When you own a sole proprietorship and business is thriving, you may want to expand further. In order to reach a larger share of the market, it is necessary to consider changing the status of the business. Ideally, expanding your sole proprietorship into a company capable of producing more is the goal! To achieve this objective, there are a few options.

The transformation of the sole proprietorship (EI) into a company depends on the objectives of the manager. This can take the form of a contribution or transfer of the sole proprietorship to the newly created company.

Reasons for the transformation into a company?

The transformation of the sole proprietorship (EI) into a company can be justified for economic, legal, tax, or social reasons. However, the entrepreneur must thoroughly understand, with the help of a professional (lawyer, accountant), the real interest in switching to a company.

Economic reasons

To expand his sole proprietorship, the entrepreneur must increase his personal financial investment or seek bank credit. The transformation is interesting if the capital to be invested in the project is low and can be provided by the entrepreneur. However, it can be a real obstacle if the project requires significant financing volumes.

The interest of the transformation into a company lies in welcoming other partners or shareholders who bring skills and funds.

Moreover, in a sole proprietorship, the entrepreneur must finance development without being able to remunerate his advances. On the contrary, in companies, advances made by a partner can benefit from the tax regime of interest on shareholder current accounts. Interest paid to partners is, under certain conditions, deductible from the company’s profits.

Legal reasons

Since May 15, 2022, there has been a separation of the personal and professional assets of the individual entrepreneur. The business owner is no longer fully liable for the debts of his sole proprietorship with all his personal assets. Now, there is protection of personal assets from any actions by professional creditors. However, the individual entrepreneur can waive this protection at the request of one of his creditors. For example, a bank may ask him to waive this protection before granting him a loan. So, it is a real risk to take.

On the contrary, the company benefits from legal personality. Moreover, it has its own assets. It creates a separation between the entrepreneur’s assets and those of the company. The risk incurred by the partners, except for partnership companies (SNC, SCS, civil companies…), is limited to the amount of the contributions each made when the company was formed. Choosing to operate as a company can therefore be relevant.

Tax reasons

The profits of a sole proprietorship are added to other income earned by the business owner (financial investments, real estate capital gains, pensions, etc.). Moreover, they are subject to income tax (IR). These profits follow the progressive scale of the tax schedule and do not allow for self-financing of the sole proprietorship. Moreover, the individual entrepreneur cannot deduct any remuneration from his taxable profit. This is particularly the case for sums he pays himself through his business. On the contrary, switching to a company can allow the individual entrepreneur to distinguish his personal taxation from the company’s taxation by choosing corporate tax (IS), at the normal rate of 25%.

Social reasons

The individual entrepreneur is a self-employed worker (TNS). He is affiliated with the social security system for self-employed individuals (SSI), which is an integral part of the general social security system. The majority manager of an LLC and the single-member manager of an EURL are also affiliated with the social security system for self-employed individuals (SSI). On the contrary, the director of a corporation (SAS, SA, SCA…) and the minority manager of an LLC are considered as assimilated employees. They contribute to the general social security system. Their social protection is almost similar to that of an employee (except for unemployment insurance).

The assimilated employee director bears a higher rate of social security contributions than the self-employed worker (TNS) but benefits in return from better foresight and a larger complementary retirement pension. However, his status as an assimilated employee does not always allow him to receive unemployment benefits in case of loss of his role as a corporate officer.

Patrimonial reasons

In the event of the operator’s death, the sole proprietorship returns to joint ownership to the heirs, who must unanimously mandate one of them to manage the family business, which can paralyze the family business. Transforming the sole proprietorship into a company can help prevent the consequences of this joint ownership. Indeed, the heirs will no longer have to share the assets of the business, but rather the social rights held by the business owner.

Moreover, the transmission of a company during the business owner’s lifetime is also facilitated. The business owner has the option to gradually transfer his social rights. Moreover, the registration duties to be paid have a ceiling (0.1% of the sale price in SAS/SASU, SA, SCA…).

Transfer your business

Legally, by transferring your business to a company, you will be able to benefit from the status of a partner. As a result, your claim will be recorded in the company’s accounts as a current account. Subsequently, by declaring your inactivity during the transformation of your business status, your tax regime must correspond to that of the company. This means that you will have to pay the non-taxed profit with the capital gains tax on the business. As for the tax exemption, it is fully valid when the value of the elements of the business exceeds 300,000 euros. Between 300,000 and 500,000 euros, it is partial.

Contribution of the business to the share capital

Legally speaking, the business becomes a contribution to the capital of a company. Through this, you will obtain shares in the company that grant you the status of an owner of a portion of the capital. However, to do this, you must follow and respect the essential legal provisions. Your business will be included in the passive capital account of the company’s balance sheet. Regarding taxation, you will be subject to taxes in case of cessation of activity. However, by referring to Article 151 octies of the CGI, you may escape immediate taxation of capital gains as well as profits on stocks.

Through lease management

For this type of transformation, you must provide evidence of your activity (more than 2 years). Governed by articles L-144-1 and in accordance with the commercial code, lease management will allow you to retain ownership of your business. However, the company will operate your business in exchange for payment of royalties to you. In this case, you will automatically carry the name of partner or manager of the company using your business. Following this procedure, only the royalty paid to you will be subject to an operating charge shown in the income statement. The advantage of lease management is that not only do you not have to register, but you will not have to pay taxable capital gains.

Note, however, that specifically for lease management, as you are the owner of the business, you will be subject to numerous social obligations. Among these, we note the mandatory contributions of CSG and CRDS on income following lease management. Also, remember that these payments will only occur when you carry out your activity within the company.

Whether it is through incorporation by contribution or by transfer, seek assistance from a professional (lawyer, accountant).