SARL or SA in Luxembourg: which company form to choose?

SARL and SA: definitions

The SARL (private limited liability company) is a capital company in which the shareholders' liability is limited to their contributions. Its capital is divided into registered shares, whose transfer to third parties is restricted by law. It is a so-called 'intuitu personae' form: the identity of the shareholders is decisive. It may be set up by a sole shareholder (single-member SARL).

The SA (public limited company) is a capital company whose capital is divided into shares, in principle freely transferable. It gives priority to the contribution of capital over the person of the shareholder. It may be set up by a sole shareholder (single-member public limited company) and, like the partnership limited by shares (SCA) and the European company (SE), may issue securities listed on a regulated market (Luxembourg Stock Exchange).

Both forms are governed by the amended law of 10 August 1915 on commercial companies and acquire legal personality from the deed of incorporation; their filing with the Trade and Companies Register (RCS) and publication make them enforceable against third parties.

When to choose one or the other (concrete cases)

Opt for the SARL if: you are launching an SME, a services business or a family structure with a restricted and lasting shareholding; you want to control the entry of new shareholders (approval clause provided for by law); you are setting up a subsidiary or a wealth holding company held by a limited circle; you are starting with a modest capital budget (EUR 12,000, or even EUR 1 in a simplified private limited liability company (SARL-S) if you are an eligible natural person).

Opt for the SA if: you are planning several funding rounds and the entry of financial investors; you want shares to circulate freely or a possible listing; the shareholding must be able to change flexibly, or even remain discreet; you want to issue a variety of instruments (different classes of shares, bonds, convertible securities) within a framework tested in practice.

It depends in particular on the number of shareholders envisaged, the investment horizon and the requirements of future funders, who often insist on an SA.

Legal framework applicable in Luxembourg

Luxembourg company law is based on the amended law of 10 August 1915 on commercial companies (consolidated on Legilux), substantially overhauled by the law of 10 August 2016 modernising company law. The SARL is governed by the provisions specific to private limited liability companies; the SA by those relating to public limited companies, which offer a choice between a unitary structure (board of directors) and a dual structure (management board and supervisory board).

Several authorities and actors are involved: the notary, whose involvement is mandatory for the deed of incorporation of a SARL and an SA; the Trade and Companies Register (RCS), managed by Luxembourg Business Registers (LBR), for registration and the publication of deeds; the Register of Beneficial Owners (RBE), for the declaration of beneficial owners; the Registration Duties, Estates and VAT Administration (AED) for registration duties and VAT; the Ministry of the Economy for the business permit where the activity requires one.

Certain limits and exceptions apply. Certain regulated activities (banking, insurance, fund management) are subject to specific regimes and to supervision by the CSSF (Luxembourg financial sector supervisory commission) or the CAA (Commissariat aux assurances), which may impose a particular form, capital or governance, regardless of the choice between SARL and SA. The SARL-S is, by way of exception, reserved for natural persons and excludes, in particular, holding, financing and insurance activities.

Conditions to be met

Setting up a SARL or an SA requires several cumulative conditions to be met: minimum capital subscribed and paid up in accordance with the law, notarial deed, complete and compliant articles of association, valuation of contributions in kind, business permit where the activity requires one, registration with the RCS, declaration to the RBE and an effective registered office in Luxembourg.

Each of these conditions carries a risk if it is not met, from the notary's refusal to incorporate to unenforceability against third parties, including fines for failure to file the RBE declaration or the risk of tax reclassification in the absence of genuine substance. The table below details each requirement and the associated risk.

Setting up a SARL or an SA: the step-by-step procedure

1. Analysis. Define the corporate purpose, the number of shareholders, the method of financing and the exit strategy in order to choose between SARL and SA.

2. Verification. Check that the company name is available with the RCS, whether a business permit is needed and whether the activity is compliant (regulated activities, SARL-S exclusions).

3. Preparing the documents. Prepare the draft articles of association and, where relevant, the shareholders' agreement, gather the founders' identity documents and supporting documents, prepare the blocking of the capital in a bank account (unless the articles provide for deferred payment) and, for contributions in kind, the auditor's report in an SA.

