‘EIRL’ – Miracle or Placebo?
Tuesday 01 March 2011
To the existing plethora of business statutes is now added another one, the Entrepreneur individuel à responsabilité limitée (EIRL).
Most expats setting up a business in France tend to adopt sole trader legal status, if only because it is easy and cheap to do so.
A sole trader in France is called an Entreprise Individuelle (EI).
Of course, the problem with this status is that there is no limited liability. So, if things go wrong, then the whole of your personal wealth – including your home - is at risk.
As a result, the government have decided to create a new legal business status which offers suitable protection.
This new business statute is called Entrepreneur individuel à responsabilité limitée (EIRL), a status that gives limited liability status to a business that is not run as a limited liability company.
So, in essence, you are a sole trader with limited liability!
But Is it Worth It?
A number of question marks surround the value of using this business status.
Perhaps the single biggest concern is that banks are still entitled to ask you to put up a personal guarantee as security against any business loan you may need.
If you default on the loan, then the bank would be entitled to recourse against your personal property, in the normal way. What then of the distinction between business and personal assets?
Similar guarantees may also be required from a landlord for a commercial letting.
So an EIRL business that does not have any assets that it could put as security would be in the same position as any other business in France, including a limited liability company.
There is also concern about the practicality of this status for those who work from home.The new structure is premised on the declaration of business assets, which are then the only assets at risk against creditors. However, if you work from home, it is going to be difficult to separate your business from your professional assets, particularly if there is no strong physical separation between the two.
Neither are the cost and formalities of this new statute cheap or easy to achieve. You need to be very careful about the formalities in the declaration of personal assets, for any over valuation of the assets by you would invalidate the declaration, and leave your personal assets unprotected.
This is why you are required to obtain the assistance of an accountant in the setting up process, whose services will not be provided to you free of charge.
You will also be required to call upon a notaire in valuing any real estate business assets, and registering it with the land registry.
So engaging all these professionals is going to incure costs, which may not be insubstantial.
There are also the higher costs of actually running the business as an EIRL, as you are required to open a business bank account, to submit annual accounts and to notify any change in personal assets each year, including depreciation of assets.
Clearly, these disclosure requirements mean that you will not be able to maintain complete confidentiality over your business as, with the need to deposit accounts each year your trading record will no longer be a secret.
You also need to be very careful over your personal conduct, for if you are found guilty of fraud or other serious failure in your accounting or business responsibilities then creditors have recourse to your personal assets.
The government has said that existing sole traders are entitled to adopt this new statute. However, this is only possible if your creditors were informed of the change. If they objected to it, they could challenge it in the courts. The final decision would rest with the court.
As you are not a limited company, you are not entitled to the fiscal benefits which come with such status, notably the ability to pay yourself partly in dividends, and thereby reduce the level of your social security contributions.
Finally, there is also an alternative, for it is possible for a sole trader to protect their home from business creditors by making a déclaration d’insaisissabilité, a process which is carried out through a notaire. The cost of doing so ranges from €200 to around €500, depending on the circumstances of your case.
So the conclusion for many business owners might well be that if they seek limited liability status, it would probably be better to simply set up a company and take the fiscal benefits; if they do not wish to do so, then merely register protection of the main home through a déclaration d’insaisissabilité.