Business owners in France now have automatic protection of the family home in the event of business failure - well, almost.
If you set up a business in France you have the choice of a large number of different legal and tax entities through which you can run the business.
Your choice of status is likely to be driven by many factors, but one of these may well be your interest in protecting the family home against seizure in the event of business failure.
Such protection may also be necessary against third party claims if you do not carry appropriate insurance cover, which is not obligatory for all activities.
Until recently there were two choices available to obtain such security - either to establish a limited liability company or to obtain protection against seizure via a notaire.
- Limited Company - This normally requires creating a company called a SARL (Société à Responsabilité Limitée), comprising a minimum of two shareholders, or a limited company comprising only one shareholder, called an EIRL (Entreprise Individuelle à Responsabilité Limitée).
- Protection Order - If you prefer not to set up a limited company it is still possible to go along to your local notaire and obtain a déclaration d'insaisissabilité, which protects your family home and other personal possessions against seizure by creditors. The cost of this procedure depends on your circumstances but is upwards of €500. You can do the process at any time, without having to wait until the bailiffs are knocking at the door. Indeed, it is desirable to do so as part of the process of business creation.
If you run your business from the family home it is still possible to obtain a déclaration d'insaisissabilité covering that part of the property that is used as your home. In practice, that may be a difficult division to make, as might then the enforceability of any judgement against the seizure of the business assets.
The government have now decided to cut through all of this formality and to decree in law that whatever your legal or tax business status in France, your principal home is protected against seizure from business creditors. This protection applies even though part of your home may be used for your business. The whole of the property is covered.
So if all you wish to do is safeguard your home, there is no need to set up a company or obtain a protection order through your notaire. Neither is there is any need to make a declaration to the notaire.
That being the case, auto-entrepreneurs/micro-entrepreneurs (neither of whom have limited liability) now have automatic protection of their home.
In the event of later sale of the home the sale proceeds also remain protected, provided they are used to purchase a new home within one year.
Despite the significance of this change, one of the central weaknesses of previous solutions remains, which is that this safeguard only applies against business creditors.
Accordingly, if you obtain loan finance from your bank for your business, who decide to take a charge on the property as security against the loan, then in the event of any default on your repayments due to business failure the bank retains a right to seize the property.
In addition, if you have substantial other personal assets (second home for instance) then these will not be covered by the new law.
You also need to ensure you operate on the right side of the law and that, in particular, your tax affairs are conducted in a proper manner, as it may otherwise invalidate this protection.
This same caveat applies to any solution aimed at protecting the main home, as the French tax and social security authorities have a very long reach in the event of serious breaches of conduct concerning tax or social security contributions.
Finally, this new automatic protection only applies from 7th August 2015, so any debts contracted prior to this date are not covered by the new law.