Succession planning and business transformation

Succession planning with the new inheritance law

The new inheritance law, effective from January 1, 2023, will offer more freedom in estate planning. This law reduces the legal reserves – the untouchable part of the inheritance guaranteed to legal heirs like descendants and the spouse. Although heirs will still have their inheritance protected by statutory reserves, these will be smaller, increasing the disposable portion of the estate. Currently, an individual can dispose of only a quarter of their estate, which will increase to half with the new law.
From January 2023, entrepreneurs will have more freedom to dispose of half of their succession. This change significantly facilitates the transfer of a family business to a descendant.

Family business succession can lead to conflicts among heirs, potentially resulting in the business’s fragmentation or liquidation to settle the inheritance. The new law will allow entrepreneurs to use a will or inheritance agreement to give more to the descendant taking over the business, ensuring its preservation.

Currently, the law does not regulate the transfer of a business upon the owner’s death. Entrepreneurs need to make arrangements, such as a will or inheritance pact, to ensure their business’s succession.

The implementation of the new inheritance law is an excellent opportunity to review succession and planning options with legal experts.

Transforming an individual business into a capital company

As your business grows, transforming your individually operated business into a capital company, like a Sàrl or SA, can be beneficial.
Many businesses start as individual enterprises, offering lower start-up costs, fewer administrative formalities, and tax advantages of not having profits taxed twice (at both the company and entrepreneur levels).

However, an individual enterprise may not be ideal for growing a commercial activity. There is unlimited liability, with the entrepreneur personally responsible for business debts. Additionally, individual enterprises cannot easily access new investors or associates and are often perceived as small-scale operations by clients and commercial partners.

The new capital company is created by the “in-kind contribution” of the individual business. Transforming an individual enterprise into a capital company involves several steps. These include preparing a balance sheet for the individual business, drafting an in-kind contribution contract, a foundation report, and a verification report, followed by a constitutive assembly.

Several conditions must be met, and legal issues addressed, to ensure the transformation aligns with your interests without adverse consequences. For instance, it’s crucial that ownership proportions remain unchanged in the transformation, as the entrepreneur should initially hold all the capital. Bringing in an investor at this stage could be seen as a partial transfer, with potential civil and tax implications.