The first stages of your new company
The « company in formation » refers to the awkward time period between the moment when the associates have decided to create the company, and the moment when the company figures in the Registry of Companies. This situation can be quite peculiar, because it’s about at this time that your company will start to have business partners, signing contracts, applying for a bank account… Except that it won’t even exist yet. As such, it makes sense to wonder: what do you do during this time period?
Summary:
- When does this period start?
- What actions can you do during this period?
- What happens to liability during this time?
- How long does it last?
- What happens to acts performed in the name of the company?
- How do expenses incurred at this time show in accounting?
1- When does this period start?
For the tax administration:
- If your business is an SA, SAS, SARL, or an EURL, it starts when funds are transferred to a blocked account. Alternatively, in case of contributions in kind, when the auditor who will appraise these contributions has been designated.
- For partnerships, it starts when the by-laws have been signed.
If you’re confused about what these are, you should check our comparison table on the different types of companies.
For commercial law:
It starts as soon as there is evidence that the future associates plan on creating a company. It could be the opening of a bank account, the signing of a protocol… anything works, really.
2- What actions can you do during this period?
Anything necessary to create the company:
Signing a commercial lease, buying furniture or assets… As long as you write “au nom et pour le compte de la société en formation” (which roughly translates to « in the name and on behalf of the company in formation) and indicate the name of the company, as well as its future head office, there’s no problem here.
When it comes to acts of commercial exploitation:
There’s really no consensus including when it comes to commercial law, as this basically means that your activity is starting.
As such, if you absolutely need to start your activity before your company is properly registered, it is highly advised that you try and stabilize the situation as fast as possible, by:
- Immediately transferring the contributions in cash on a blocked account
- Signing the by-laws
- Trying to speed up the administrative paperwork
You should probably note that it is always possible to present the demand to register your company to the Commercial Court.
3- What happens to liability during this time?
When your company is still in formation, the only people who are liable are those who’ve committed acts “in the name and on the behalf of the company”, as well as eventual future associates who’ve given their permissions to do it in their name.
Be careful, though! Even once the company has been created, and the company has “taken back” these acts, if you failed to mention that one of these acts were done in the name of the company, your debt creditors are allowed to turn to you rather than your company!
As such, it might be a good idea to mention preventive clauses in the contract, such as a clause which states that the registration of the company is a condition for the contract to be valid.
4- How long does it last?
It shouldn’t be too long. In general, it is advised that you do not go over 6 months.
Why? If you take too long, tribunals could make your company go from “company in formation” to “de facto company”. If that happens, every associate is infinitely liable.
5- What happens to acts performed in the name of the company?
For acts that were concluded before the by-laws were signed:
If I was mentioned in these acts that they were done “in the name of the company”, then these are automatically annexed to the by-laws. As such, signing these by-laws means that these acts will be “taken back” by the company as soon as it will have been created.
In practice, the associates who had to spend money for the company when it was in formation can choose for the company to pay them back when the funds are unlocked. Though, of course, it is always possible to leave these amounts on the accounts of an associate, which will make them appear on the financial result of the company.
For acts that were concluded between the signature of the by-laws and the registration of the company:
When they sign the by-laws, the associates can decide to give the right to certain of them to make new acts until the company is created. They can decide for only certain of them to have this right, or for all of them to be able to; and this mandate can either appear in the by-laws themselves, or in a separate document.
However, it has to be precise enough to describe what acts they are allowed to take, their purpose, and their main terms. If not, these acts may not be automatically “taken back” by the company when it’s registered. Of course, there’s no problem as long as this procedure is done correctly, though.
Sometimes though, some acts will already have been made before the mandate is written. In these cases, it’s probably safer to mention that all acts done before this mandate will be automatically taken back by the company when it’s registered.
Having the company explicitly decide to take back these acts
Even when the company has already been registered, it’s always possible to have the company take back these acts. If the associates vote for this decision by the majority defined in the by-laws (or by simple majority if nothing was specified), then this is possible.
The EURL is a bit of a special case, though. There, the sole associate will have to submit the decision to have the company take back all acts taken in its name to the special Registry of Decisions.
Remember, commercial law explicitly states that the company can only be responsible for these acts if you’ve done at least one of these procedures!
6- How do expenses incurred at this time show in accounting?
Any money you’ve spent in this period in order to create your company will appear in the “founding expenses” category in your balance sheet. Basically, these refer to the expenses spent to create the company (registering fees, fees of the paperwork, etc.), and those made to start its activity (surveys, advertisement, etc.)
These can appear in accounting in two different ways:
- They can appear as fees, that are completely deductible for the first year of the company’s activity
- Or they can appear in your balance sheet as “founding expenses”. They are then depreciated over the 5 following years. Be careful though! The company cannot actually start distributing dividends until these have been completely depreciated!
