In France, a “société à responsabilité limitée” (SARL) is a commercial company where liability is limited up to the amount of contributions, and which has characteristics of a partnership (2 to 100 people), in particular because the shares held in the capital are not freely accessible without the agreement of all or some of the partners.
The terminology of “société à responsabilité limitée” already appears in a law of 23 May 1863, but it in fact refers to a form of public limited company unrelated to the current SARL.
The current “société à responsabilité limitée”, whose legal character is somewhat ambivalent, as it cannot be described as either a partnership or a capital company, was developed in Germany (GmbH) by a law dating from 1892. Since the year 1925, the SARL is also a legally recognized legal form in France.
History and Consequences of the Concept of “Limited Liability”
The concept of “limited liability” and its implementation in laws in the nineteenth century (in France, laws of 23 May 1863 and 24 July 1867; in England laws from 1856 to 1862 on joint-stock companies limited) counts, according to Harari in the book Sapiens, “among the most ingenious inventions of humanity”: “Peugeot is a creation of our collective imagination. Legal scholars speak of a “fiction of law”. Peugeot belongs to a particular genre of legal fiction, that of “limited liability companies”.
The idea behind these companies is one of the most ingenious inventions of mankind.” . Harari explains the advantages as follows: “If a car broke down, the buyer could sue Peugeot, but not Armand Peugeot. Although the company borrowed millions before going bankrupt, Armand Peugeot did not owe a single franc to its creditors. After all, the loan had been granted to Peugeot, the company, not to Armand Peugeot, the Homosapiens shareholder!
This explanation shows that the term “limited liability” is a euphemism: it is in fact not a limitation of risks but a real transfer of responsibility and risks from the shareholder to the company, to its work group, criminal and economic liability. However, regardless of the amount invested by the shareholder, he still has the power and is the owner of all the means of production (premises, machines, computer resources, etc.), including those acquired thanks to the “millions” borrowed. In fact, the enterprise, which acquires by borrowing, which repays and maintains the means of production at its own expense, is the owner of nothing because it is not subject to property rights.
Thanks to this “limited liability” and the non-existence of the company in law, several processes allow shareholders to increase the means of production they control while minimizing their investment (the share capital) as much as possible: leveraged investment, leveraged purchases, share buybacks. It is therefore very understandable that shareholders resort to these procedures rather than issuing additional shares, provoking the arrival of other shareholders with whom the risks are shared, but also power and ownership. If the company were, like an association under the law of 1901, subject to law, “limited liability” would be replaced by “shared responsibilities and properties” between shareholders and the company’s work group, each according to his or her contribution. “Leveraged” and other processes for the benefit of some would be no more, and many others would rejoice.
Principle of the SARL
In French law, the SARL is discussed by two series of texts: Articles L223-1 to L223-43 of the Commercial Code, which deal with its constitution and operation, and Articles L241-1 to L241-9 of the same code, which are penal provisions establishing the list of offences concerning this corporate form.
The difference also lies in its management method, which is much simpler than that of a public limited company (SA). Indeed, a SARL is managed by a manager, who is required to report at least once a year to a general meeting of the partners. On the other hand, a public limited company is managed by a general manager (or executive board) who reports to the board of directors (or the supervisory board), and the members of the latter in turn report to the general meeting of shareholders.
Since the law of 11 July 1985, the SARL has had two variants: the multi-member SARL (at least two partners) and the EURL (only one partner). The practice company, contrary to what its name indicates, is not a SARL but a private practice company (SEL).
There are now nearly 2 million SARLs in France. In 2022, nearly 80,000 SARLs were created in France. The SARL is suitable for small and medium-sized businesses.
The SARL can be declined in various complementary forms, depending on the activity carried out and the partners concerned, which can bring various advantages from a tax point of view (among others): the SARL with variable capital, the press SARL, or the family SARL. In a multi-member SARL, the minimum number of partners is two; by provision of the Commercial Code, it cannot exceed 100. A “société à responsabilité limitée” (SARL) set up by a single partner is said to be a single-member company.
