French SARL: Limited Liability Company Formation, Management, and Taxation

The Société à Responsabilité Limitée (SARL) is the traditional French limited liability company form. Created by the Law of 7 March 1925 and now governed by the Code de commerce, the SARL offers limited liability for shareholders while providing a simpler legal framework than the Société Anonyme (SA). The SARL is suitable for small and medium-sized businesses and is one of the most common corporate forms in France, though it has been partially supplanted by the more flexible Société par Actions Simplifiée (SAS).

Formation

The SARL is formed by one or more physical or legal persons who subscribe to the share capital. The maximum number of shareholders is 100. The company is formed by the execution of the articles of association (statuts), the subscription of the share capital, and the registration of the company with the Registre du Commerce et des Sociétés (RCS).

The articles of association must include certain information: the corporate name, the registered office, the corporate purpose, the duration of the company (maximum 99 years), the amount of share capital, the number and nominal value of shares, and the identity of the managers (gérants). The articles must be in writing and may be executed by private deed or notarial deed.

Capital Requirements

The SARL has a minimum share capital of €1, the requirement having been eliminated by the Loi de modernisation de l’économie of 2008. The capital must be adequate for the company’s activities, but there is no legal minimum. The capital may be contributed in cash or in kind. Contributions in industry (services or know-how) are not permitted in the SARL.

At least 20% of cash contributions must be paid up at the time of formation, and the remainder must be paid up within five years. Contributions in kind must be fully paid up at the time of formation. The contributions are audited by a commissaire aux apports (contributions auditor) unless the value of the contributions in kind does not exceed €7,500 and represents less than 50% of the share capital.

The Gérant Management

The SARL is managed by one or more managers (gérants), who may be shareholders or non-shareholders. The managers are appointed by the shareholders and may be removed by a decision of the shareholders representing more than half of the shares. The managers have the power to act on behalf of the company in all circumstances, subject to the limitations set out in the articles.

The manager’s powers vis-à-vis third parties are broad. The company is bound by acts of the manager that fall within the corporate purpose, even if those acts exceed the manager’s internal authority. The company may avoid liability only if it proves that the third party knew the act exceeded the corporate purpose or could not have been unaware of it.

Shareholder Decisions

Shareholder decisions are taken at meetings or by written consultation. The law distinguishes between ordinary decisions and extraordinary decisions. Ordinary decisions, including the approval of annual accounts and the appointment of managers, require the approval of shareholders representing more than half of the shares. Extraordinary decisions, including amendments to the articles and changes to the share capital, require a qualified majority.

The qualified majority for extraordinary decisions depends on the nature of the decision. Amendments to the articles generally require the approval of shareholders representing at least three-quarters of the shares. Increases in capital may be approved by a simple majority of shares. Changes to the nationality of the company require unanimity.

Share Transfers

Shares in an SARL are not freely transferable. The transfer of shares to third parties requires the approval of the shareholders representing at least half of the shares (unless the articles provide for a higher majority). Transfers between shareholders and to certain family members are free (the shares may be freely transferred).

The approval procedure gives the other shareholders the opportunity to acquire the shares if they refuse to approve the transfer. If the shareholders refuse to approve the transfer, they must acquire the shares within three months or obtain a buyer. The price is determined by agreement or, failing agreement, by an expert appointed by the court.

Tax Treatment

The SARL is subject to corporate income tax (impôt sur les sociétés, IS) by default. The standard rate of IS is 25% (as of 2022). However, small SARLs may benefit from a reduced rate on the first €42,500 of profits. The SARL may also be subject to the contribution sociale sur l’impôt sur les sociétés and the contribution exceptionnelle.

The SARL may opt for transparency for income tax purposes (impôt sur le revenu, IR). The option is available for existing companies under certain conditions and for new companies during their first five fiscal years. The option allows the profits to be taxed at the shareholder level rather than the company level. The option may be beneficial for small companies with few shareholders.

The EURL Variant

The Entreprise Unipersonnelle à Responsabilité Limitée (EURL) is the single-shareholder variant of the SARL. The EURL is formed and governed by the same rules as the SARL, with the exception that there is only one shareholder. The single shareholder exercises all the powers of the shareholders’ meeting and may be the manager of the company.

The EURL is a popular corporate form for individual entrepreneurs who wish to limit their liability while maintaining control of their business. The EURR offers the same limited liability as the SARL while being simpler and less costly to operate. The EURL is subject to the same tax regime as the SARL.

Advantages and Disadvantages

The SARL offers several advantages: limited liability for shareholders, a simple and well-established legal framework, low minimum capital, and a flexible management structure. The SARL is suitable for a wide range of business activities and is well understood by French professionals, including accountants, lawyers, and bankers.

The SARL also has certain disadvantages: the maximum of 100 shareholders, restrictions on share transfers, less flexibility than the SAS, and the requirement for unanimous consent for certain decisions. The obligation to prepare annual accounts and appoint a statutory auditor when certain thresholds are exceeded may also be burdensome for small companies.

Comparison with SAS

The SARL has been partially supplanted by the SAS, which offers greater contractual freedom, more flexible governance, and fewer restrictions on share transfers. The SAS is generally preferred for subsidiaries of foreign companies, joint ventures, and innovative companies. The SARL remains a good choice for small and medium-sized businesses that value simplicity and legal certainty.

The choice between the SARL and the SAS depends on the specific needs of the business. Factors to consider include the number of shareholders, the need for flexibility in governance, the intended exit strategy, and the tax implications. Professional advice should be sought before deciding on the appropriate corporate form.