What legal status should you choose as a freelance consultant?

Article written on April 16, 2021 by Fabian Barloco, Diplômé d'Expertise comptable (D.E.C), KeoBiz.

Mini plan

• The different legal forms and tax options (corporate income tax / personal income tax)
• 3 tips for choosing your legal status
• Converting your SASU into a EURL

Legal status

Generally speaking, every entrepreneur begins his or her career by conceiving an innovative idea around a promising project, but rarely does he or she give any real thought to the choice of legal and tax status.

However, this decision has real consequences for the business. On the one hand, the choice of a tax status has a real impact on the charges the company will have to pay (see table below); on the other hand, the legal status will define the entrepreneur's relations with third parties, and possibly his partners; in other words, his rights and obligations as a company director.

The choice for auto-entrepreneur status falls into the micro BIC or micro BNC category, but we don't recommend it, as it's not adapted to the entrepreneur's reality and quickly becomes costly, especially as it doesn't allow for the deduction of actual business expenses.

IS / IR tax options

It is important to note that the option to change tax regime (from income tax to corporation tax or vice versa) is in all cases subject to conditions that depend on the legal form chosen.

IS: Corporate income tax; 15% of income up to €38,120, then 26.5% on the portion above this amount. This 26.5% rate is set to fall to 25% in 2022.

IR: Income tax: Industrial and Commercial Profits (BIC) and Non-Commercial Profits (BNC).

Taking this range of options into account, entrepreneurs can choose the status that suits them best, but they also have a responsibility to choose their status and legal form (as well as their tax options) carefully.

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3 tips for choosing your legal status

Tip #1: Target first, taxes later!

The temptation exists to choose a legal status solely, or mainly, to reduce the tax bill. Is the entrepreneur's aim to pay as little tax as possible, or to succeed in his or her objective? If it's the latter, you need to choose the legal form that best suits the entrepreneur's goal, while optimizing his or her tax burden, and not the other way around.

Tip #2: Status is a good means to an end!

The business is not a goal in itself, but a component of the entrepreneur's life project. The question must be asked as to how he intends to use his profits: reinvestment, diversification, personal expenditure... all questions that will guide him towards the choice of the optimum legal form for his unique project.

Tip #3: Prevention is better than cure - never truer than in law!

It should not be forgotten that the choice of legal status is first and foremost a question of law, and that the election of a legal status may enable the entrepreneur to enjoy protection, particularly in terms of assets, but it also exposes him or her to obligations and, consequently, to certain risks.

A number of questions need to be asked in order to provide a satisfactory response to the issues faced by entrepreneurs when choosing the legal and tax status of their company. :

• the nature of the relationship he wishes to have with his associates (or future associates),
• the level of responsibility it is prepared to assume towards third parties,
• the level of control it wishes to exercise over the management bodies,

Fortunately, not all choices are irrevocable! By way of example, let's take a look at the particular case of switching from SASU to EURL, while remaining subject to corporation tax.

Converting your SASU into a EURL

How do you go about it?

The following steps must be strictly followed. An Extraordinary General Meeting must be held, the minutes of which will record the decisions of the sole shareholder to proceed with the transformation.

You will then need to redo the company's articles of association, draw up the appropriate legal forms and publish a legal announcement in the BODACC or JAL.

As the EURL, whose sole shareholder is an individual, is automatically subject to corporate income tax, you will need to opt to remain subject to corporate income tax in accordance with the rules set out in the French General Tax Code (article 239 of the CGI).

What's the point of such an operation?

As the manager of a SASU is subject to the social security system as an employee, he or she can be remunerated in two ways:

• Or from the distribution of dividends, once per financial year (beware of fictitious dividend distributions, which are punishable by law), and provided there is an accounting profit, by paying a tax of around 30% (flat-tax).
• Or from the payment of a salary, bearing social security contributions at around 80% of the net salary.

On the other hand, the sole managing partner of an EURL is covered by the "travailleur non-salarié" (TNS) scheme. As a result, he pays 45% of his social security contributions, with a corresponding reduction in social security entitlements.

In both cases, it makes sense to opt for corporate income tax, so that you can deduct your remuneration from your taxable income, thereby reducing the amount of corporate income tax you pay.

The final word?

The chartered accountant remains a privileged partner to help the entrepreneur choose his legal status, and also to take together the important decisions for his business, notably those concerning the allocation of company expenses or the implementation of optimizations.

More about Keobiz

A member of the Ordre des Experts Comptables d'Ile de France, KeoBiz is WEEM's partner accounting firm. KeoBiz advisors are available to help community consultants and experts with all their technical questions.

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