Legal form

This page was last modified on 10-10-2017

The choice of the legal form of a business adapted to the situation and to the needs of the entrepreneur is of vital importance because this choice has a significant influence on the future operation and structure of the business.

The entrepreneur must first choose between:

  • a sole proprietorship;
  • or a commercial company.

If a commercial company is chosen, a choice must then be made between:

  • capital companies (société de capitaux), in which the person is only liable for the debts of the company up to the amount of his contribution;
  • or partnerships (société de personnes), in which the person has unlimited liability for the debts of the company backed up by his/her personal assets.

Although statistics show a strong preference for company structures, they are not suited for every business project.

Choosing the most appropriate business form requires an analysis on a case by case basis which, in addition, could be based on the expertise of specialists in business start-ups/takeovers.

Although this is an important choice, the legal form is never definitive. However, subsequent modification gives rise to major costs and has tax consequences.

Who is concerned

The choice of the legal form of a business has to be made by every (future) entrepreneur who intends to:

  • create a new business;
  • take over an existing business;
  • change the legal form of an existing business in the event of, e.g.:
    • a change in the number or capacity of the partners;
    • a significant increase in the turnover;
    • a change in the structure or organisation of the business, etc.

Preliminary steps

In order to choose the most suitable legal form for a business project, the project must first be clearly defined at different levels:

  • nature of the planned business activity;
  • amount of capital to invest;
  • willing to go for a partnership or not;
  • respective commitments of the stakeholders;
  • links between the stakeholders (trust, family or financial);
  • strategic objectives of the business, etc.

How to proceed

Available forms

Sole proprietorship

A sole proprietorship is a business form whereby the entrepreneur, skilled craftsman or trader finances the business and makes all the business decisions alone.

A sole proprietorship does not have legal personality as no distinction is made between the business and the entrepreneur. The entrepreneur therefore assumes full responsibility vis-à-vis third parties (debt of the business) and invests his personal assets.

This business form which guarantees independence as well as minimal formalities is therefore more suitable for smaller businesses.

Sole proprietorships are not obliged to have a minimum amount of share capital nor do they have to draw up articles of association.

The term 'sole proprietorship' covers all self-employed persons carrying out a business activity in their own name, namely:

  • self-employed persons carrying out a commercial activity (i.e. skilled craftsmen, traders and manufacturers that require a business permit to carry out their activity);
  • members of the independent professions (the liberal professions, artists, consultants, etc.);
  • self-employed persons in the agricultural sector in the broadest sense (farmers, horticulturists, market gardeners, foresters and viticulturists).

NB: the term 'self-employed' is used here in the sense of 'sole trader', not to be confused with the social security status (self-employed - indépendant) that uses the same term.

Commercial company

Commercial companies are established with the aim of generating a profit. There are different forms of commercial companies which can be divided into 2 categories:

Capital companies

Capital companies are impersonal companies that rely mainly on the capital contributed by the partners, independently of their personal, moral or business capacities.

Company shares are freely transferable.

In principle, the liability of the partners in a capital company is limited to the amount of their contribution.

This category includes:

Partnerships

Partnerships are similar to sole proprietorships in that the deed of partnership is based mainly on the partners themselves who know and trust each other.

The transfer of shares requires the agreement of all of the partners.

The partners are jointly and severally liable for the debt of the business.

This category includes:

Hybrid companies

Hybrid companies have the characteristics of both capital companies and partnerships.

They are capital companies because the financial liability of their partners is limited to the level of their contribution to the company capital.

They are also considered to be partnerships, given that they are constituted by a limited number of partners and that there are strict conditions concerning the sale of company shares.

This category includes limited liability companies (SARL).

Liability of the promoter (limited or unlimited)

Capital company

In principle, the liability of partners of a capital company is limited to the amount of their contribution.

Sole proprietorship and partnership

The debt of a business is settled by using all of the assets (both professional and private) of sole proprietors (sole traders) or partners.