SARL Legal features
Capital
The amount of the company’s capital is freely set by the articles of association (Article L223-2 of the French Commercial Code); Originally, the minimum capital was 20,000 francs (law of 13 July 1967). On 1 March 1985, this minimum capital was raised to 50,000 francs (Law No. 84-148 of 1 March 1984), then at the changeover to the euro to 7,500 euros, today the minimum capital of a “société à responsabilité limitée” is set freely when the company is incorporated.
Abolition of a minimum capital: the law on economic initiative of 1 August 2003 abolished the minimum capital requirement of 7,500 euros; It is therefore legal to open a company with a capital of one euro. However, share capital is a guarantee of confidence in banks and lenders or creditors. It is also an indication for partners, because they are more likely to do business with a company that has a large amount of capital, because in the event of problems, the partners are liable for losses up to their contribution to the capital. However, the health of the company is only imperfectly rendered by the share capital and it is better to read its accounts and balance sheets.
The capital is divided into shares and its distribution is mentioned in the articles of association.
In particular, this makes it possible to organise the distribution of powers within companies (majority and minority shareholders, important in the voting of decisions). The shares must be subscribed in full by the partners. They must be paid up in full when they represent contributions in kind.
Cash contributions must be paid up at least one-fifth of their amount at the time of creation. The surplus is released in one or more instalments by decision of the manager, within a period which may not exceed five years from the date of registration of the company in the Trade and Companies Register. However, the share capital must be paid up in full before any subscription of new shares to be paid up in cash of at least a quarter of their amount (Law 2012-387 of 22-3-2012), failing which the transaction will be null and void.
Contributions in kind (goods, stocks, receivables, etc.) must be made immediately.
Contributions to industry are now allowed (special skills, “skill”, expertise), but they are not included in the amount of the incorporation share capital. They do, however, allow you to acquire the status of partner and to participate in the sharing of the profit. Where applicable, the articles of association shall determine the terms and conditions under which shares may be subscribed to in industry.
Partners (natural or legal persons)
- Minimum: 2 (Article L223-1 of the French Commercial Code)
- Maximum: 100
Their liability is limited to their contributions.
Collective decisions in a SARL
- Decisions leading to an amendment to the articles of association are called extraordinary collective decisions.
- Decisions that do not lead to an amendment to the articles of association are called ordinary collective decisions.
- Collective decisions are usually taken at general meetings.
For SARLs incorporated before August 4, 2005
- Ordinary meetings: No quorum is required.
- 1 convocation: majority of the shares;
- 2 Convocation: majority of votes cast by the shareholders present or represented.
- Special meetings: No quorum is required.
- Majority of 3/4 of the shares (clause contrary to the articles of association deemed not to be written).
For SARLs incorporated after August 4, 2005
- Ordinary meetings: No quorum is required.
- 1 convocation: majority of the shares;
- 2 Convocation: majority of votes cast by the shareholders present or represented.
- Special Meetings:
- quorum of 1 /4 of the shares on 1 convocation,
- 1/5 of the shares out of 2 notices,
- Majority of 2/3 of the shares held by the shareholders present or represented.
A statutory clause providing for different conditions is valid.
Other rules
Unanimous decision to:
- transformation of the SARL into SNC, SCA, SCS and SAS;
- Change of nationality
- Increase in associate engagements.
Double majority in number and capital for:
- Sale of shares
Half of the shares for:
- capital increase through incorporation of reserves,
- conversion into a public limited company if the equity of the last balance sheet exceeds €750,000.
Incorporation of a SARL
Statutes
- General elements of the contract
- Consent: rules of common law
- Legal capacity Capacity:
- Non-trading partners: civil capacity is sufficient to be a partner. An emancipated minor, a protected adult, two spouses or a foreigner may be associated. Legal entities may also be associated.
