Let’s talk about company formation in France.
Like many jurisdictions, you can do business in France via an incorporated entity with a separate legal identity – or not. Let’s start with the unincorporated options then proceed onto the incorporated ones
Entreprise Individuelle (EI): A Simple Start for a Small Business
A sole proprietorship — or an entreprise individuelle — is a relatively easy business to set up. If you want to choose this form of business, you won’t need to establish a separate legal entity in order to operate. Hence, there is no minimum capital investment needed. Also, there is only one person controlling the business, making it easier to manage operations and profits.
Although this form of business may be convenient, it also brings with it a lot of responsibility: an EI is legally bound to the entrepreneur, meaning that the owner is liable for all of the company’s business and debts. If your company goes bankrupt, then debt collectors have the right to seize your personal assets.
In order to start an EI, you will need to meet the following:
• proof of address in France (rental contract signed by landlord or recent bill)
• proof of identity (residence card or passport)
• French healthcare (carde vitale)
In addition — if you are married — your spouse must provide written proof that they know about the possible consequences of debt associated with this type of company. If you are an EEA national you will not need a residence permit to start an EI. However, if you are not an EEA national, you will need a residence permit in addition to the correct visa.
Before 31 December 2015, there were three regimes possible as an entreprise individuelle:
1. Auto-entrepreneur: with a maximum yearly turnover, no TVA (ie VAT) and a fixed rate of social charges based on the turnover.
2. Micro-entreprise: with a maximum yearly turnover, no TVA and social charges based on a forfait. This means that there is a call for social charges appel de charges sociales (about 3,000 euros in year one) and a lump sum of social charges to be paid once the yearly turnover has been confirmed. This used to be the main regime used by entrepreneurs, until the auto-entrepreneur was introduced in 2009. Since then there has not been many micro-enterprise registrations, but there is still a large number of companies under this regime that will have to switch to the new micro-entrepreneur in the future. The government mentioned a three year delay to do so.
3. Reel simplifie: with no turnover limit, liability to TVA and social charges representing about 46% of the net profit.
They landscape was simplified by merging the auto-entrepreneur and the micro-entreprise. Now we have the micro-entrepreneur, but in practice it works like the old auto-entrepreneur – i.e. a limited turnover, no TVA and a fixed rate of social charges based on the turnover.
There are however turnover limits on the TVA exclusion. So before choosing this, it makes sense to get advice from a qualified professional to ensure it’s the right fit for your situation.
As per the former auto-entrepreneur regime, micro entrepreneurs have two choices on how they pay their income tax:
1. Regime micro: i.e., declared once a year. The micro-entrepreneur’s turnover will be declared with the French income tax form Impot sur le Revenu in May/June the following year and will be paid in September/October.
2. Impot liberatoire: i.e. the micro-entrepreneur choose to pay an extra percentage of his/her turnover towards the income tax. This tax will be paid on a monthly or quarterly basis, at the same time as the social charges. The micro-entrepreneur will only be able chose impot liberatoire if his/her reference income foyer fiscal is 26,764 euros/person.
If your EI grows, you may change it into a limited liability company (EIRL) or a public limited company (S.A.).
Entreprise Individuelle à Responsabilité Limitée (EIRL)
This option is similar to the EI: however, with the EIRL you will be able to have limited liability without having to establish a separate legal entity. If you want to start this type of business, be cautious: your legal obligations with an EIRL are a bit hazy.
Most of the time, banks still reserve the right to ask you to instill a personal guarantee before granting a loan to you. This way, if you were to default on a loan the bank would be entitled to collect your company’s assets. If your company’s assets are not enough to cover the debt, the banks are then entitled to collect your personal assets as well.
The choice of company form also has impacts on the tax and social security systems of the income derived from the activity.
1 – The limited liability company in France (SARL – Société à Responsibilité Limitée)
The LLC, the type of company most commonly used in the context of business creation in France, it offers the advantage of a simple structure in which the liability of the partners is limited to the amount of their contributions.
Its capital, whose law does not set any minimum amount, is divided between at least two partners. It is managed by one or more managers, partners or not.
2 – The single-person limited liability company (EURL)
This can be considered as a special category of limited liability company as the EURL has only one shareholder.
Its operating rules are very similar to those of the SARL. The main difference concerns its tax system: its profits are automatically taxed on income tax in the shareholder’s name, although an option to corporation tax is possible
3 – The private limited liability company (SELARL)
The law has adopted the rules of operation of LLCs to adapt them to the needs of the liberal professions; so the SELARL was born.
The rules governing it are very similar to those of the SARL, but they take into account the particularities and ethics of the professions for which they were created.
4 – The public limited company (SA – Société Anonyme Par Actions)
The SA is composed of at least two shareholders (and 7 if it is listed on the stock exchange) with a minimum share capital of 37 000 €. It is headed by a President and a Chief Executive Officer (who may be one and the same person) and by a Board of Directors composed of at least three people.
It is subject to the obligation to appoint an auditor.
The public limited company, because of the cumbersome nature of its operating rules, should be reserved for projects of a certain size. It is also used when shareholders who are not involved in the activity want to exercise a power of control within the board of directors.
Shareholders’ liability is limited to the amount of their contributions.
5 – The simplified joint stock company (SAS)
This relatively new form of company has had some success. As a result, many SAs have been transformed into SAS. However, as a general rule, SAS is not suitable for a business creation by a natural person. Indeed, the rules governing it are similar to those of the SA. However, some measures make it simpler. Thus, no minimum amount for share capital is required. In addition, the appointment of an auditor is reserved for SAS of a certain size or with capital ties to other companies
The SAS can be constituted with only 1 partner.
Compared to SA, it offers the advantage of flexibility: the law allows shareholders the possibility of freely organising its operation in the articles of association. This flexibility requires the informed advice of a qualified professional because it can lead to the development of rules that would be difficult to apply later on.
6 – The simplified single-person joint-stock company (SASU)
This is a special category of SAS with only one partner. Only a few operating rules differ from those applicable to SAS, simplifying legal formalism in particular.
Like SAS, SASU is rarely adapted to a start-up company.
7 – General partnership (SNC)
This form of company is rarely used because it has the disadvantage of not protecting its shareholders’ assets: they are in fact indefinitely and jointly and severally liable for the company’s debts on their personal property.
It is constituted without minimum capital, by at least two partners, all of whom are merchants. As such, a minor cannot be associated with it.
It is managed by one or more managers.
The SNC’s results are taxed at the level of its shareholders for income tax purposes unless the company opts for corporation tax.
8 – Professional civil society (SCP)
This form of company allows several persons exercising the same liberal profession to exercise it in common. They are then indefinitely liable for social debts.
No minimum capital is required.
CPC’s profits are taxed on income tax at the level of each partner.
Is the use of the associative form appropriate to develop a company?
You have to be very careful. Because in most cases, the association is not the most appropriate structure. And it can even present certain risks.