So you’re about to launch a business or are rethinking your activity. Not sure which legal form best suits your needs? This article looks into the key characteristics of the main legal forms in Luxembourg.
A self-employed entrepreneur, also known as a “freelancer,” “sole proprietorship” or “self-owned business” is the easiest legal form pursuing an activity. As its name suggests, it consists of an entrepreneur running a business under their own name without creating a distinct legal structure. Unlike most other legal forms, sole proprietorships are not required to have a minimum share capital or statutes.
The main benefit of this regime is its simplicity as it implies little formalism in terms of administration and activity management. Freelancers conduct business alone and decide alone. Regarding taxation and administration, self-employed entrepreneurs must:
- hold a business permit in their own name (if their activity falls within the scope of the Ministry of Economy, otherwise they can work under a different status or authorization),
- obtain a VAT number in their own name if their business activities are subjected to VAT,
- register with the Trade and Companies Register (RCS) if their operations are of commercial nature,
- keep transparent accounts (ledgers with records of income and expenses) – an accountant is not mandatory,
- declare profits earned through their activity in their personal income tax return – the taxation rate is based on a progressive scale for private persons.
However, this legal form exposes the concerned activity to higher financial risk as it “is one” with the entrepreneur’s personal wealth: since no distinct legal structure is created, all belongings both personal and professional mix together as the property of the entrepreneur. This means the entrepreneur assumes full liability with respect to third parties (suppliers, public authorities, busines partners, etc.) and commits their personal belongings, even for settling company debts.
Furthermore, a sole proprietorship does not allow you to conduct business with other associates, though it is possible to hire on staff.
You can find the administrative steps for starting a business with this status in our dedicated article.
Though a great many company types exist, we will only be exploring the 3 most common in Luxembourg, which are the SA, the SARL and the SARL-S. The information below is about these types.
Conducting business as a company means creating an actual legal structure because the company itself qualifies as a distinct person. Thus, a company can sign contracts and have its own property, distinct from the entrepreneur’s personal belongings. In a certain manner, a company status protects the entrepreneur.
A company status also allows for several people to join forces as associates and conduct an activity together, in accordance with the rules laid out by the statutes.
However, a company implies a certain degree of formalism in administrative tasks and activity management. Decisions are made in abidance of the rules defined in the statutes.
Running a business in the form of a company requires :
- creating an entity by registring the company with the Trade and Companies Register (RCSL-LBR), which depending on the chosen form can entail calling upon a notary,
- obtaining a business permit, that must be filed for by an associate or employee on behalf of the company,
- obtaining a VAT number in the name of the company if the business activities are subjected to VAT,
- keeping accounting records in accordance with the standard chart of accounts (SCA). An annual financial statement must be filed on the site of the Trade and Companies Register, which requires the company to access the services of an accountant,
- paying corporate business tax, calculated on the basis of the company’s taxable income. The company can also be subjected to wealth tax, established by assessing its taxable wealth. Do note: wealth tax applies to every company for a lump sum payment of minimum EUR 535 per year.
Which legal form to choose? Based on what criteria?
Liability of the partners in each of these company types is limited to the amount of their contributions.
- SA (Public limited company)
A public limited company (SA) has the benefit of allowing free transfer of shares. Shareholders can operate in relative anonymity. This legal form is especially suited to companies that call upon investors, as they can freely buy and sell shares. It is the form most commonly used by “major” corporations.
An SA can be formed by one or more natural or legal persons and must be formed in the presence of a notary. The minimum amount of capital needed to form an SA is EUR 30,000. The capital must be fully subscribed and at least one quarter paid up.
An SA is subjected to more restrictive regulations in terms of internal governance. It can choose either a monistic structure (board of directors that manages the company) or a dualistic structure (a management board manages the company and a supervisory board supervises the management).
- SARL (Private limited liability company)
A private liability company (SARL) is a form of commercial company in which shares are not freely negotiable: this means they cannot be transfered to non-shareholders without the approval of the general shareholders meeting representing at least 75% of share capital (or 50%, depending on the statutes). This allows for the control of associates joining the company.
An SARL can have between 2 and 100 shareholders, who can be natural or legal persons. A form of SARL known as a “single member” limited liability company can be set up by a single shareholder.
Incorporating as an SARL requires a minimum share capital of EUR 12,000. That capital must be fully subscribed and paid up at the time the SARL is incorporated. This company type must also be formed in the presence of a notary.
An SARL is managed by one or more managers (whether shareholders or not) appointed by the shareholders for a limited or unlimited term. A legal person can be appointed as manager.
- SARL-S (Simplified limited liability company)
An SARL-S is a simplified version of the SARL form, that is subjected to the same rules with the exception of the following:
- the minimum share capital required to form an SARL-S is reduced to EUR 1 and this type of company can be formed by private deed, without the need for a notary,
- SARL-S companies can only be formed by natural persons.
A natural person cannot be a shareholder in more than one SARL-S at the same time, unless shares were transferred to them following the death of another shareholder.
The SARL-S form eases access to entrepreneurship by reducing the the cost of starting a businss and is particularly well suited to new entrepreneurs who require little initial investment. It is not recommended for activities involving high fixed costs, such as restaurants.
The scope of an SARL-S must fall within its business permit. Of course, the first step to creating this type of company is applying for a business permit from the Ministry of the Economy. If the line of business does not reside with the Ministry of the Economy, an SARL-S form cannot be considered. If you wish to create an SARL-S, we invite you to first sign up for a free weekly workshop with the House of Entrepreneurship, “Le parcours du créateur d’entreprise au Luxembourg” (The journey of an entrepreneur in Luxembourg), to learn about the various steps and permits required to do so.
For more information about the administrative procedures involved in creating a business, see our dedicated article.
What you need to remember
To choose the legal form best suited to your business project, take these elements into consideration:
- the nature of the business activity you have in mind,
- the capital you will need to invest,
- your desire to work with associates, or not,
- the respective commitments of the stakeholders,
- the relationship between stakeholders (trust, family, or financial bond),
- the company’s strategic objectives, etc.
The House of Entrepreneurship of the Chambre of Commerce is the national contact point for future entrepreneurs and established company heads alike. (Future) entrepreneurs can contact the House of Entrepreneurship’s information point to move forward with their business creation/takeover project or be put in touch with the relevant structures or partners.
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