- There are no incompatibilities or prohibitions that limit access to a SARL. However, it is not necessary to have been subject to suspension of civil rights, and a certificate of non-conviction is required, in accordance with Article 128-1 of the Commercial Code, recently relaxed by the law on the modernization of the economy of August 4, 2008.
- Purpose:
- the SARL must be commercial regardless of its purpose
- Certain activities are prohibited: insurance companies, capitalization companies, banks or tobacconists cannot be limited liability companies. (Entertainment companies can be in the form of SARLs since 1988)
- Some activities are reserved for other types of companies: management of securities portfolios, investment companies
- Some activities are reserved for SARLs: real estate management company
- Certain activities are carried out as a “société à responsabilité limitée” under certain conditions: for example, a chartered accountant’s “société à responsabilité limitée”.
- Elements specific to partnership agreements
- The number of partners: 2 to 100. If the number becomes equal to 1 partner, it is transformed into EURL. If the number of partners becomes more than 100, there is an adjustment within the year, otherwise the company is dissolved or regularized as a public limited company.
- Capital: it is freely set in the articles of association (previously, the minimum capital was 7,500 euros); it can be paid up in whole or in part, over a maximum period of 5 years. Subsequent to the establishment, the capital may be increased (capital increase).
The capital is made up of contributions:
- There are three types of contributions within the framework of the SARL: the cash contribution, the contribution in kind and the contribution in industry. However, the contribution to industry is only valid for so-called family SARLs (between spouses, children)
- Shares representing cash contributions must be paid up at least 1/5 of their amount. The subsequent release shall take place in one or more instalments by decision of the manager within a period which may not exceed five years from the date of registration. Deposit within eight days at a notary, bank or Caisse de dépôts et consignation. Possibility to take back the funds if they are not constituted within six months of payment.
- In the case of contributions in kind, the articles of association must contain the valuation of the contributions. A contribution auditor is appointed unanimously by the future shareholders or by order of the President of the Commercial Court; This commissioner draws up a report annexed to the statutes. This obligation does not exist when the value of any contribution does not exceed EUR 30,000 and the total value of the contributions in kind does not exceed half of the capital. The valuation engages the joint and several liability of the shareholders towards third parties if there is no contribution auditor or if the shareholders have retained a value higher than the value recommended by the contribution auditor.
- Since 2001 (NRE law), contributions to industry have been allowed without restriction. However, the contribution does not entitle the employee to shares, but to shares in industry. It is the articles of association that will then set the conditions of remuneration. If the articles of association do not set them, the amount of profits and losses will be equal to the partner with the fewest shares.
The capital is represented by shares:
- The subscription and total payment of the shares must be done at the time of incorporation, i.e. at the signing of the articles of association.
- The distribution of shares must be mentioned in the articles of association. The distribution of profit and loss is not necessarily proportional to the shares, but the share in the losses cannot be greater than the shares.
- Specific elements of the partnership agreement: profit-sharing, affectio societatis, company name, duration, etc.
Form and publicity requirement
- Statutes:
They must be ratified, written (by private signature or by authentic deed) and signed by all partners. In addition to the information common to any company, it must include for the SARL the valuation of contributions in kind, the choice of managers and the distribution of powers, the transfer of shares, the methods of consulting the partners and the methods of distribution of profits. In the appendix, the report of the contribution auditor and the statement of the acts carried out on behalf of the company in formation are added.
- Deeds executed on behalf of the company not yet registered:
Persons acting on behalf of the company are jointly and severally liable for the consequences of their actions indefinitely, unless the company, after being incorporated and registered, takes over their commitments on its behalf. These commitments are then deemed to have been entered into from the outset by the company. There are two automatic takeover procedures: the deeds annexed to the articles of association and the acts provided for in the articles of association.
- Advertising measures:
- the articles of association must be registered with the tax office within 30 days of signing,
- insertion in a Journal of Legal Announcements,
- insertion in the Official Bulletin of Civil and Commercial Announcements,
- registration in the Trade and Companies Register.
