French Business Structures: Civil vs Commercial

• Session 2 covers French business structures and running a business alone

French Business Structures

• Business structures are categorized into Civil and Commercial types.

Civil Business Structures

• Encompass fields like agriculture, extractions, intellectual activities, regulated liberal professions, and non-commercial real estate.
• Governed by legal texts L. 1845 to L. 1870-1 of the Civil Code.
• Entities include SCI, SCP, SCM, SCEA, and EARL.
• Liability is unlimited but proportional.
• Primarily subject to income tax.

Commercial Business Structures

• Involve buying/selling of goods, objects, real estates, buildings, goods rental, manufacturing, transport, and banking operations.
• Governed by legal texts L. 110-1 and L. 110-2 of the Commercial Code.
• Entities include SNC, SCS, SCA, SARL, SAS, and SA.
• Liability can be unlimited, joint and several, or limited.
• Subject to income tax or corporate tax.

French Commercial Business Structures

• Divided into Unincorporated and Incorporated Business Structures.

Unincorporated Business Structures

• Silent/Secret Partnership (SEP):
  • A partnership unknown to third parties, with the active partner conducting business alone.
  • The silent partner's risk is limited to their investment if their participation remains undisclosed.
  • Not recognized as a separate legal entity.
  • Liability becomes unlimited, joint, and several if members' identities are revealed, depending on whether it is a commercial or civil activity.
• Partnership by Implied Agreement:
  • A partnership is not legally formalized, where members act as real partners without formal recognition.
  • Established by court decision to resolve patrimonial conflicts.
  • Partners' liability is unlimited, joint, and several.
• Sole Proprietorship (Entreprise individuelle):
  • The simplest form of trading structure where one sole trader operates alone.
  • Liability is total, with no distinction between personal and business assets.
  • Debts of the business are the personal responsibility of the trader, potentially leading to bankruptcy.
  • The sole trader has complete control and owns all business assets.
  • Minimal regulation and official accountability; no requirement to file annual reports beyond income tax and VAT.

Sole Proprietorship Under French Law

• Allows one person to retain complete ownership, control, and operational dynamics.
• The individual operates alone in their own name without a separate legal entity.
• A sole proprietor can have employees but not partners.
• Liability relates to the assets connected to the business.
• Does not have a legal personality.
• Usually subject to income tax unless opting for corporate tax.

Evolution of Sole Proprietorship Status in France (Law n 2022-172 of 14 February 2022)

• Establishes a unique status protecting personal assets for those practicing a professional activity in their name.
• It protects the entire personal estate from professional creditors, unless the sole proprietor decides otherwise.
• Only property connected to the professional activity can be seized in case of bankruptcy.
• The status of limited liability sole proprietorship (EIRL) is cancelled.

Creating a Sole Proprietorship in France

• It involves an online process via the "guichet unique" for creation, modification, and termination.
  • See the site: www.formalités-entreprises.gouv.fr for creation, modification, and end of activity.
• Registration in the National Registrar for Enterprises (RNE) is required.
• Automatically, the entrepreneur's estate divides into personal and professional estates.
• The professional estate contains business-related goods, rights, obligations, and securities.

Sole Proprietorship Pros and Cons

• Pros:
  • Simplicity and ease of formation, involving only one individual.
  • Complete control over decision-making.
  • Entitlement to all profits generated by the business.
  • Limited liability applicable under French law to professional assets or assets connected to the business.
  • Option to opt for corporate tax.
• Cons:
  • Personal liability for business debts and legal issues.
  • Lenders may rely on personal credit information for business loan applications.
  • Raising capital or getting business financing from investors is difficult, as there are no shares to offer.
  • Difficult to sell the business fund to others; however, you can directly sell the business fund.

Fonds de Commerce (The Business Fund)

• Referees to the business activity but doesn't include the real estate property.

• It can be owned, sold, or rented by either a legal or natural person.

• Contains tangible and intangible elements

  • Physical components that include machinery and equipment as well as goods or raw material.
  • Incorporeal components that include trade names, commercial leases, customer base, potential customers and intellectual property rights.

• The activity has to be commercial and the owner a merchant.

• Important points:

  • A lessor can send notice to the tenant/lessee in order to end the commercial lease.
  • It excludes civil clienteles, handiwork and public establishments.
  • Employees remain with the new owner even if work contracts exist.
  • Excludes real estate and debts.

