As we enter the last quarter of 2011 (or any final quater for that matter), it’s time to take a step back, get up to date with your book keeping and assess whether your current French business set up is still right for you. Initially you registered a certain business type, auto-entrepreneur, entreprise individuelle under reel simplifie, EIRL, EURL or SARL, because it was right at the time taking into account your investment, risks, expenses and level of trade. Is it still the case one year down the line?
Ask yourself the following questions:
- Am I reaching the authorised turnover threshold (for auto entrepreneurs)?
- Have my expenses significantly increased in 2011?
- Should I be claiming TVA?
- Will I be investing in my business in 2012?
- Will I be hiring someone in 2012?
- These questions will give you a few clues as to whether you should consider changing your regime, i.e. way your social charges are being paid, or your business type (entreprise individuelle, EURL, EIRL, SARL).
In this article I will look at the three main changes possible:
- Auto-entrepreneurs switching to réel simplifié
- Entreprise individuelle switching to a limited company EURL/SARL
- EURL/SARL switching from income tax to incorporation tax
1. Auto-entrepreneurs switching to réel simplifié
Starting as a auto-entrepreneur might have been a risk free option to test your market, but is it still appropriate as your business grows? The two major drawbacks of the auto-entrepreneur regime are that you cannot claim for expenses or to claim TVA back. Check your yearly running expenses (rent, petrol, accountant, travelling, etc.) and assess your yearly goods purchase for trading activities. Compare the amount of social charges you would have paid under réel simplifié versus the auto-entrepreneur.
As a rough calculation social charges under the auto-entrepreneur regime: 12% for trade, 18.3% for profession libérale and 21.3% for artisan. Social charges under réel simplifé represent in real terms about 46% of your net profit, i.e. sales - expenses.
If you are thinking of switching, I would advise you to establish a provisional plan with an accountant in order to compare both systems. As a rule of thumb, activities such as restaurants, builders reselling materials and trading activities are rarely a good fit for the auto-entrepreneur.
Make a quick assessment of your projected turnover for 2012. Do you expect to go over the turnover threshold of 32 600€ for services and 80 600€ for trade? If so, when do you ecpect to again above this threshold? Second, third or fourth quarter? It makes sense to plan the switch to a new regime in January 2012, as changes halfway through a year can be messy (See article).
2. Entreprise individuelle switching to SARL/EURL
For business owners under régime réél, ask your accountant for a copy of your bilan (loss & profit account). What is your net profit and based on these figures what will be your social charges balance payment, called régularisation de charges sociales in 2012 . Is it still appropriate to remain as an entreprise individuelle?
Your social charges under entreprise individuelle régime réel come down in real terms to about 46% of your net result, i.e. appel de cotisation 2011 + balance payment paid in 2012 based on your 2011 results.
If your activity and your net result have significantly increased, moving to a SARL/EURL could be more tax efficient. This would enable you to pay yourself an income along the year (taxed at 46% for social charges) and pay yourself the remaining amount in dividends once the company has paid the incorporation tax of 15% (up to 38 120€, then incorporation tax 33.33%). Note that these dividends will then be liable to CSG on your income tax.
It is important to take time to talk to your accountant and check whether a switch would make sense or if it is still to early. Once again, a provisional plan would help you make the appropriate decision.
3. EURL or SARL switching from income tax to incorporation tax
Entrepreneurs having created a limited company with only one shareholder, can choose to opt for income tax (impôt sur le revenu) or incorporation tax (impôt sur les sociétés). Based on your personal situation (single, married, number of children, total household income) it will make sense to switch from impôt sur le revenu to impôt sur les sociétés. The switch has to be planned ahead and a request will have to be sent to impôts.
Assess your overall household income for 2012 (spouse income, dividends, property rentals, etc) and ask your accountant to compare the two regimes. Which fiscal regime will be best for you in 2012.