Consequences of converting a sole proprietorship into a company

Your sole proprietorship, " , " is growing, and you would like to incorporate it to bring in new partners or expand your business.

In this case, it is necessary to plan ahead for a wide range of procedures and their impact on the day-to-day operations of your business.

A sole proprietorship cannot be immediately converted into a corporation because it does not have its own legal personality

It is therefore essential to establish a new legal entity.

However, this step requires following a specific method, which can sometimes be cumbersome depending on the complexity of the project.

The purpose of this article is to explain each of these aspects in detail in order to ensure that the transition proceeds as smoothly as possible.

Converting a sole proprietorship into a corporation: What steps are involved?

There are two options available to you for converting a sole proprietorship into a corporation:

• You may decide to start a new company
• You may decide to transfer the business assets from the sole proprietorship to a new company. This can be done through a contribution of assets or by purchasing the business assets.

The first step is to set up a new company

Most often, this takes the form of an LLC, a simplified joint-stock company (SAS), a general partnership (SNC), or a corporation (SA). If the entrepreneur wishes to continue working alone, they will opt for a single-member simplified joint-stock company (SASU) or a single-member limited liability company (EURL).

The documents to be filed with the clerk’s office of the commercial court must include the following:

• The company’s articles of incorporation, dated, signed, and certified as true copies by the partner
• Requiredofficial forms
• The address of the company's headquarters
• Certificate of Deposit with the Bank
• The appointment of the company’s manager. If this has already been specified in the articles of incorporation, it is not necessary to submit this document
• Payment of court fees

Each manager must provide a copy of their identification and a sworn statement certifying that they have no criminal convictions.

If the transaction involves the purchase of a business, you must provide a copy of the purchase agreement registered with the tax authorities, as well as a certificate of publication from confirmingthe legal notice detailing the sale.

If the contribution involves a business, you must provide a copy of the contribution deed, which must be stamped and registered with the tax authorities, as well as proof of publication of the legal notice stating the contribution.

If the amount of any single contribution exceeds €30,000, the appointment of a contribution auditor is required. In this case, a copy of the auditor’s report must be provided.

All documents must be filed with the CFE (Business Registration Center) with jurisdiction over the address of the new company’s registered office.

The business owner will receive their Kbis extract, SIREN number , and SIRET number within an average of one week after submitting the application. Additional specific procedures may apply depending on the chosen legal structure.

What administrative consequences should be expected?

If you choose to transfer the business through a contribution, it is transferred to the new company as a contribution in kind.

Consequently, the business assets associated with the former sole proprietorship are transferred in full and are considered to belong to the newly formed company.

Its value is directly contributed to the new company's capital stock, and the company receives securities in exchange.

If you choose to transfer the business through the sale of the business assets, the new company finances the acquisition with a bank loan, and the entrepreneur receives the funds or is granted a claim against the company.

If you choose to restructure the business through a lease-management arrangement, the former operator may retain ownership of the business, and the appointed manager pays the former operator a royalty.

Your point of contact will always be the CFE with jurisdiction over the address of the new company’s registered office

What tax implications should be expected?

If you choose to transfer the business through a contribution of the business assets, the contributor is subject to the taxes applicable to the cessation of business operations.

The new company must pay the registration fees (calculated based on the value of the business).

If you choose to transfer the business through a sale of the business, the seller must pay any outstanding taxes from their previous business activities. The company must also pay the registration fees.

If you choose to convert your property through a lease-management arrangement, no registration fees are due, and you will not owe any capital gains tax.

Converting a sole proprietorship into a corporation involves a number of time-consuming steps

Hiring a professional is often a good idea to ensure that these tasks are performed properly and safely.