French Corporations: SAS vs SARL

French Corporations

• 90% of French companies are either SAS or SARL.

SARL: The Traditional Choice

• SARL is the historical legal structure for small and medium-sized businesses.
• The owners are only liable for the capital they invest due to the limited liability.
• Strict governance and management rules make it less flexible than SAS.
• They are often chosen by small businesses, shops and family businesses because they provide clear rules and stability.
• 29% of new corporations registered in France are SARLs.

SAS: The Modern Choice

• SAS provides shareholders greater flexibility to organize management with fewer restrictions.
• SAS is a better choice for startups because it issues stocks more freely than SARL, making it easier to attract investors.
• SAS is adapted from Anglo-Saxon corporate models, attractive to companies with ambitions to scale.
• 61% of new corporations registered in France are SAS.

SAS: The Modern Corporate Structure

• SAS became the dominant corporate structure in France after being introduced in 1994.
• It was created to facilitate collaborations between large corporate groups.
• SAS is designed for businesses that engage in trade and commercial activities.
• Commercial activities can be carried on any type of business, except for certain regulated sectors such as tobacconists, insurance, and regulated professions.
• Regulated professions include doctor, dental surgeon, nurse, lawyer, architect, expert-accountant, statutory.
• At least 2 associates are needed, or it is a SASU.
• There is no maximum limit to the number of associates
• The President can be a non-associated natural person (not owning stocks) or a legal entity.
• A minor emancipated or unemancipated can be an associate but stocks managed by legal representatives until majority.

SAS: Governance Flexibility

• The Articles of Association will specify terms and conditions, such as the president's powers, decision-making processes, and management bodies.
• Regulations about stock transfers are set in the Articles of Association:
  • Lock-in clauses make stocks non-transferable for up to 10 years.
  • Approval clause indicates that all stock transfers, even between family members, require approval.
  • Preemption clause states if a corporate shareholder changes ownership, they must offer their stocks to existing shareholders.
  • Exclusion clause sets the conditions under which a shareholder can be forced to sell their stocks (misconduct, non-compliance, etc.)
• The lack of standard protection can be dangerous for less experienced business owners who do not fully understand the legal framework.

SAS: General Flexibility

• Annual general meetings are not mandatory unless shareholders specify it in the articles of association.
• This reduces administrative burden, especially for small companies.
• SAS can issue preferred stocks with different powers such as enhanced or limited voting rights and priority dividends.

SAS: Registered/Share Capital

• Registered capital is freely determined with a minimum of 1 €.
• Registered capital can consist of contributions in cash (money), kind (equipment, vehicles, buildings, goodwill, patents) or expertise (know-how).
• Contributions in expertise can be added to the company but are not considered for the evaluation of the registered capital.
• Associates only have financial liability up to the amount of their contribution.
• At the SAS creation, > 50% of the cash contribution must be paid into an account.
• The rest must be paid within 5 years following registration.

SAS: Statutory Auditors

• Not all SAS companies need to have a statutory auditor unless the company exceeds at least 2 of the following 3 thresholds:
  • Balance sheet total > 4 million €.
  • Turnover (excluding tax) > 8 million €.
  • More than 50 employees.
• A statutory auditor independently reviews the company's financial statements to ensure compliance with accounting and financial laws.
• Verifying financial accuracy avoids fraud or misleading reports.
• They ensure transparency for stakeholders, detect financial risks and they become critical.

SAS: Popularity

• SAS is a "One-Size-Fits-All" structure and can be used for almost any type of business.
• SAS shareholders can freely define the roles and decision-making process in the Articles of Association.
• SAS is ideal for startups and companies seeking external funding, making it easier to attract investors due to freely issued stocks.
• SAS is not suitable for companies that need to be listed on the stock exchange (SA is required).
  • Stocks are parts of the company's capital, while listed stocks are traded on the financial markets.

SARL: The Old Fashioned French Law?

• SARL offers a balance between flexibility and protection.
• Intuitu Personae dictates that the identity of the shareholders matters and shares cannot be freely transferred.
• Existing shareholders often approve new partners in SARLs.
• Intuitu Pecuniae means that investments still has a role as partners contribute to the capital and expect financial return.
• Minimum capital of 1€ creates little initial investment.
• An EURL is a SARL with only 1 partner.
• A minor emancipated or unemancipated can be an associate.