Micro Enterprise (Auto-entreprise)

• Private enterprises with a maximum turnover for 2025
  • 188 700 euros for commercial and 77 700 euros for delivery services.
• Benefits from the least demanding system for reporting.
• Created on January 1, 2009, following Law n 2008-776 of August 4, 2008.
• Subject to:
  • Income tax: Turnover – fiscal deduction.
  • Free payments (monthly or quarterly): 1% of the turnover for commercial activities; 1. 7% for the services delivery; 2.2% for the liberal activities.
  • Real estate tax (starting N+1.)

Micro-Enterprise Regime

• Encompasses simplified micro-social and micro-fiscal regulations.
• Open to sole proprietors (natural persons).
• Accessible to everyone.
• Exclusive or alternative/cumulative.
• Contribution rates relative to turnover:
  • Commercical activities 12.8%
  • Liberal and service activities (23%)
• Payment of cotisation (as and when money is collected)
• No commitment accounting, but keeping the recipe/purchasing book is required.
• No subject to VAT, but within a certain threshold.
• Compulsory professional liability insurance (as applicable)
• There is social protection.
• Tax brackets for 2024: 101,000 EUR for commercial and 39,100 EUR for services.

Micro-Enterprise Regime: Advantages and Limits

• Advantages:
  • No VAT tax payment if under certain payments.
  • There are simplified forms for payment and special contributions (no income, no contribution).
  • Choice of "free payments."
  • Running costs that have been reduced with simplified accountability.
  • It is accessible to all.
• Limits:
  • Free payments don't consider professional expanses (transport, insurance etc.)
  • Income tax has predetermined deductions.
  • All contributions are calculated upon turnover as opposed to balance sheet.
  • Hard to fiscally amortize investments done.
  • Turnover limited to certain thresholds
• A Micro enterprise is the perfect thing to do if you want to start a business but have no money.

Jurisdiction

• Guidance for merchant disputes (hints):
  • The Commercial court handles all disputes between merchants.
  • Judicial court for disputes between merchants and non merchants.
  • Judicial court/Commercial court for non-merchant vs merchant disputes
  • Judicial Court between non-merchants.

French Law on Marriage Regimes

• This section covers marriage regimes under French Law

Marriage Regimes Under French Law

• Different regimes in France affect ownership and liability during marriage and divorce.
• Communauté réduite aux acquêts:
  • The default system, requires no notary.
  • Household debts are joint.
  • Inheritance/own property stays out of community.
  • Property acquired during marriage is in the community.
  • At divorce/death, personal property/inheritance remains personal.
• Avec Participation aux acquêts:
  • Requires notary.
  • Individual household debts.
  • Inheritance/own property stays out of community.
  • Property acquired during marriage stays out.
  • At divorce/death, personal property/inheritance remains personal.
• Séparation de biens:
  • Requires notary.
  • Individual household debts.
  • Inheritance/own property stays out of community.
  • Property acquired during marriage stays out.
  • No community to dissolve at divorce/death.
• Communauté Universelle:
  • Requires notary.
  • Joint household debts.
  • All Inheritance/own property stays in the community.
  • Property acquired during marriage stays in the community.
  • Community is separated in two at divorce/death.

Marriage Regimes Detailed

• Regime of Community Property Reduced to Acquisitions (Legal Regime):
  • Applies to couples not signing a marriage contract before a notary.
  • Separate Property: Owned individually before marriage and Each spouse controls their separate property.
  • Community Property: Acquired during marriage and including earnings, salaries, and income.
  • Since the new status of the sole poprietor, assets useful for the professional activity: are automatically included in the professional assets of the SP without any agreement from the spouse.
    • Only the spouse's own property is protected.
• Separation of Property Regime:
  • Chosen via contract before a notary; it maintains two separate asset groups for each spouse.
  • Assets are managed independently, but tax solidarity exists for property wealth and income tax.
• Advantages:
  • Only the debtors assets may be seized in case of financial issues.
  • Divorce does not impact fate to company.
  • Promotes autonomy management in the community property regime
• Disadvantages:
  • May leave non-working spouse without resources if the marriage ends.
• System of Participation in Acquisitions:
  • Requires a marriage contract before a notary.
  • During Marriage: Managed separately, with individual responsibility for debts.
  • At Divorce: the spouse who is less affluent will receive of the increase in assists in their spouse.
• Is ideal for retention of business ownership with pooled savings.
• Universal Community Regime:
  • A unique regime with all property owned on the day of marriage, including what occurred subsidiarity - that makes common mass.
  • Should be avoided by potential business owners in case of bankruptcy.
  • All debts, for nature or debt are held by the community
  • In the event of bankruptcy, is at risk.