The development and transfer of a sole proprietorship may make it necessary to transform it into a company, in particular to facilitate the raising of external capital.

However, the transformation of a sole proprietorship into a corporation has in principle the same tax consequences as the cessation of a business in terms of income tax and registration fees.

To remedy this situation, the legislator has introduced an optional regime in Article 151g of the CGI, which avoids immediate taxation. In addition, the contribution to the company may be exempt from registration fees subject to certain conditions.

• Common law regime: immediate taxation.

The contribution of a sole proprietorship to a company normally results in the cessation of activity, and the immediate taxation of operating profits not yet taxed, unrealised gains on fixed assets and any profits and gains on deferred taxation.

This taxation can be a real obstacle to the incorporation of growing sole proprietorships.

The option for the deferral regime, the main features of which are described below, may help to overcome this difficulty.

• Optional tax deferral regime

This scheme is open to any entrepreneur (natural person) who brings to a company a sole proprietorship or a complete branch of activity of an industrial, commercial, craft, liberal or agricultural nature. The form of the beneficiary company and its tax regime are irrelevant. However, the beneficiary company must be subject to an effective tax regime at the time of the contribution.

The option for this special regime allows the entrepreneur to benefit from a tax deferral for capital gains recognised on non-depreciable fixed assets, and an exemption for capital gains recognised on depreciable fixed assets and profits on inventories, the corresponding tax burden being transferred to the company receiving the contribution.

The consequences of the contribution are then generally limited to the taxation of the result of the last financial year of the individual activity, with certain profits on which taxation was suspended at the date of the contribution also benefiting from favourable treatment.

However, it should be noted that this scheme cannot be combined with certain other preferential tax schemes, in particular with the exemption for capital gains made by small companies whose revenues do not exceed certain limits. Taxpayers must therefore choose the regime that they consider to be the most favourable, as this choice may be difficult and requires a real analysis of the costs and benefits of each, taking into account the different characteristics of the two regimes.

To benefit from the optional deferral regime, the contributor and the company must, jointly, exercise the option for the special regime in the deed of contribution or incorporation of the company. Otherwise, the capital gain is immediately taxable.

A number of reporting obligations must also be respected, both by the entrepreneur/contributor and by the newly created beneficiary company.

The contributor must submit the declaration of the results of the last financial year within 60 days. A statement of the follow-up of capital gains carried forward must be attached to this declaration. The contributor must also, when filing his income tax returns for the year of the contribution and subsequent years, attach a statement tracking capital gains carried forward on non-depreciable items.

The company receiving the contribution must attach to its income statements a statement of follow-up of the capital gains not taxed at the time of the contribution, and keep a register of capital gains on non-depreciable items, under penalty of a fine of 5% of the amounts omitted.

• Registration rights

Many acts of company life must be registered with the competent services of the tax administration, generally giving rise to a fixed or proportional levy.

However, it should be recalled that an entrepreneur who is a natural person and who contributes all the fixed assets allocated to the exercise of his professional activity may benefit from a total exemption from registration fees provided that the incorporation of the new company and the contribution are carried out at the same time and that the contributor undertakes to keep his securities for at least 3 years.

Otherwise, the contribution for consideration resulting from the assumption by the company of the contributor's liabilities is subject to a proportional duty which may be 3% or 5% depending on the nature of the assets on which the liabilities are charged.