SARL: Governance

• The Managing Director (MD) must be a natural person, shareholder or not.
• The MD is appointed in the Articles of Association or by separate deed at an AGO.
• The MD is responsible for the daily management of the company (signing contracts, hiring employees).
• Decisions of the managing director must be in line with the company's interests or it is considered mismanagement.
• Articles of Association can limit the MD's powers (ex: prior authorization from the partners required).
• The MD is prohibited from borrowing from the or obtaining a credit line overdraft from the SARL.
• The MD is not allowed to have the SARL guarantee commitments to third parties.

SARL: Decision Making

• Shareholders have a voting right proportional to shares held.
• AGO approves the annual financial statements, and appoints, dismisses and remunerates the managing director:
  • Decisions at an AGO are taken by a majority of associates (50% + 1) representing at least half the company's shares.
• AGE is called when the company's Articles of Association is modified.
  • Decisions must be taken by a 2/3 majority of shares (75%).
• Shareholders can attend meetings via visio.

SARL: Registered/Share Capital

• Registered capital is freely determined, minimum of 1 €.
• Capital can be made up of contributions in cash, kind, or expertise.
• Associates are financially liable up to their contribution.

• 20% of the cash contribution must be paid when the SARL is created.

• The remainder must be paid within 5 years after registration.

SARL: Statutory Auditors

• Partners can unanimously decide not to appoint a statutory auditor if conditions listed below are met:
  • None of the contributions in kind is worth more than 30 000 €.
  • The total value of the contributions in kind is less than half the registered capital.

SARL: Shares Treatment

• Profit distribution occurs proportionally to the percentage of shares held.
• SARL is not as flexible as an SAS due to restrictions on share transfers
• Selling shares to other co-partners is allowed by default (since 2004), unless the Articles of Association state otherwise.
• Selling shares to a third party requires the approval of the shareholders, given in AGO by the majority of the number of partners & the majority of the total shares.
• When inheritance occurs: shares are freely transferable, they pass to the heirs without the need for approval.
• In a divorce, when partner owned stocks jointly with a spouse, the shares are split as part of the settlement.

EURL: Key Features

• It is what a SARL becomes with only 1 partner.
• There is no tax advantage.
• It is easier to transfer ownership because instead of selling assets one at a time, the owner sells shares.
• Safer than an "Entrepreneur Individuel" because limited liability protects assets.
• A freelancer can create an EURL to protect their assets.
• If business grows, they may convert to an SARL with more partners.
• SASU is more popular because it offers more flexibility for investors.

SAS vs. SARL

• SAS requires a minimum of 2 members, and governance is by a president; SARL requires 2-100 members and is governed by a managing director.
• Both have free registered capital and allow cash, kind, and expertise contributions upon creation.
• At least 50% of cash contributions must be paid at an SAS creation, while at least 20% for SARL upon creation.
• Both options can be taxed as corporate tax (IS) or income tax (IR).
• SAS uses an assimilated employee, but SARL is self-employed if the manager is the majority; otherwise, shares are assimilated.
• SAS uses stocks, while SARL uses shares.
• Approval by associates is required for SARL; there is no trading market for shares, but SAS has approval clause possible
• Registration fees for an SAS are 0.1% of the transfer price vs 3% of the transfer price after a 23.000€ deduction

SAS vs. SARL: Pros/Cons

• SAS benefits include standard, more flexible, and easier to attract outsiders and grow.
• SAS' disadvantage is less suitable for family businesses.
• SARL benefits are easier to understand, less risk of losing control, and better for family-owned businesses.
• SARL disadvantages are perception of very small business and not as attractive for external investors.

Global Perspective

• SARL and SAS are specific to French law.
• Nuances should be seen in the differences.
• In most countries, small businesses with limited liability have one standard structure.
• In France, SARL is seen as a family business.
• In Belgium, Germany, and Luxembourg, similar structures can be used both in small and big corporations.