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Legal structure

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  Distinguishing between the structure and the business

The legal structure and the business must be clearly distinct from each other. Every plan for a new business is based on an activity that in legal terms is qualified as:

 commerce: the commercial code lists the activities qualified as commerce. They consist primarily of the purchase and resale of goods for profit, as well as the sale of certain services: hotels, restaurants, entertainment, etc.

 craft: a craft business's activity consists of making, processing or repairing goods or providing services. Craft activities are identified on a list issued by decree and fall into different categories: food, construction, manufacturing and services. In addition, a new craft business should not employ more than 10 persons in principle.

 industry: the business's activity consists of processing raw materials. However, in contrast to craft activities, the role of machines and labour must be predominant. The earnings of the entrepreneur do not come from his or her own manual labour in this case, but from organising the business's production.

 civil: a number of activities are qualified as civil, including farming and the self-employed professional occupations.

The latter term refers to two major categories of activities.

- "regulated" professions: architects, lawyers, accountants, physicians, notaries, etc. The members of these professions must comply with strict ethical rules and are subject to the supervision of the professional bodies (colleges, associations, unions). Their titles are protected by law.

- "unregulated" professions: all economic activities that are not commerce, craft, industry or farming or regulated professions.
Some of these professions are free from any rules (e.g. consultants, trainers), while others need authorisation to do business (e.g. driving schools).

Farming consists of growing crops and raising animals. It also covers auxiliary activities, such as processing and marketing products, which also qualify as farming.

  Choosing the right legal structure

Whatever business you want to start, you will need to choose between:
- registering your business as a sole trader,
- or setting up a company.

  If you choose to do business as a sole trader, then you and your business will be one and the same. This legal structure concerns freelance entrepreneurs (for more information, see the website www.autoentrepreneur.biz) or entrepreneurs who opt to do business as a limited liability sole trader (EIRL).

Consequently :

- You will have a large degree of freedom: you will have the only say in your business and not be accountable to anyone. The notion of "misuse of company assets" does not exist for a sole trader.

- On the other hand, there is no segregation between your personal and business assets. Therefore the creditors of your business can come after all of your assets, including any assets you have acquired with your spouse, if your marriage contract calls for community of acquisitions.

However, you can protect your real property that is not used for your business activity from creditors by means of a notarised official notice of immunity from seizure filed with the mortgage registry and, where appropriate, with the company registry or the trade registry or published in a legal notices publication.

You can also protect your personal assets by choosing to do business as a limited liability sole trader (EIRL) and registering the assets used for the purposes of your business. This will segregate your personal assets from your business assets. Your liability will be limited to the registered business assets and, if your business runs into trouble, your business creditors can seize only the registered assets.

 Assets that qualify as registered business assets include:
- goods, rights, obligations and guarantees necessary for the conduct of business (e.g. goodwill, lease, special equipment and tools, etc.)
- assets used for the purposes of your business that you decide to register.

- In this case, your family name will be the official name of your business, but you can also add a business name.
If you choose to do business as a limited liability sole trader, your name should be immediately followed or preceded by the words "Entrepreneur individuel à responsabilité limitée" or the acronym "EIRL". This language must be included in all of your business documents.

- Business income is subject to personal income tax. You must declare the profits from your business on your income tax return in the appropriate category, without deducting your own compensation. The categories are industrial and commercial profits if you are in a craft or commercial business, and non-commercial profits if you are a self-employed professional.
If you opt to do business as a freelance entrepreneur and choose a pay-as-you-go system, you will pay income tax on sales revenue as it is received. The amount of the tax due will be a fixed percentage of your sales revenue that depends on the nature of your business.
If you choose to do business as a limited liability sole trader, you can choose to pay corporate income tax if you are subject to the standard tax rules (régime réel). In this case, you also pay tax on your profits, but after deducting your own compensation. This choice is irrevocable.

- You will be in the social security scheme for non-wage earners and your social security contributions will vary depending on the tax rules applying to your business. If you opt for the social security scheme for micro-enterprises, your contributions will be based on your sales revenue.

- The formalities for registering your business are simple. All you need to do is register your business as natural person with the business formalities centre (CFE).

If you choose to do business as a limited liability sole trader, you will file your statement of registered business assets with the centre, which will then transmit it to:
- the company registry (RCS) if you are a merchant,
- to the trade registry (RM) if you have a craft business,
- to the registry of your choice if your business requires registration with both these registries,
- the registry kept by the clerk of the competent court for commercial cases if you are a self-employed professional,
- the registry kept by the clerk of the commercial court if you are a freelance entrepreneur,
- the chamber of agriculture if you are a farmer.

   If you decide to incorporate your business, you will create a new legal entity that is distinct from you and the other founding partners.

Consequently :

- The business will have its own assets, that are totally distinct from your assets. If the business runs into trouble, and if you cannot be blamed for any serious mismanagement, your personal assets will be protected from seizure by the business's creditors (unless you have incorporated as a general partnership - société en nom collectif - in which case each partner has full joint and several liability for all of the business's debts).

- If you use the company's assets for your own purposes, you could be liable to prosecution for "misuse of company assets".

- Since your incorporated business is a "new person" you must give it a name (company name), an address (registered office) and make a minimum contribution to its initial assets that will enable it to cover its first capital and current expenditures (registered capital).

- The manager that you name to represent the company to others will not be acting on his or her own behalf, but in the name of and on behalf of a distinct legal entity. This means the manager must comply with certain formalities when making important decisions. The manager must also make periodic reports to the partners about his or her management of the company.

- The incorporation of your business will require some further formalities: drafting and registering the articles of association, publication of legal notices, etc.

There are many different types of company, but we will mention only most common ones:

- limited liability company with a single shareholder - entreprise unipersonnelle à responsabilité limitée (EURL) : an SARL with only one partner,
- limited liability company - société à responsabilité limitée (SARL),
- a conventional public limited liability company - société anonyme (SA) run by a board of directors,
- simplified joint stock company - société par actions simplifiée (SAS).

  Main selection criteria for a legal structure

- Nature of the business

- Desire to form a partnership

- Asset structure: protecting and transferring assets

- Financial commitment

- Business operations

- Entrepreneur's social security scheme

- Tax rules applying to the entrepreneur and the business

- Credibility of the business with regard to others (bankers, customers, suppliers, etc.)

The table below summarises and compares the main features of the different legal structures.

For more information, especially about the tax and social security impact of your choice,
see the entrepreneur portal at : www.afecreation.fr/pid223/7-choisir-un-statut-juridique.html 
and talk to legal professionals.


Décembre 2011

Clear and comprehensible
Thank you so much for explaining it! Clear and comprehensible...
Posté par Pablo (themeaningofthename.com), 06/06/2013 18:59

Création d'entreprise, reprise d'entreprise | AFE, Agence France Entrepreneur

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