Running a Business Alone

Lesson 2: Running a Business Alone

• Topics covered include sole traders/proprietors, auto-entrepreneurs, fonds de commerce, and implications of marriage and civil partnerships.

Sole Traders/Sole Proprietors: Definition

• A business owned and run by one individual, existing as a legal structure in the UK called Sole Trader and in the U.S. it is called Sole Proprietor.

Sole Traders/Sole Proprietors: Advantages

• Easy and inexpensive to start.
• Offers full control over the business and profits.
• Can have employees but you remain the sole owner.
• Has minimal administrative requirements.
• Income is reported on the owner's personal tax return, with no separate corporate tax.

Sole Traders/Sole Proprietors: Disadvantages

• There is no legal personality.
• There is unlimited liability, meaning that personal assets are at risk.
• Raising capital can be difficult.
• Business lifespan is reduced, ceasing to exist if the owner retires, dies, or cannot work.

Unlimited Liability Considerations

• It can be terrifying because if the business fails, the owner's personal assets like home, car, and savings are at risk.
• Despite this, 51% of new businesses in France were sole traders in 2020.

Mitigating Unlimited Liability Risks

• Lack of alternative structures can lead to this choice, due to more administrative steps and higher costs for other business structures.
• Low-risk activities are often undertaken by sole traders, reducing the chance of significant debt.
• This structure is often seen as a starting point or evolutionary approach.
• Business insurance covers liabilities such as damage claims, lawsuits, or accidents.
• Small-scale debt and personal savings usage limits accumulating large debts.
• Negotiating with creditors may involve payment plans to preserve relationships and recover funds over time, avoiding bankruptcy.

Case Study

• A couple hired a wedding photographer for £1,450 and were unhappy with the photo quality.
• The couple demanded a refund and compensation.
• The court ordered the photographer to refund £500, pay £170 in court fees, £100 for inconvenience, and £450 for emotional distress, for a total payout of £1,220.
• The total payout was lower than the original payment, preserving proportionality.

Understanding Risks

• Certain risks in business operations can be unfortunate but not entirely unpredictable.
• Risks can generally be divided into two broad categories: unsatisfactory products or services and unpredictable events.

Unsatisfactory Product/Service

• Occurs when the business fails to meet the agreed upon standards of quality or expectations by the customer, which is predictable.
• The wedding photographer case is an example.
• The photographer's work was substandard due to poor skill, inadequate equipment, and a lack of professional care.
• This is predictable because mistakes, lapses in judgment, or lower-than-expected quality can occur when providing a service.

Mitigating Risks of Unsatisfactory Product/Service:

• Clarity in Contracts: Clearly outline deliverables and quality standards in the service agreement.
• Research and Preparation: Investigate the professional selected to know what service quality to expect.
• Insurance: Professional liability insurance can help cover damages for customer dissatisfaction.

Unpredictable Events

• The business encounters force majeure events that are unpredictable, external, and unavoidable, such as natural disasters and accidents.
• Examples: floods or fires damaging the photographer's studio or car accidents preventing delivering of service.

Mitigating Risks of Unpredictable Events:

• Force Majeure Clauses: Include a clause in contracts to address scenarios where performance becomes impossible due to external events.
• Business Insurance: Purchase insurance coverage for property damage, loss of assets, or inability to perform services due to accidents.
• Contingency Planning: Develop backup plans such as storing data in the cloud and spare equipment to minimize disruption in emergencies.

Most Probable Risks

• Defective product/work: 23%
• Collision/accident: 22%
• Human error: 19%
• Accidental damage: 6%
• Slip/fall/falling object: 6%
• Water/fire/smoke damage: 3%
• Damage caused to the environment: 3%
• Natural risks: 2%
• Vandalism/terrorism: 1%
• Damage to property: 1%
• Example of Unhappy Clients risk: A client takes legal action for a breach of confidence.
• Tailoring sole trader policy to include professional indemnity ensures assistance with funding both defence and settlement of the claim.
• Example of Confidential Customer Data Loss: A cyber-attack can prove costly.
• Cyber and data insurance can assist by covering the cost of ransom, account for days of lost business, and offer access to cybercrime experts.

Single Corporate Forms (France)

Entreprise Individuelle (EI) and Entreprise Individuelle à Responsabilité Limitée (EIRL)

• Before 2022: Only the principal residence of the entrepreneur was protected from seizure and entrepreneurs had to declare goods.
• After 2022: The EIRL status was deleted and a unique El status was formed.
• Legal Separation of Patrimonies: The entrepreneur's patrimony is divided in business and personal estates
• Problems include lack of clarity in the distinction and banks often requiring entrepreneurs to voluntarily offer personal assets as collateral when seeking loans.

