Family SARL: what you need to know before getting started
A family SARL allows a company formed by relatives to be taxed under personal income tax, with no time limit. Profits, as well as losses, are reported directly on each partner's tax return. For a family project in the investment phase or a furnished rental business, this tax regime can be highly advantageous.
However, it is neither automatic nor always beneficial. High profits taxed at the partners' marginal tax rate can sometimes be much more expensive than corporate tax. Furthermore, the status can be lost without warning, simply by admitting a partner from outside the family circle.
This guide outlines the necessary requirements, the tax and social security implications, a comparison with the SCI, and the mistakes that cause the company to revert to corporate tax.
What is a family SARL?
A tax option, not a legal entity type
Legally speaking, the family SARL does not exist as a distinct entity. It is an ordinary SARL, with its own articles of association, manager, and meetings, that opts for a specific tax regime provided for by Article 239 bis AA of the French General Tax Code.
Everything that applies to a standard SARL therefore applies to it as well, including limited liability for contributions, the two-partner minimum or governance rules.
Income tax with no time limit
A SARL is generally subject to corporate income tax. A new SARL can opt for income tax, but only for five fiscal years. A family SARL is an exception, as its election remains valid indefinitely as long as the requirements continue to be met. This makes it a long-term holding vehicle, rather than just a startup regime.
What are the requirements for creating a family SARL?
Capital held exclusively by family members
All partners must be related by a kinship recognized by law, specifically direct-line relatives (grandparents, parents, children, grandchildren), siblings, spouses, and PACS partners.
The circle is narrower than the common definition of family. An uncle, nephew, cousin, brother-in-law, or unmarried partner cannot be a partner. Two brothers in partnership with the son of one of them also fail to meet the requirement, as a nephew is not a recognized relative of his uncle.
Commercial, industrial, artisanal, or agricultural activity
This scheme is reserved for these four categories of activity. Liberal professions are excluded, as are civil activities such as the unfurnished rental of properties. Furnished rental, which is fiscally considered a commercial activity, remains eligible, which explains a large part of the scheme's success.
A unanimous decision
The option must be decided by all partners and notified to the tax authorities before the start of the first financial year concerned. The notification must specify the capital distribution and the family relationship between the partners. For a new company, it can be exercised upon incorporation.
How is a family SARL taxed?
Profits taxed directly at the partner level
The company does not pay tax on its profits. Each partner declares their share of the profit under the category of industrial and commercial profits, or agricultural profits, and adds it to their other income.
This tax applies whether the profit is distributed or not. A partner may therefore have to pay tax on money that remains in the company's account, which must be anticipated in their personal cash flow management.
Losses deductible from total income
This is the most tangible benefit of the regime. When the company operates at a loss, each partner can deduct their share of the loss from their total income, in proportion to their ownership stake. During the investment phase, when expenses and depreciation exceed revenue, the tax savings are immediate.
Non-deductible manager compensation
In a standard limited liability company (SARL) subject to corporate tax, the manager's compensation is an expense that reduces taxable income. Under the family SARL regime, this is not the case, as it is added back into the profit and taxed as part of the manager's share. This mechanism completely changes the approach to optimizing executive compensation.
Family SARL: choosing between personal income tax and corporate tax
When personal income tax is the better option
Personal income tax is advantageous when profits are low or negative, or when the partners fall into lower tax brackets. It eliminates the double taxation faced by a company subject to corporate tax, which is taxed first on its profits and then a second time on distributed dividends, and it allows for losses to be passed through to the partners.
When corporate tax regains the advantage
Conversely, a significant profit taxed at a marginal rate of 41% or 45% costs much more than corporate tax, which is 15% on profits up to €42,500 for eligible SMEs, and 25% thereafter. The gap widens even further when the partners do not need to withdraw these profits and prefer to leave them in the company for reinvestment.
The choice should therefore only be made after a multi-year simulation, partner by partner, incorporating the expected level of earnings and each individual's cash flow requirements.
What is the social status of a manager of a family-owned SARL?
The majority manager, as a self-employed worker
A manager who holds more than half of the shares falls under the social security system for the self-employed. To determine this majority, their shares are added to those of their spouse and minor children, which often shifts a manager who was thought to be a minority shareholder into the majority category.
For income tax purposes, their contributions are also calculated based on their share of the profit, even when it is not distributed. This is a critical point that most projects only discover after the fact.
The minority or equal-share manager, as an assimilated employee
If the manager holds half of the shares or less, they fall under the general social security scheme as an employee. In the absence of remuneration, they do not pay social security contributions. The choice of manager and the distribution of capital should therefore be carefully considered when drafting the articles of association.
Why is the family SARL so attractive to furnished rental investors?
Furnished rentals: a commercial activity for tax purposes
Because furnished rentals are classified as industrial and commercial profits (BIC), they can be operated through a family SARL while remaining subject to personal income tax. Furthermore, the non-professional status of the rental is assessed at the level of each individual partner, in proportion to their rights, rather than at the company level.
Using depreciation to offset rental income
The company can depreciate the building and furniture, deduct loan interest and expenses, and thereby reduce its taxable income to zero for several years. This is the same mechanism as depreciation for non-professional furnished rentals (LMNP) when done directly, applied here to a joint investment.
However, the tax implications of a resale must be anticipated from the moment of acquisition. It is this that determines the final return on the investment, far more than the tax savings achieved during the holding period.
Family SARL or SCI: which one should you choose?
Two tools with different approaches
The SCI is a tool for holding and transferring assets, designed for unfurnished rentals. The family SARL is a commercial company designed to operate a business. To hold an unfurnished rental property and prepare for its transfer through the gifting of shares, the SCI generally remains the right choice. For operating furnished rental properties as a family, the family SARL has the advantage.
The specific case of furnished rentals
An SCI that engages in furnished rentals beyond an incidental portion of its revenue becomes subject to corporate income tax, resulting in less favorable taxation upon exit. The family SARL avoids this pitfall, as it can carry out this activity while remaining subject to personal income tax.
The question arises in the same terms as it does for purchasing a primary residence through a company. The choice of structure depends as much on the exit strategy as it does on the holding period.
How does a family-owned SARL lose its tax status?
Events that terminate the election
Four situations cause the loss of this status, without any procedure or warning from the tax authorities.
- a partner from outside the family circle joining the capital, even for a single share
- abandoning the commercial, industrial, artisanal, or agricultural activity
- converting the company into another legal form
- voluntarily waiving the election
The first is by far the most common. Gifting shares to a nephew, an inheritance that brings in an heir outside the permitted circle, or the arrival of an investor are enough to cause the entire company to lose its status.
A permanent and costly exit
A company that has reverted to corporate income tax can never opt for this regime again. Exiting also carries an immediate cost, as any non-deducted losses are forfeited and undistributed profits are taxed in the hands of the partners.
The best protection remains an approval clause in the articles of association, which makes any transfer of shares subject to the consent of the partners. For succession planning, the coordination with a Dutreil agreement or a split of ownership must be studied in advance.
Have your family SARL plan validated before opting
The family SARL is a powerful tool for investing and operating a business with family members, but its benefits depend entirely on the tax situation of each partner, the expected level of earnings, and the exit strategy. The option must be decided before the start of the fiscal year and is lost at the first misstep.
The accountants at Virtus Group will simulate the income tax and corporate tax implications with you, secure the drafting of your articles of association and approval clause, and guide you in choosing between a family SARL and an SCI. Contact us before incorporating your company or exercising the option.