Appointment of officers
The directors of SARL are called “managers”. Every SARL has at least one manager. The manager(s) are appointed by the articles of association (in which case they are referred to as statutory managers) or by decision of the shareholders representing more than half of the capital (unless a stronger majority is provided for in the articles of association).
The management of a “société à responsabilité limitée” can only be exercised by natural persons with their civil rights (a legal person cannot therefore be the manager of a société à responsabilité limitée”).
The partners of a “société à responsabilité limitée”
The partners of a “société à responsabilité limitée” (between 2 and 100) do not have the status of trader and can carry out a remunerated activity within the company. As with any legal form, the partner has rights and obligations.
Increase, Decrease, Transform, Dissolution
Capital increase
In the Law of 2 July 1966, there are few specific provisions concerning the capital increase of SARLs. Therefore, the provisions applicable to SAs should be taken as a guide.
- The increase by way of contributions
- Cash contributions
The capital increase will be decided by the Extraordinary General Meeting since the articles of association will be amended with a majority of 3/4 of the shares. If the articles of association so provide, the decision may be taken by written consultation.
At the first consultation, the meeting must decide on the most important terms and conditions (amount, number of shares, amount of the premium, etc.). The manager is in charge of the subscriptions and releases of funds since full payment is required immediately. The second consultation ratifies the capital increase and amends the articles of association.
If the increase is not made within six months of the first deposit of the funds, the contributors may request a refund of their deposits. In the case of subscription by a third party, approval is required. For spouses who share property, it is necessary to notify the spouse under penalty of nullity of the contribution.
In the event of a cash contribution by individual partners, an income tax credit is granted. It amounts to 25% of the amount contributed. Securities should be held for five years.
With respect to advertising:
- Recording of the minutes of the meeting
- Inclusion in a newspaper of legal announcements
- Filing with the registry (minutes of the meeting, articles of association, declaration of conformity)
- Amending application to the RCS
- BODACC Insertion
- Contributions in kind
The contribution of property in kind must be the result of a written contract. The procedure is similar to that which exists at the level of incorporation: contributions (business assets, lease rights, commercial leases) are evaluated in a report annexed to the articles of association under the responsibility of a contribution auditor. The contribution agreement must be approved by the partners.
Regarding advertising, the same applies to the increase by cash contributions, but the report of the auditor of contributions must also be filed with the clerk of the commercial court.
- Set-off of claims in shares
Either by contribution in kind or by way of compensation. Set-off claims must be certain and payable. In addition, this possibility must be provided for by the special meeting that decides on the increase.
- Increase through incorporation of reserves, share premiums and profits
The decision to proceed with such a capital increase is validly taken by the shareholders representing at least half of the shares and not 3/4. The formalities are identical to those for an increase by cash contributions.
Reduction and loss of capital
The Law of 1 August 2003 repealed the requirement that, except in the case of the conversion of the SARL into a company of another form, the reduction of the share capital below the legal minimum may only be decided under the condition precedent of a capital increase intended to bring it at least to that level.
Reference should be made to the rules relating to the reduction of the share capital of public limited companies:
- Nature and reasons for the transaction:
The reduction of the capital is envisaged according to two hypotheses during the life of the company:
- The company reduces its capital by repaying the contributions. It considers that its capital is too large in relation to its cash flow needs. This is not a common case, it is only found in companies that have reduced their activity.
- The company has suffered losses such that depreciation by deduction from future profits seems unlikely, and in any case makes it impossible to distribute dividends during the period of this depreciation, or the company wishes to improve its financial situation and reduces its capital to compensate for all or part of the losses.