The benefit of limited liability, which is not available to sole proprietorships, may prove more advantageous in theory than in practice. Indeed, many company creditors (in particular banks which have granted loans to the company) require the partners to personally guarantee the debt of the company. Therefore, should the company default, the company creditors can recover their receivables from the personal assets of the partners.

Anonymity of the promoter

Capital company

In the case of certain company forms, such as a public limited company (société anonyme - SA), entrepreneurs who do not wish to be known to the public as the promoter of the business may remain anonymous. This is not the case for a limited liability company (société à responsabilité limitée - SARL) as its shares are issued as registered shares.

Sole proprietorship and partnership

In the case of a sole proprietorship or partnership, the entrepreneur is necessarily known to the public as the promoter of the business.

Allocation of powers within the busines

Commercial company

The company provides a legal framework which allows it to determine the competences and powers of each stakeholder in the business

A high level of freedom with regard to the drafting of the articles of association provides for more flexibility when it comes to allocating powers. Therefore, where several people wish to set up a business together, a company structure is almost unavoidable. By setting up their business in the form of a company, they can appoint one or more managers and determine the powers to be allocated to said managers, while other participants, who wish to be less involved in the company, can simply be partners, who nevertheless retain the right of inspection vis-à-vis the company, mainly through general meetings.

Sole proprietorship

A sole proprietorship does not lend itself easily to being set up using a similar structure where several people are involved.

Transfer of the company

Commercial company

In general, it is quite easy to transfer a business set up in the form of a company from one generation to the next or even to one or more third parties. Indeed, rather than selling the business as a whole, it is easier to sell the shares of the company. This means that company shares can be transferred gradually over time, in particular in the case where a founder hands the business down to the next generation.

Sole proprietorship

In the case of a sole proprietorship, the transfer of a business requires the transfer of the whole business, as it cannot be subdivided into strictly equal parts.

In the event of the death of the entrepreneur, the business is subject to the common law on inheritance with the possible risk of dismantling.

Operating costs

Commercial company

The constitutional document of a company usually takes the form of a notarial deed which involves notary fees, registration fees and publication fees.

A specific fixed registration fee of EUR 75 (which replaces the capital duty), is payable when a company is incorporated, when the articles of association are amended or when a company transfers its registered office to Luxembourg.

The company must also be managed according to certain formalities:

  • sending notices to attend general meetings or management body meetings;
  • keeping the minutes of meetings and shareholder registers;
  • filing the necessary documents with the Trade and Companies Register, etc.

Sole proprietorship

A sole proprietorship does not incur formation expenses. Assets or capital transferred from a taxpayer's private assets to their working capital are considered to be a change in allocation and not a contribution. The transfer of personal funds or assets to the business does not result in any tax consequences for the entrepreneur given that the entrepreneur and the business are one and the same.

Sole proprietorships are not subject to the same management formalities as commercial companies meaning that entrepreneurs can dedicate themselves fully to their business activity.

Accounting aspects

Capital company

Public limited companies (SA) and limited liability companies (SARL) must:

Sole proprietorship or partnership

Sole proprietorships, general partnerships (sociétés en nom collectif - SENC) and limited partnerships (sociétés en commandite simple - SECS) may prepare a simplified version, which could reduce the costs associated with keeping the accounts.

They are not subject to filing their annual accounts with the Trade and Companies Register.

However, businesses with an annual turnover in excess of EUR 100,000 (excl. VAT) are also subject to the SCA, the approval of accounts on the eCDF, the filing of accounts with the Trade and Companies Register and subsequent publication.

Social security aspects

The following are affiliated with the social security scheme as self-employed persons:

  • natural persons established as traders;
  • SENC, SECS and SARL partners holding more than 25 % of company shares and on the basis of whom the business permit is granted;
  • directors, general partners or representatives of public limited companies (SA) or cooperative companies (SC) responsible for the day-to-day management of the business and on the basis of whom the business permit is granted.

Note also that under certain conditions self-employed persons affiliated to the scheme may be entitled to unemployment benefits.

