Legal status
The legal status you choose will have a huge impact when you create a company. There are a number of criteria to look at before you make your choice:
The type of activity you do: some activities will determine the choice of legal status for you. You should contact the professional organisations which govern your chosen business (for example: a tobacconist must be formed as a one-person business or partnership). The status may also depend on whether your business is commercial, artisanal or professional.
It makes a difference whether you want to start a business alone or as an association. The rules governing how a company functions will depend on whether the director is the sole decision-maker or not.
The desire to protect your assets: it can sometimes be advantageous to choose a legal status with limited liability.
The financial needs of the future company, and the need to bring on board new investors.
The tax system used by the company: depending on your legal status, your company’s profits will either be subject to income tax or corporate tax.
The status of the director (the TNS status for one-person businesses and majority owners, or the general social security status for others).
The company’s flexibility in terms of how it runs.
Here are the various options available to you if you want to go out on your own but not formally create a company:
One-person business
One-person businesses are relatively simple to create and manage. The entrepreneur has great freedom to act.
With a one-person business, the entrepreneur is a single person, forming the totality of their company.
As professional and personal assets are not legally separated, the business owner is liable for their company’s debts. It is however possible to protect their primary residence and their property assets by establishing a non-seizure declaration with a notary.
Two specific types of one-person business have come about recently:
Micro-entrepreneurs
The micro-entrepreneur status allows entrepreneurs to form a one-person business whose constitution and administration are greatly simplified.
Being a micro-entrepreneur gives you a simplified status and reduces your social security contributions, under a system in which your taxes and contributions are proportional to your turnover.
Anybody can become one, whether as their main business or as a sideline. To take advantage of this status, you need to register with the Register of Commerce or the Trade Register. This status is only open to people who, in 2017, did not generate an annual turnover of more than:
- 82,800 euros for a sales or accommodation business;
- 33,200 euros for a service business.
One-person business with limited liability (EIRL)
An entrepreneur can also choose an EIRL status, allowing them to protect their personal assets by creating assets dedicated to their professional activity, which are distinct from their private assets - and without creating a company. They will however need to open a business bank account.
This type of company can have trouble obtaining credit, due to the reduced assets used as collateral. Banks generally get around this by requiring additional securities (a personal guarantee, or a security concerning their personal assets). In response, Bpifrance Financement and the Siagi have implemented expanded guarantee mechanisms to make it easier for EIRL businesses to secure credit.
Here are the various options available to you if you want to create a company (on your own or in partnership):
There are more legal and accounting obligations in a company than in a one-person business, but also more options: fiscal optimisation, fundraising, leverage, etc.
The company can also be created after an initial test phase as a one-person business. As such, the Sapin II law has significantly relaxed the conditions needed to turn a one-person business into a one-person company (EURL or SASU), by removing the obligation to appoint a capital contributions auditor. This came into effect on the 11 December 2016. This has made it decidedly easier and cheaper for entrepreneurs.
And of course, forming a company is essential if you want to bring other people on board your project.
There are two types of company: SARL and SAS (limited liability companies) are very popular among very small to medium-sized companies. Among commercial businesses, there are also SA and SNC status, which are designed to meet specific needs. The SCA, while relatively uncommon in France, is an interesting cross-over status for large companies who want to become publicly traded while maintaining control over their company.
Below are the four main types of company in France: SARL, SAS, SA and SNC.
Limited liability companies (SARL)
SARLs are comprised of at least one associate (a single-person SARL, also known as a EURL) and at most 100 people.
The total capital involved is in theory set by the associates (except for a few regulated sectors). 20% of the capital must be deposited upon the creation of the company, and the remainder in the next five years (the partial release of the company capital can however prevent the company from taking advantage of lower tax rates).
The associates’ liability is limited to the amount they put into the company.
SARL status must be established in writing. What the company does and how it operates are regulated and made public (reducing flexibility).
The company can have one or more directors who must be actual people, and may or may not be remunerated. If it is co-directed, it is the total shares owned by the co-directors which will determine the type of management (majority or minority) applicable to each manager, regardless of the shares they own individually.
In general, SARLs are subject to corporation tax - except for family SARLs, which can choose to be subject to income tax, or one-person SARLs, which are subject to income tax by default (unless they choose otherwise).
The director(s), provided they have a majority share, are placed under the RSI status (the TNS system). Since 2013, it is no longer fiscally beneficial to pay dividends to the majority shareholder manager, who will generally just take a wage increase or a bonus rather than dividends. A dividend payment agreement with an associate or investor will frequently cause entrepreneurs to choose SAS status over SARL.
The minority (or equal) shareholding managers will be governed by the general social security system.
A SARL is required to appoint an external auditor in the event that they exceed the threshold set by decree.
Simplified joint-stock company (SAS)
SASs are comprised of at least one associate (a single-person SAS), with no upper limit.
Company capital is required, and the total involved is in theory set by the associates (except for a few regulated sectors). 50 % of the capital must be deposited upon the creation of the company, and the remainder in the next five years (the partial release of the company capital can however prevent the company from taking advantage of low tax rates).
The associates’ liability is limited to the amount they put into the company.
SAS companies must be established in writing, but they have great flexibility in terms of how they operate. An SAS status allows you to provide bespoke services. Only part of their tax system is governed by the SA system.
An SAS has at least one director (the President), but 7 director positions can be created (President, Managing Director and up to 5 Assistant Managing Directors), and may or may not be remunerated.
The manager(s) will be governed by the general social security system.
An SAS is required to appoint an External Auditor in the event that they exceed the thresholds set by decree. However, the law states that they are also required to do so independently of these thresholds if the company either controls another company or is controlled by another company. This sometimes dissuades companies from using the SAS status in parent-subsidiary type structures.
Especially simple, flexible and adaptable, the SAS status is particularly useful in terms of bringing new investors on board (adapting how the company is run, issuing equity warrants, unequal dividend distribution clauses, etc.).
It is also much more flexible in terms of selling stock, with low taxes applied (0.1% instead of 3% with an amortisation system up to €23,000 for SARLs). These are beneficial for the purchaser in the event that they want to sell on these stocks (selling the company or some of the shares) following a significant increase in value. For property companies (of any type), the taxes are set at 5%.
General partnerships (SNC)
SNCs consist of at least 2 associates, with no upper limit.
The company’s capital is freely determined by the associates. The partial release of the capital can be organised within the company statutes.
SNCs are companies in which all of the associates are considered traders. They are considered liable (in terms of their personal assets) indefinitely and in solidarity with the other associates.
Public limited companies (SA)
SAs consist of at least 2 associates (7 for listed companies), with no upper limit.
A minimum capital of 37,000 euros must be constituted. 50% of the capital must be deposited upon the creation of the company, and the remainder in the next five years (the partial release of the company capital can however prevent the company from taking advantage of low tax rates).
The associates’ liability is limited to the amount they put into the company.
A traditional SA is directed by the Managing Director, under the aegis of an administrative council of 3 to 18 members, who determines the business strategy and ensure that it is implemented. SAs with boards and administrative committees are, however, primarily used for very large companies.
SAs are subject to corporation tax.
The directors (Managing Director, Assistant Managing Director, Member of the Board) fall under the general social security system.
SAs are more rigid in how they function, and are also more heavily scrutinised than SASs.
Here is a comparison table to help you with your decision.
