Setting up and running a sole proprietorship presents a number of challenges, not least that of protecting your personal assets from the vagaries of your professional activity. For a number of years, the Entreprise Individuelle à Responsabilité Limitée (EIRL - limited liability sole proprietorship) offered a solution that made this separation possible. Although this system is now being phased out in favour of a new single status, understanding how it works remains relevant for the entrepreneurs who have adopted it and for understanding how the protection of sole traders is changing.
This article takes a look back at the essential mechanisms of the EIRL: how it made it possible to distinguish between personal and business assets, what its advantages and constraints were, and why the legislation has changed since February 2022. We look at the allocation of assets, creditor protection, day-to-day operations and the current transition.
What is the EIRL: breaking with the unity of patrimony
For a long time, French law has been characterised by the principle of the unity of assets and liabilities.. According to this classic theory, an individual (natural person or legal entity) holds a single estate encompassing all his assets and debts, both present and future. For a sole trader, this meant that all his personal assets (housing, savings, etc.) could be seized to pay business debts. Not a very reassuring prospect.
Given the limitations of this principle in encouraging individual initiative, the law of 15 June 2010 created the EIRL (limited liability company).. Its major innovation? Allowing sole traders to allocate part of their assets to their business activity, thereby creating a "special-purpose asset" separate from their personal assets.. All without having to set up a separate company (such as a EURL or SASU).
The main objective was clear: to limit the entrepreneur's liability. Thanks to the EIRL, debts arising from the professional activity were, in principle, secured only by the assets allocated to that activity.. Conversely, personal debts could only be recovered from personal assets.. This is a direct derogation from articles 2284 and 2285 of the Civil Code, which establish the principle of assets as the sole pledge of creditors..
It is important to note that the EIRL was not a legal status in its own right, but a system that could be opted for by any sole trader carrying on a commercial, craft, agricultural or liberal profession activity, including self-employed entrepreneurs..
The creation of affected assets: the declaration
The introduction of the EIRL was based on an essential formal act: the declaration of assignment of assets and liabilities. It was this step that materialised the separation between the assets dedicated to the business and the rest of the entrepreneur's possessions.
This declaration had to be filed with a legal publicity register: the Registre du Commerce et des Sociétés (RCS) for traders, the Répertoire des Métiers (RM) for craftsmen, the registre held by the Chamber of Agriculture for farmers, or a special register held at the commercial court registry for self-employed professionals and self-employed entrepreneurs not registered elsewhere..
The declaration contained precise information to identify the entrepreneur and his activity. In particular, it gave the name and surname, the address, the name used for the business (which had to include the name and the words "EIRL" or "Entrepreneur Individuel à Responsabilité Limitée"), the address of the principal place of business, and the purpose of the business activity carried out..
A fundamental point of the declaration was the descriptive statement of the property affected. It was necessary to list precisely the assets (in kind, quality, quantity and value) that the entrepreneur decided to dedicate to his business. The 2019 PACTE Act clarified that it was possible to start an EIRL without initially allocating any assets, by not filing a descriptive statement in this specific case.. Previously, this absence could be seen as a serious breach of duty..
Specific rules applied to certain assets. To assign a property (or part of a property), a notarial deed and publication at the land registry office (formerly the mortgage office) were required, failing which the assignment could not be enforced.. For joint property (acquired during the marriage under a community property regime) or undivided property (owned by several people), the express agreement of the spouse or co-owners was essential.. Initially, a valuation by an expert (auditor, chartered accountant, notary for a building) was compulsory for assets worth more than €30,000.. This costly obligation has been abolished by the PACTE Act in 2019 to simplify the creation of new companies..
The effects of assignment: separation of assets and liabilities
Once the declaration of appropriation had been duly filed and published, the separation of assets and liabilities became enforceable against third parties, but with important nuances concerning creditors.
The general principle, set out in Article L. 526-12 of the French Commercial Code, was as follows: creditors whose rights have arisen from on the occasion of the EIRL's professional activity could only take legal action against the affected assets. Conversely, personal creditors (whose claims have no connection with the business activity) had only the unaffected (personal) assets as collateral..
A small exception tempered this rule for personal creditors: if the personal assets proved insufficient to pay them, they could seize the profit made by the EIRL in the last financial year for which the accounts had been closed.. A limited safety valve.
The enforceability of this separation was not uniform. For creditors whose claim arose from after the filing of the declaration, the separation was enforceable by operation of law. They were supposed to be aware of the entrepreneur's situation, in particular through the mention of "EIRL" on his business documents..
For creditors with existing claims before the filing of the declaration ("prior creditors"), the situation was initially more complex. The law of 2010 allowed the entrepreneur to make the declaration enforceable against them, provided that he expressly mentioned this in the declaration and informed them individually by registered letter.. These creditors then had one month in which to lodge an objection with the judge, who could either reject it, order payment of the debt or demand guarantees.. If the creditor won the case and the contractor did not perform, the separation remained unenforceable against the creditor.. The Sapin 2 Act of 2016 abolished this option of enforcing against prior creditors, which was a source of complexity..
