Which legal form should you choose for your business?

When you’re considering starting a business in Luxembourg, one of the first questions you’ll face is: which legal structure should you choose? This decision is crucial, as it has significant tax and legal implications for the management and long-term viability of your business.

In this article, we provide a comparative analysis of the main types of businesses 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): Simple and Quick to Start

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

Taxation of the sole proprietorship

• Personal Income Tax (IRPP): Profits are taxed directly in the entrepreneur’s name, at a progressive rate ranging from 0% to 42%.
• Social Security Contributions: Based on income, as a self-employed individual.
• VAT: Subject to VAT if turnover exceeds €35,000.

Advantages of a sole proprietorship

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

Disadvantages of a sole proprietorship

• Unlimited liability for debts.
• High tax burden on high incomes.
• Less attractive to certain potential clients.

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

• Social security contributions: €12,500, including unemployment insurance for the self-employed
• Income tax: €3,762.26
• Net income after taxes: €37,500

This highlights the importance of anticipating social security and tax obligations as a sole proprietor.

More information on sole proprietorships.

The Limited Liability Company (LLC): Structuring Your Business

The LLC is ideal for small and medium-sized entrepreneurs. It allows you to separate personal assets from business assets, thereby limiting liability.

Taxation of the SARL

• Corporate income tax (IS): 24.94% on profits.
• Registration tax: 0.5% on capital.
• Social security contributions for managers: Majority-owning managers are subject to self-employed social security contributions.
• VAT: Applicable once annual revenue reaches €35,000.

Advantages of the SARL

• Liability limited to capital contributions.
• Favorable tax treatment if profits are reinvested.

Disadvantages of the SARL

• Minimum capital requirement (€12,000).
• More complex formation procedures than a sole proprietorship.

For example, Mathilda, the 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 taxes: €36,129.28

The public limited company (SA): for large businesses... but not exclusively

The Société Anonyme (SA) is suitable for large companies requiring significant capital. Its shares can be freely transferred.

Taxation of the SA

• Corporate income tax (CIT): 24.94%.
• Registration tax: 0.5% of capital.
• Dividends: Subject to a 15% withholding tax.

Advantages of the SA

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

Disadvantages of the 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 corporate tax.
• Partnerspay income tax on their profits according to the progressive tax 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 Shares (SCA): for investment funds

The SCA is often used for private equity transactions. It allows for fundraising 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

Business structure	Liability	Primary 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
LLC	Limited to capital contributions	Corporate income tax, VAT, social security contributions	€12,000	Protection of personal assets	Required capital, more complex management
SA	Limited to capital contributions	Corporate 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 capital contributions	Corporate income tax, VAT, taxed dividends	None	Fundraising, flexibility	Management complexity

In conclusion, the choice of a company’s legal structure in Luxembourg depends on several factors, such as its size, structure, and growth ambitions.

It is essential to evaluate tax benefits, asset protection, and liabilities before proceeding. To optimize your situation, it is recommended to consult a certified public accountant or a specialized attorney.

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