Every entrepreneur is faced with a dilemma: do I want to run my business alone or with others? Should I set up a sole proprietorship or a company?
French law distinguishes between sole proprietorships and companies.
In the first case, this means there is only one partner.
Otherwise, several partners take part in the company's capital, which is why it's called a corporation(SAS, SARL, SNC, etc.).
The law even allows a sole trader to operate as a company via an EURL or SASU.
The choice of legal status must be at the heart of the entrepreneur's concerns.
In fact, it is essential to choose the status that is best suited to the expectations of the manager and offers the fewest possible constraints on a day-to-day basis.
This article explains the differences and consequences of setting up a sole proprietorship or a company.
Operating as a sole trader offers greater simplicity for the entrepreneur, both when setting up the business and on a day-to-day basis. You don't have to set up a legal entity separate from yourself, which limits the amount of red tape you have to deal with.
However, he cannot take on any partners in the capital of his company. He is the owner of the entire capital, bears alone any losses generated, and his liability is unlimited. In other words, his personal assets can be used to recover the company's debts.
Generally speaking, the operation of this type of structure is simplified, with fewer accounting, tax and legal formalities. In addition, the sole shareholder is the only person entitled to make management decisions for the company. The sole shareholder is generally subject to income tax.
The main advantage of a sole proprietorship is that it is simple to set up.
What's more, there's no need to convene an annual general meeting, approve the financial statements or collectively decide on the allocation of profits. The micro-entrepreneur status is VAT-exempt, enabling you to offer very competitive rates.
A company is a legal entity, and therefore has its own legal personality in the eyes of the law.
In return, it has genuine legal capacity and its own assets.
This status provides greater protection for entrepreneurs, since their liability is limited to the amount of their capital contributions to the company: in the event of bankruptcy, their personal assets are fully protected.
A company is characterized by the presence of at least 2 shareholders. Each receives a certain number of shares, depending on the amount of cash, in-kind or industrial contributions made. All partners must share in profits and losses, unless otherwise stipulated in a clause. In general, the company is subject to corporate income tax.
The administrative, legal, accounting and tax formalities are more onerous in the case of a company: partners must meet at least once a year at a shareholders' meeting, the company must keep proper accounts, file its annual financial statements and have them approved, and so on.
The most important differences to consider before making your choice are of several kinds:
- A sole proprietorship obliges you to run your business alone, while a company allows you to include other partners.
- In a sole proprietorship, the manager's liability is unlimited, whereas in a company it is limited to the amount of his or her capital contributions.
- Administrative formalities and day-to-day management are simplified with a sole proprietorship.
- The manager of a sole proprietorship has full powers, whereas these are generally shared between several partners.
- The manager of a sole proprietorship is affiliated to the social security scheme for the self-employed, while those of a company may also be covered by the general scheme under certain conditions.
To make the right choice, you need to think carefully before setting up your business.
For example, the EIRL is a "hybrid" status between a sole proprietorship and a company.
There's no such thing as a better status than another, but only some are better suited to your constraints and objectives.
Written by our expert Paul LASBARRERES-CANDAU
November 13, 2018
