At last you’re ready to make your dream a reality: standing on your own two feet, no more boss, making your own decisions, working on projects that truly interest you… you’re going freelance! At first glance, it all seems straightforward, flexible… but some more complex realities come along with the freelance status. This article lays out all the elements to take into consideration before taking the plunge:
Definition of the freelance status
A freelance entrepreneur or sole proprietorship designates a person who conducts professional activities for their own account, as an independent merchant, artisan or intellectual worker. The entrepreneur acts in their own name, and there is no separate legal entity.
Reasons to go freelance
First of all, choosing your legal structure should not be taken lightly. Your decision will have repercussions for you: on your property, your taxation and certain social aspects. Do not go into this with preconceived ideas. Take time to look into the different statuses available to you and weigh the pros and cons for your specific project and life situation. Ideally, your decision should be made with the help of a professional.
On one hand, freelancing means:
- You will not be subject to a required minimum of finances to create an initial capital;
- Fewer and less costly administrative formalities for your launch;
- Broad freedom of action since you’re in full command. You will have no one to report to (“misuse of corporate assets” doesn’t exist in a sole proprietorship);
- Generally little formality in the administration and management of your activity (accounting, publications, etc.);
- You can combine an employed activity and a freelance activity on the side (be aware of non-compete and exclusivity clauses in your contract).
On the other hand, freelancing does not allow you to:
- build a project with others, pool efforts and contributions (which does not mean you can’t liaise with other freelancers via contracts or find other solutions);
- separate your personal assets from those of your business – it’s all intermixed, which can expose you to financial risks. In reality, you are liable for your company’s debts with all your belongings pledged as collateral, including anything purchased with your spouse, where applicable. In contract, should you run into a problem as a company or corporation (other than qualified mismanagement), your personal property would be safe from any actions taken by company creditors.
As you can see, you should not solely base your decision on the tax (financial) and social advantages that come with creating a company.
In short, the « freelance » format is particularly advisable if you’re a solo-entrepreneur, if your targeted activity doesn’t require any substantial investments upfront, and especially if you are just getting your activity off the ground (or still need to give it a test-run).
Also note that it’s much easier and faster to go from freelance to another legal form. The other way around is possible, but it’s a much more tedious process and usually means liquidating1 your company first.
Footnote: If, in the end, you opt for founding a company, this article "it's official, I'm starting a business !"2 may be of interest.
Steps for setting up and related costs
Here are the steps to be taken to see your freelance project through in Luxembourg:
- Applying for a business permit (+/-1 to 4 weeks): required for any person wishing to engage in a commercial, industrial or craft activity, as well as certain liberal professions. Chancellery dues for issuance are of 24 EUR;
- Availability of the company name: a freelancer works under his or her own name. However, a sole proprietorship engaging in a commercial activity can have a name of its own, and that name must not be the same as any existing company name and include the freelancer’s first and last names. Availability can be checked with the Luxembourg Business Registers (“LBR”) at the time of registration. The name availability certificate costs about 10 EUR;
- Registering with the LBR (+/- 24 hours): this step is only mandatory for natural persons establishing themselves as traders. Fees for filing a constitutive act can be between 15 EUR and 106 EUR;
- Affiliating with the Joint Social Security Centre (“CCSS”) (+/- 1 week): when a freelancer is starting a business in the Grand Duchy, he or she must affiliate with the CCSS to protect themselves from risks relating to health-maternity, occupational accidents, pension and dependency. To do so, the freelancer must submit a declaration form for self-employed persons3;
- Registering for VAT with the Registration Duties, Estates and VAT Authority (“AED”) (+/- 2 to 4 weeks): to register for VAT, the business must submit an initial declaration to the AED (this is mandatory). Registration4 (the act of requesting a VAT number) can be optional, as an exemption system exists that often applies to new activities generating less than 30,000 EUR in annual turnover, pre-tax.
- Registering with a professional association, where necessary.
Certain other non-mandatory steps or other costs may arise, depending on your situation: training fees to access real estate5 (995 EUR) or HORECA6 professions (245 EUR), or other regulated professions; external consultancy fees (market study, business plan drafting, etc.)…
Post-creation obligations and responsibilities
- Decisions: the entrepreneur makes decisions regarding his/her activity alone.
- Responsibilities: he/she bears full responsibility towards third parties (company debts) and commits his/her personal belongings. The entrepreneur is solely responsibly for financing his/her company.
- Accounting: the entrepreneur is required to keep transparent accounting records (accounting books showing money incomes and expenses). A sole proprietor qualifying as a merchant must follow the minimum standard chart of accounts and file his/her accounts at the company’s main offices, at the disposal of all concerned when annual turnover exceeds 100,000 EUR.
- Direct taxation: Sole proprietorships are fiscally “transparent” as to the entrepreneur’s personal taxation as a natural person. The following taxes apply: personal income tax – municipal business tax – property tax. No withholding tax is applied. Regarding the first two taxes mentioned, freelancers must prepare an annual tax return7, which must be submitted to the Direct Tax Administration, or Administration des Contributions Directes8 (“ACD”) before March 31st of the following year
- VAT: freelances who have a VAT number must periodically (depending on turnover volume) and annually prepare VAT statements9 as well as summary statements for intra-community transactions (EU). These documents and the ensuing payments must be issued within 15 days following the end of the concerned period, and before March 1st of the following year for the annual statement.
- Social security contributions: freelancers must pay social security contributions10 to the CCSS on a monthly basis, within 10 days following the transfer of a statement of account. The basis for calculating social contributions is dependent on the freelancer’s professional revenue. This revenue is determined following the insured party’s end of year tax return submitted to the ACD. If they are affiliating for the first time, the CCSS calculates contributions based on the minimum social wage11, though it is possible to adapt the calculations to avoid colossal adjustments down the road. Exemptions and reductions12 do exist for cases where there is little or no revenue, or for ancillary activities.
- Supervision: the law does not require financial supervision of sole proprietorships (auditors, etc.).
The House of Entrepreneurship of theChambre of Commerce13 is the national contact point for future entrepreneurs and established company heads alike. (Future) entrepreneurs can contact House of Entrepreneurship to move forward with their business creation/takeover project or be put in touch with the relevant structures or partners.
Learn more :
1 : liquidating / 2 : "it's official, I'm starting a usiness !" / 3 : declaration form for self-employed persons / 4 : Registration / 5 : real estate / 6 : HORECA / 7 : tax return / 8 : Administration des Contributions Directes / 9 : VAT statements / 10 : pay social security contributions / 11 : minimum social wage / 12 : Exemptions and reductions / 13 : House of Entrepreneurship of theChambre of Commerce
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