- Distinction from capital depreciation:
Capital depreciation is the operation by which the company reimburses its partners all or part of the nominal amount of their share. When possible, this operation is decided by the EGM (C.Com, art L.225-198) and is carried out by levies on profits or reserves. Depreciation constitutes a return of the contributions, as an advance on the liquidation bonus (the sum due to the partners, at the end of the company, after the sale of all the assets and payment of all the debts), without any change in the capital. - Condition of the transaction: Decision of the
EGM on the basis of the Statutory Auditors’ reports. Equality of shareholders: the transaction may not affect the equality of shareholders. Creditors of claims prior to the decision may not object to the reduction of capital on the grounds of losses. Otherwise, they have a period of 20 days after the decision of the EGM to oppose this procedure. The objection is lodged with the Commercial Court, which may reject it, order the repayment of debts or order the provision of guarantees.
Transformation
If the company is converted into a general partnership or a civil partnership, this requires the unanimous agreement of the partners.
If the company becomes a public limited company, there are conditions. A deliberation of the shareholders representing at least 3/4 of the shares is required. The balance sheets for the last two financial years must be approved by the partners.
A report by a commissioner on the state of the corporation is required. In addition, the manager will ask the President of the Commercial Court to appoint a processing auditor (who may be the statutory auditor). This auditor assesses the value of the assets and the special benefits for the benefit of the partners or third parties. He submits a report in which he certifies that the amount of equity is at least equal to the share capital. In practice, it may be responsible for drawing up the report on the situation of the company.
The SARL that is transformed into a public limited company must follow the rules specific to the public limited company, i.e. at least 7 partners, the capital, the appointment of an auditor, the modification of the articles of association, the conversion of the shares into shares and the respect of the publicity formalities.
Dissolution
Causes common to all companies: Expiry of the term, extinction of the object, judicial liquidation, cancellation of the partnership contract, decision of the partners.
Other causes: The company is automatically dissolved after one year if the number of partners exceeds 100, if the equity capital is below the legal minimum, or if half of the capital is lost.
The SARL is not dissolved by the death of a partner (or by his incapacity, personal bankruptcy, etc.).
Tax
In principle, the SARL is subject to corporate income tax (IS).
However, the SARL can opt for income tax (IR) in two cases:
- if all the partners are natural persons and members of the same family (spouses and/or partners bound by a civil solidarity pact and/or children); however, this option is not possible if the SARL has a liberal activity;
- even if the partners are not members of the same family, provided that more than 50% of the capital is held by natural persons and that the manager and his family hold at least 34% of the capital; This option is reserved for companies created less than five years ago, carrying out a commercial, artisanal, agricultural or liberal activity, and below the triple threshold of 50 employees, 10 million euros in turnover and 10 million euros in balance sheet total; this option is only valid for 5 financial years.
If the company is subject to income tax, only the partners are taxed and not the company itself (this is called tax transparency): each partner must declare a fraction of the profit proportional to his or her participation in the capital in his or her income tax return; This is the case even if the company does not distribute the profit: on the other hand, there will be no need for further taxation on the day on which the company makes a distribution.
The SARL is subject to VAT as soon as it has a genuine economic activity (this excludes exclusively financial holding companies).
Social security
Two social security schemes can apply to the manager of a “société à responsabilité limitée”:
- a minority or equal manager, i.e. one who holds no more than 50% of the shares, or who is not a partner, is subject to the social security scheme for salaried workers if he or she is remunerated for his or her duties; he is not subject to tax and is not subject to contributions if his duties as manager are not remunerated;
- a majority manager, i.e. one who holds more than 50% of the shares, is a self-employed worker (TNS) subject to the RSI, whether paid or not.
If there are several managers, the shares held by all the managers are added together to determine whether or not the management is the majority (a manager holding less than half of the shares is therefore in the RSI if he is a member of a collectively majority management).
It should be noted that the paid minority or equal manager only benefits from the social security of employees: he is not an employee under labour law and therefore cannot benefit from the provisions of collective agreements or unemployment rights.
It is possible to combine the function of minority manager with the status of employee. To do so, the manager must meet the following conditions:
- occupy an effective job,
- carry out an activity separate from the management,
- be remunerated by a salary,
- work under a relationship of subordination.
The majority manager may not combine an employment contract with his or her function as manager in the same company (in such a case, there is no relationship of subordination).
References (sources)
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