Auto-Entrepreneur/Micro-Entrepreneur

• Created by the law of August 4th, 2008.
• It is a sub-category of the EI with a simplified tax and social security system; "Simplified ≠ Cheaper"

Asset Separation for EI and Auto-Entrepreneur

• Separation occurs automatically at one of the following milestones:
  • Date of business registration
  • Start date of activity
  • First use of the business name

Professional Assets for EI and Auto-Entrepreneur

• Fonds de commerce: All elements necessary for the exercise of activity, such as clientele, sign, and trade name
• Movable property: Tangible (merchandise, machinery, tools, vehicles) or intangible (copyrights, shares, customer data, trade name)
• Immovable property cannot be moved (land, apartment, office)
• Cash float: Sums kept at the place of business and sums held in bank accounts dedicated to the activity.
• Securities (Sûretés) - Guarantees for paying off debts if the business cannot pay: mortgage, surety bond
• Claims & Debts (Créances et Dettes): Money you are owed & Money you owe

Personal Assets for EI and Auto-Entrepreneur

• Include elements not included in professional assets.
• Assets (Actif): Main residence, savings accounts, retirement funds, personal vehicles
• Liabilities (Passif) : Loan to purchase a personal vehicle

Protection Principle for EI and Auto-Entrepreneur

• Personal assets are protected from being seized by creditors for business debts.

Exceptions for EI and Auto-Entrepreneur

• Public creditors (tax authorities and social security organizations) can claim both personal and professional assets to recover unpaid taxes.
• In cases of fraud or mismanagement, courts may allow creditors to access personal assets.

Voluntary Waiver of Separation for EI and Auto-Entrepreneur

• Can choose to give up separation in specific cases:
  • Using personal assets as collateral for business debt
  • Waiving protection at a creditor's request
• Business assets can't be used to secure personal debts.

Auto-Entrepreneur: Thresholds

• Crossing these thresholds will result in switching of tax regime.

Auto-Entrepreneur: Tax Regime

• In the first two years, the auto-entreprise is automatically placed under the micro-enterprise tax regime.
• If revenue exceeds thresholds for two consecutive years, you are automatically switched to the simplified real tax regime, starting January 1 of the following year.

Fonds de Commerce: Definition

• Represents all tangible and intangible assets used by a business owner for their commercial activity.

Tangible Assets in Fonds de Commerce:

• Physical items necessary to operate the business.
  • Example: equipment (ovens and mixers for bakers), furniture (tables and chairs in a cafe), and tools.

Intangible Assets in Fonds de Commerce

• Non-physical elements that contribute to the business's value and operation.
• Client Base client base consists of regular customers who consistently purchase goods or services.
• Clientele is the core element of a fonds de commerce, lacking a consistent revenue source without it.

Assessing Client Base Value:

• Turnover trends.
• Type of business.
• Market position.

Lease Rights (Droit au Bail)

• Commercial leases last 9 years and can be renewed.
• To terminate the lease, the landlord must pay the tenant eviction compensation equal to the value of the fonds de commerce.

Trade Name (Nom Commercial)

• Protected from unfair competition: if another business attempts to use a name that causes confusion.
• Protection is limited to the specific geographic area where the business operates.

Other Intangible Assets:

• Shop sign.
• Intellectual and industrial property rights.
• Administrative licenses.
• Real estate is never included.

Fonds de Commerce Ownership

• Can be bought, sold, or leased (location-gérance), making it a key element in commercial transactions.

Owner of the Fonds de Commerce:

• Is the person or entity that legally holds the rights over the business's assets.
• Can be a natural person, a legal person, or an association.

Buying a Fonds de Commerce:

• Advantages include fast setup and pre-existing agreements & partnerships.
• Take care with hidden liabilities: The buyer must check for any hidden liabilities

Selling a Fonds de Commerce:

• Advantages include exiting from leasing, cash-out opportunities, and transforming intangible assets into realized value.
• Transparency is recommended to avoid post-sale disputes.

Leasing a Fonds de Commerce:

• Business owner allows someone else (the tenant-manager) to run it while still owning the assets.
• The tenant pays a fee (redevance) to use the business
• Advantage for Marie: She earns passive income.
• Advantage for Alex: He manages a business without making the upfront investment required to buy the restaurant.

Marriage in France

• Different marital regimes: communauté universelle, séparation des biens, communauté réduite aux acquêts, participation aux acquêts.
• Affect how assets and debts are managed during the marriage and how they are divided in case of divorce or death.

Communauté Universelle

• All assets (past and present) are shared in the community.
• Debts incurred during the marriage is is shared.
• Divorce and Death: Divorce is divided 50/50. All is given wholly over to surviving spouse

Separation des biens

• No assets are shared in the community.
• Debts is separated and stays within the person.
• Divorce and Death: Separate

Communauté réduite aux acquêts

• Default system with acquired items are shared.
• debts incurred during the marriage and goods is shared.
• Divorce and Death: Divorce is divided 50/50. All is given wholly over to surviving spouse

Participation aux acquêts

• no assets are shared, but the calculation of enrichment is.
• debts incurred during the marriage and All is given wholly over to surviving spouse
• Divorce and Death: inheritance and property stays seperate

Marriage In the UK

• The different types of way that assets handled in marriage and is split in divorces
• Prenuptial agreement and postnuptial agreements are common and is assets are jointly owned regardless of who paid for them
• An fair agreement in a UK divorce can lead to the court not following a divorce. needs to be a written agreement, no Inadequate disclosure, Coercion , no legal advice , and fair terms, is key components
• Typically in a divorce the couple tries to split 50/50 and court aims to do a fair division.
• unequal division of assets in split is not always followed due to the other factors that leads tp a bigger portion. Having Children, Financial contributions and any Needs are the reasons

I hope these notes will assist in your studies!