire to associate

One can be tempted to create a company with several people for various reasons: patrimonial, economic, fiscal or social.

But if you do not have the desire to associate, to pool your skills, knowledge, address book, etc., from the get-go, the chances of success will be considerably lessened.

If you want to be the only one on board and if you don’t want to have to constantly report to potential associates, then it’s better to remain independent, in sole proprietorship or in EURL. Even if you want to associate with others, but only to share only certain expenses and thus save money, these structures are better: this is, for example, the structure of the civil society resources (SCM) or the economic interest grouping (GIE), in which each partner remains independent at the level of exercise of his professional activity.

How your heritage is organized:

If you have a personal patrimony to protect, the choice of the legal structure becomes important.

Normally, as a sole proprietorship, the manager is liable for all his assets (excluding his principal residence) in respect of debts arising from his independent activity. Since January 1, 2011, however, he has the option to opt for the EIRL (individual entrepreneur with limited liability) plan. This option will allow him to build a patrimony dedicated to his professional activity distinct from his personal patrimony. This patrimony will be composed of the assets allocated to his professional activity and the professional creditors will only be able to seize this professional patrimony in case of payment failure.

The legal framework, which constitutes a company, will be different from one structure to another. For example, in a partnership (SNC), for example, each partner is jointly and severally liable with the corporation. In case of financial difficulties, if the property of the company is not enough to pay off the creditors, they may seize the property of one or more partners, though they will have to be paid back in part by his co-partners.

Regardless of the type of company chosen, the director(s) is/are responsible for the good management of the company towards their partners and third parties. If they are proven to be responsible for misconduct that caused the financial difficulties of the company, it will be possible to make them liable for the company.

Finally, as soon as the company requests a bank loan, it is likely that the guarantee of certain officers or associates will be required.

  Financial needs

Normally, you should have determined the financial needs of your company when preparing the provisional accounts.

When they are high in volume, the creation of a company may be necessary to welcome investors in the capital.

Be careful, however! You should make sure not to confuse “minimum capital” and “financial needs of the company”. Indeed, some companies impose a minimum social capital, which naturally has no relation to the actual financial needs of the company.

 The operation of the company

Depending on the structure you choose, the operating rules will be more or less restrictive.

In the sole proprietorship, the leader is alone. As a result, the operating rules are reduced to a minimum. He makes all the decisions, but is liable in return.

In companies, the leader does not act on his own behalf, but “in the name and for the account” of the company. He must therefore always follow certain guidelines and obtain the authorization of his associates for all important acts that affect the life of the company.

  The social regime of the entrepreneur

Before, it used to be decisive in the choice of the legal structure. Indeed, some company creators did not hesitate to form fictional companies so that they could benefit from the general Social Security regime of the employees.

However, since, legislation has largely evolved towards the harmonization of by-laws.

 The tax regime of the entrepreneur and the company

Depending on the structure chosen, the profits of the business will either be subject to income tax, or to corporation tax. Again, this criterion will rarely be critical in the creation phase. Indeed, it is difficult to accurately estimate the projected sales revenue of the future company and thus achieve a realistic tax optimization.

Nevertheless, if you are able to benefit from a tax-exempt measure, it may be advantageous to choose a structure that will allow you to be subject to income tax. The exemption will then relate to all the benefits, including those corresponding to your remuneration…

Credibility with partners (bankers, customers, suppliers, etc.)

It is undeniable that, in order to approach certain markets, the creation of the company as a company with substantial capital will be recommended.

 

And what if you aren’t ready to start your business yet?

Know in this case that there are some ways that allow you to be legally affiliated with another structure in order to test out your company idea, or to fulfill a specific request.

These are:

  • The wage portage
  • The Incubator
  • The activity cooperative

 

In conclusion

You should take into consideration all of these different criteria, and avoid only relying on one of them.
Take your time to compare the different structures that may apply to your project.
And, well… make sure you make the right choice!

 

If you want to learn more about one-person companies in particular, this table will tell you everything you need to know.

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