Which legal form should you choose for your business?

When considering setting up a business in Luxembourg, one of the first questions you will ask yourself is: which legal form should I choose? This choice is crucial, as it has significant tax and legal implications for the management and sustainability of your business.

In this article, we provide a comparative analysis of the main types of companies in Luxembourg, focusing on their tax treatment, advantages, and disadvantages. This guide will help you understand the differences so you can make an informed choice.

Sole proprietorship (EI): quick and easy to start

A sole proprietorship (EI) is the simplest legal form for an entrepreneur who wants to start a business on their own. There is no distinction between the assets of the business and those of the owner, which means unlimited liability.

Taxation of sole proprietorships

• Personal income tax (IRPP): Profits are taxed directly in the entrepreneur's name, with a progressive rate of 0% to 42%.
• Social security contributions: Based on income, as for self-employed workers.
• VAT: Applicable if turnover exceeds €35,000.

Advantages of sole proprietorship

• Quick and easy to set up.
• No minimum capital required.

Disadvantages of a sole proprietorship

• Unlimited liability for debts.
• High taxation on large incomes.
• Less attractive to some potential customers.

For example, John, a freelance graphic designer with a gross income of €50,000, is subject to:

• Social security contributions: €12,500, including unemployment contributions for freelancers
• Income tax: €3,762.26
• Net income after tax: €37,500

This shows the importance of anticipating social security and tax contributions as a sole proprietor.

More information on sole proprietorships.

Limited liability company (LLC): structuring your business

The SARL is ideal for small and medium-sized entrepreneurs. It allows you to separate your personal assets from those of the company, thereby limiting your liability.

Taxation of SARLs

• Corporate income tax (IS): 24.94% on profits.
• Subscription tax: 0.5% on capital.
• Social security contributions for managers: Majority shareholders are subject to social security contributions for self-employed workers.
• VAT: From €35,000 in turnover.

Advantages of the SARL

• Liability limited to contributions.
• Tax advantages if profits are reinvested.

Disadvantages of the SARL

• Minimum capital requirement (€12,000).
• More complex formalities for setting up than for a sole proprietorship.

For example, Mathilda, manager of an LLC with a gross income of €40,000, pays:

• Social security contributions: €10,000
• Income tax: $2,370.72
• Net income after tax: €36,129.28

The public limited company (SA): for large companies... but not only

The public limited company (SA) is suitable for large companies requiring significant capital. Its shares can be freely transferred.

Taxation of the SA

• Corporate income tax (IS): 24.94%.
• Subscription tax: 0.5% on capital.
• Dividends: Subject to a withholding tax of 15%.

Advantages of the SA

• Ideal structure for raising funds.
• Liability limited to contributions.

Disadvantages of an SA

• High minimum capital requirement (€30,000).
• Complex management.

Limited partnership (SCS): for specific needs

The SCS combines the characteristics of corporations and partnerships, with general partners (unlimited liability) and limited partners (limited liability).

Taxation of the SCS

• No direct tax on the company.
• Partners payincome tax on their profits according to the progressive scale.

Advantages of the SCS

• Flexibility in structuring investments.
• No minimum capital requirement.

Disadvantages of the SCS

• Unlimited liability for general partners.

Limited partnership with share capital (SCA): for investment funds

The SCA is often used for private equity transactions. It allows funds to be raised through its shares.

Taxation of the SCA

• Corporate income tax (CIT): 24.94%.
• Dividends: 15% withholding tax.

Advantages of the SCA

• Flexibility and simplified fundraising.

Disadvantages of the SCA

• Complex structure, with varying responsibilities between general partners and limited partners.

Summary table of the main types of companies in Luxembourg

Type of company	Liability	Main taxation	Minimum capital	Advantages	Disadvantages
Sole proprietorship (EI)	Unlimited	Income tax, VAT, social security contributions	None	Easy to set up, no capital required	Unlimited liability
Limited liability company	Limited to contributions	Income tax, VAT, social security contributions	€12,000	Protection of personal assets	Capital required, more complex management
Corporation	Limited to contributions	Income tax, VAT, taxed dividends	€30,000	Suitable for large companies	Complex management
SCS	Unlimited for general partners	Income tax on profits, VAT	None	Flexibility, no direct tax	Unlimited liability for general partners
SCA	Limited to contributions	Income tax, VAT, taxed dividends	None	Fundraising, flexibility	Management complexity

In conclusion, the choice of legal form for a company in Luxembourg depends on several factors, such as size, structure, and growth ambitions. It is essential to assess the tax advantages, asset protection, and liabilities before getting started. To optimize your situation, it is recommended that you consult a certified public accountant or a specialized lawyer.

Want to start your own business? Find out more here.