When you decide to sell your business, you have two options: transfer it for free or sell it for a price. It’s important to carefully consider the legal structure of the transfer due to its tax and legal consequences.
Choosing the method of transferring a business
When you decide to sell your business, you have two options: transfer it for free or sell it for a price negotiated with the buyer. In the latter case, you must choose the method of transfer (selling the business assets or the shares) while being aware of the legal and tax consequences of each. Capifrance breaks it down for you.
Before making your decision, you need to understand the specifics of your business’s legal structure (sole proprietorship or company) and its assets.
Sole proprietorship or company: what are the differences?
Sole proprietorship (EI)
This legal structure applies to individuals who wish to conduct business without creating a company. The business and the owner are a single entity: the personal and professional assets of the entrepreneur are not separate. The entrepreneur owns the business’s assets and is solely responsible for its debts. The formalities are simplified as much as possible, making it the simplest way to start a business.
In the case of a sale, only the assets are involved. The structure itself cannot be sold.
Company
Unlike a sole proprietorship (an individual), a company is a legal entity, separate from its founding members. This means that the business and its members are distinct entities: the members have no rights over the business’s assets and are protected from creditors in case of financial difficulties. A company can take various legal forms, which may change over the years: EURL, SARL, SAS, and SA.
In the case of a sale, the members can sell shares, while the company can sell its assets.
The special case of the EIRL
The “entrepreneur individuel à responsabilité limitée” (EIRL) is a legal regime for individual entrepreneurs who want to limit their liability by creating a dedicated pool of assets specifically for their professional activities, without forming a company.
The sale of an EIRL follows specific rules. Depending on the legal form of the buyer (individual entrepreneur or commercial company), the assets dedicated to the professional activity may or may not be preserved.
Business assets or commercial assets
These represent the set of tangible and intangible assets used in the operation of the business. Tangible assets include equipment, furniture, goods, and vehicles, while intangible assets include licenses, client base, lease rights, etc.
Free transfer
You can transfer your sole proprietorship for free to an heir, employees, or another operator.
Types of free transfer
There are several types of donations:
- Simple donation: This allows the business owner to transfer ownership during their lifetime. The beneficiary must accept the transfer, which is done before a notary. However, the donor must respect the principle of equality between heirs. Inheritance taxes depend on the degree of kinship between the buyer and the seller.
- Shared donation: Unlike a simple donation, a shared donation allows inheritance issues to be settled in advance. It does not follow the principle of equality among heirs and favors one child over the others. Financial compensation is used to compensate the other children.
- Donation with usufruct reservation: You transfer your business while retaining the right to manage it and receive income from it. In other words, only the “bare ownership” is transferred. This method is often used for early transmission of assets to future heirs.
- Donation to employees: Transfer to one or more employees occurs, for example, if none of the children want the business or if the seller has no descendants. To qualify, the employees must have worked full-time under a permanent contract for at least two years in the business.
Tax implications of free transfer
In the case of a donation of your sole proprietorship, the seller is immediately taxed on the last profits made at the date of transfer, as this act is considered a cessation of activity. In addition, the capital gain made at the time of the transfer is taxable, although there are several mechanisms to partially or fully exempt the donation from taxes.
The assets subject to a donation are also subject to free transfer taxes (registration fees), which the recipient must pay. Tax scales are applied to the net assets transferred, depending on the value of the assets and the degree of kinship between the seller and the buyer.
Transfer for a price
Is it better to sell your business assets or your shares? Both techniques are possible, depending on the legal structure of your business. The legal and tax consequences, however, vary depending on the case.
Selling the business assets
This involves selling the assets of your business (equipment, clients, inventory, etc.) that are listed on the balance sheet. Debts are not transferred. This is partly why selling assets is generally more expensive than selling shares, which include the company's liabilities.
In the case of asset sales, some contracts signed by the business are terminated, while others are automatically maintained. For example, the law requires the buyer to keep employee contracts and the commercial lease. However, the buyer can decide to terminate contracts with suppliers and service providers.
Selling shares (company ownership)
This involves shareholders selling the rights they hold in the company's capital. Unlike an asset sale, the transfer of shares includes the company’s liabilities (debts), which the buyer assumes. For this reason, the share sale contract must include a liability guarantee clause to protect the buyer from potential hidden liabilities at the time of sale. All contracts signed by the business remain in effect.
Tax implications for the seller and the buyer
The sale of a business for a price has tax consequences for both the seller and the buyer.
For the seller:
- Immediate taxation of profits
- Taxation of capital gains
- Wealth tax (ISF)
For the buyer:
- Interest on the loan used to finance the acquisition
- Registration fees
- Specifics of buying a business
For the business:
- Economic territorial contribution
- Tax debts
Taxation for share sales
In the case of selling shares, the associated shareholder is subject to both social security contributions and income tax on the capital gain realized from the sale. The General Tax Code provides tax reductions based on the length of time the shares were held:
- 50% of net gains for shares held between 2 and 8 years at the time of sale
- 65% for shares held for at least 8 years.
Taxation for asset sales
Taxation on the sale of business assets is particularly heavy. It covers several aspects:
- Immediate taxation of profits and deferred profits
- Payment of VAT
- Payment of the economic territorial contribution
- Tax on capital gains