However, it should be noted that this separation of assets and liabilities was not absolute. Article L. 526-12 of the Commercial Code provided (and still provides for existing EIRLs) for important exceptions. In the event of fraud on the part of the entrepreneur, or serious breaches of the rules (confusion of assets and liabilities, lack of dedicated accounting, failure to comply with reporting obligations), the entrepreneur once again became liable for all of his assets, whether or not they were affected by the fraud.. Similarly, in the event of collective proceedings (safeguard, reorganisation, compulsory liquidation), the court could decide to combine the assets if it found that they were confused.. Separation was therefore a strong form of protection, but conditional on compliance with strict rules.
The life and development of affected assets
Affected assets were not fixed on the day the declaration was made. It was intended to evolve in line with the business activity.
To make this distinction, the EIRL entrepreneur was required to hold one or more bank accounts dedicated exclusively to his professional activity.. Separate accounts also had to be kept, in accordance with commercial rules, even if the business was a civil one (except for micro-tax schemes, which benefit from less stringent obligations)..
The annual accounts (or simplified documents) had to be filed each year with the register where the declaration of assignment was made.. Since the 2014 law, only the filing of a bankruptcy petition is required.. This annual filing was tantamount to updating the composition and value of the assigned assets..
The composition of the assets could change. The entrepreneur could decide to allocate new assets useful to its activity (not strictly required) after the creation of. Since the PACTE Act, the entry of an asset from personal assets in business accounts is deemed to be an assignment.. Conversely, the same law has clarified the possibility of withdrawing an asset from the patrimony affected ("decommissioning") if it is no longer useful for the business.. Specific formalities (notarial deed, spouse's agreement, etc.) were still required for the addition or withdrawal of real estate or joint/undivided property..
An important principle governs this development: real subrogation. When an appropriated asset was sold, the compensation received (the sale price) or the new asset purchased in replacement automatically became part of the appropriated assets.. This ensured the continuity of the pledge of professional creditors.
Finally, the entrepreneur himself determined the income from his business that he wished to transfer to his personal assets for his private needs.. These sums were then removed from the affected assets.
The transfer of affected assets
Another innovation of the EIRL was the possibility of transferring the affected assets as a whole, i.e. as a coherent set of assets. and liabilities.
In the event of the entrepreneur's death, the assignment ceased in principle. Assets were reunited for the succession, but creditors retained the pledge they had at the time of death.. One exception existed (before it was repealed in 2022): an heir could declare his intention to continue the business and take over the affected assets, thereby maintaining the separation, subject to compliance with the rules of inheritance and a declaration of takeover..
The most revolutionary of these concerned inter vivos transfers (sale, gift, contribution to a company).. Article L. 526-17 of the French Commercial Code made it possible to transfer all affected assets (property, rights, contracts, debts) without first having to liquidate them.. The transferee (transferee, donee, transferee company) became the debtor of the professional creditors in the place of the initial entrepreneur, without this constituting a novation..
This mechanism was an interesting alternative to the traditional sale of a business, which only involves assets.. With the transfer of affected assets, the debts and contracts associated with the business were also transferred, simplifying the takeover of an ongoing business.. In addition, this transaction was exempt from the onerous formalities for the transfer of a business as set out in Articles L. 141-1 et seq. of the French Commercial Code.. However, prior creditors or creditors to whom the initial separation was not enforceable had a right to object to the transfer, similar to that which existed at the time of the creation of the company, which could result in the transfer being unenforceable against them if they were successful..
The programmed end of the EIRL
Despite its advantages and the simplifications made over time (notably by the PACTE Act in 2019) ), the EIRL system was still considered too complex by the public authorities.
Act No. 2022-172 of 14 February 2022 to promote self-employed professional activity marked a major turning point.. It created a single status for all sole traders, establishing an automatic separation between business assets and personal assets, without the need for a specific declaration of assignment. This new system, which came into force on 15 May 2022, offers automatic protection that is deemed equivalent to that of the EIRL, but with fewer formalities..
As a direct consequence, the EIRL regime has been "phased out" with effect from 15 February 2022.. This means that it is no longer possible to create new EIRLs from this date.. The possibility for an heir to take over an affected asset has also been removed..
However, EIRLs created before 15 February 2022 will continue to exist and carry on their business in accordance with the rules that applied to them before that date.. They can still modify their affected assets (add or remove assets) in accordance with previous legal provisions.. In other words, "phasing out" is not an immediate abolition, but a halt to new creations.
Navigating the intricacies of sole trader status and protecting your personal assets requires careful analysis. If you have any questions about your current situation or the new single status, our firm will be happy to advise you.
Sources
- French Commercial Code (in particular articles L. 526-5-1 to L. 526-21, L. 621-2, L. 680-1, L. 141-1)
- Civil Code (in particular articles 1413, 2011, 2284, 2285)
- Act no. 2010-658 of 15 June 2010 relating to individual limited liability entrepreneurs
- Act no. 2019-486 of 22 May 2019 on the growth and transformation of businesses (PACTE Act)
- Law no. 2022-172 of 14 February 2022 to promote self-employed professional activity
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