Tax aspects

Capital company

Profit realised by capital companies is taxable at the level of the company and not at the level of its partners or shareholders. From a tax point of view, capital companies are therefore categorised as 'opaque'.

Profits paid out in the form of dividends to partners or shareholders are taxed. This does not, however, result in double taxation or a greater total tax burden compared to sole proprietorships.

Sole proprietorship or partnership

Profit realised by sole proprietorships is taxable at the level of the entrepreneurs or partners. From a tax point of view, these businesses are therefore categorised as 'transparent'.

Taxation according to legal form
 

Sole proprietorship (Entreprise individuelle)

Commercial company

'Transparent'
partnerships
(SENC, SECS)

'Hybrid' company
(SARL)

'Opaque'
capital company
(SA, SECA)

Tax payer

The entrepreneur carries out a business activity in his own name.

The income of the business is allocated to a single person: the entrepreneur.

We speak of private withdrawals.

A transparent company is not taxable as such.

The income of the business is directly taxable at the level of its partners.

The company is not liable for any withholding tax.

The income of the business is directly taxable at the level of the company: the shareholders/partners are only taxable when the profit is distributed.

We speak of distribution of dividends with application of withholding tax: rate of 15%, unless there is a more favourable rate (double tax treaty, parent/subsidiary directive, etc.)

Tax

The following are payable by sole proprietors or partners in a partnership:

Capital companies are subject to:

Dividend distributions are subject to a special withholding tax.

Legal aspects

Legal management according to legal form
 

Entreprise individuelle

Société de personnes
SENC, SECS

Société à responsabilité limitée
SARL

Société de capitaux
SA, SECA

German equivalent

Einzelunternehmen

Personengesellschaft
(Offene Handelsgesellschaft, Kommanditgesellschaft)

Gesellschaft mit beschränkter Haftung (GmbH)

Kapitalgesellschaften
(Aktiengesellschaft, Kommanditgesellschaft auf Aktien)

English equivalent

Sole trader / Sole proprietorship / Individual enterprise

Partnership
(general partnership, limited partnership)

Limited (liability) company

Capital company
(public limited company, partnership limited by shares)

Legal personality No legal personality.

Only the entrepreneur has the legal personality as a natural person.

The legal personality of a business set up in the form of a company is separate from that of the partners that form the company.

As a legal person, it has rights and obligations under commercial and tax law.

Assets No personal asset base. The assets, which include the business, belong only to the entrepreneur.

A corporate company has its own assets.

Financial liability The entrepreneur or the partners have unlimited liability on their personal assets for the debts of the business.

Liability limited to the amount of contributions.

Constitutional document

/

Private deed or notarial deed with a published extract.

Notarial deed published in full.

Number of partners

Only the entrepreneur

SENC : minimum 2

SECS: 1 general partner and 1 or more limited partners

From 1 to 40

As from 1

Share capital

No minimum

Minimum EUR 12,394.68

Minimum EUR 30,986.69

Company shares

/

Company shares not transferable

Registered company shares that can be transferred under strict conditions Freely transferable registered or bearer shares / bonds
Decision-making bodies

/

General meeting and Management General meeting for companies with more than 25 partners General meeting and board of directors meeting or general meeting, management board and supervisory board
Monitoring and auditing of accounts

/

Internal auditor (commissaire aux comptes) or statutory auditor (réviseur d’entreprises) for SARLs with more than 25 partners Internal auditor or statutory auditor
Accounting and financial information The annual financial statements are not provided to third parties (unless annual turnover > EUR 100,000) Annual financial statements are filed with the Trade and Companies Register (Registre de Commerce et des Sociétés - RCS).

Who to contact

Chamber of Skilled Trades and Crafts
2, Circuit de la foire internationale
L-1347 - Luxembourg-Kirchberg
Postal box B.P. 1604 / L-1016
Luxembourg

Email contact@cdm.lu

14, rue Erasme
L-1468 - Luxembourg
Luxembourg
Phone: (+352) 42 39 39 - 330
Email info@houseofentrepreneurship.lu

Opening hours
from 8.30 to 18.00