4. Filing and notary. Sign the deed of incorporation before a notary, who receives the articles and records the subscription of the capital and, unless the articles provide for deferred payment, its payment.

5. RCS and publications. The notary files and publishes the articles with the RCS; the company, which has had legal personality since the deed of incorporation, becomes enforceable against third parties.

6. Follow-up. Declaration to the RBE, registration for VAT and social security, obtaining the business permit if it was not obtained beforehand, opening the operating accounts.

7. Outcome. A registered, operational and compliant company, ready to enter into contracts and to publish its annual accounts in accordance with the applicable obligations.

Timescales

Theoretical timescale. Once the file is complete, the appointment at the notary's office can take place within a few days, as the notarial deed and registration with the RCS are quick.

Practical timescale. In practice, one to three weeks after the documents have been gathered and the capital deposited, the appointment at the notary's office being possible within a few days; the business permit, where required, is issued separately within a few weeks. Opening the bank account and the compliance checks (KYC/AML) are often the longest step.

Factors causing delay. Account opening and KYC procedures, contributions in kind and the auditor's report, the business permit, complex or cross-border shareholding structures, translation and legalisation of foreign documents.

Costs

The main cost items include: the notary's fees for the deed of incorporation; the publication and registration fees with the RCS; the fees of the lawyer, fiduciary or chartered accountant for the structuring, the articles and the shareholders' agreement; the auditor's report in the case of a contribution in kind (particularly in an SA); bank charges and domiciliation fees; recurring costs for accounting, filing of the annual accounts, any statutory audit and RBE compliance.

These items vary according to the complexity of the matter and the service providers. No fixed price can be guaranteed without a prior analysis of the project.

Legal risks

The choice of form and the quality of the structuring give rise to several risks: a form unsuited to the financing, incomplete or contradictory articles, undercapitalisation, an overvalued contribution in kind, failure to file the RBE declaration, lack of genuine substance or a dispute over the transfer of shares.

Most of these risks can be anticipated upstream: choose the form according to the investment strategy, have bespoke articles and a shareholders' agreement drafted, size the capital according to actual needs, value contributions rigorously, file the RBE declaration as soon as the company is registered and ensure an effective registered office and governance in Luxembourg. The table below summarises the risks, their severity and their prevention.

Common mistakes

Choosing the form out of habit or on the basis of immediate cost, without taking account of the financing and exit strategy; copying standard articles without adapting the governance, the purpose and the transfer clauses; neglecting the shareholders' agreement, which prevents most disputes.

Underestimating bank and KYC timescales; forgetting or delaying the RBE declaration; confusing the SARL and the SARL-S, although the SARL-S is reserved for natural persons and excludes holding and financing activities; setting up a shell without genuine substance, which is fragile from a tax perspective.

Three practical cases

Simple case. Two shareholders set up a services agency in Luxembourg. Closed shareholding, no fundraising planned, a wish to control entries into the capital. The SARL is suitable: capital of EUR 12,000, protective approval clause, flexible governance by one or more managers.

Cross-border case. A foreign group wishes to establish a subsidiary in Luxembourg to structure pan-European investments and, in time, to bring in institutional co-investors. The SA is often chosen for the free transferability of shares, the flexibility of the shareholding and the possibility of issuing various instruments. Local substance and ATAD compliance must be addressed carefully from the outset.

Conflict case. Three equal shareholders in a SARL find themselves deadlocked: no majority emerges and one shareholder wants to leave, but the articles provide for neither an exit clause nor a buy-back mechanism. The dispute concerns the valuation of the shares and the approval of a buyer. A shareholders' agreement and well-drafted exit clauses would have avoided the impasse. The resolution involves negotiation, an expert valuation, or even litigation.

Comparison of SARL and SA

The comparative table below sets out the main criteria side by side: minimum capital, number of shareholders, nature of the securities, transfer regime, character of the company, governance, anonymity of the shareholding, eligibility for listing and form of the deed of incorporation.

Additional points. The SARL-S (simplified SARL) allows natural persons to start with capital of EUR 1 to EUR 11,999.99, without a notary for the deed of incorporation, but excludes holding, financing and insurance activities and requires an amendment of the articles of association towards the ordinary SARL to raise the capital to EUR 12,000 or more. The SAS (simplified joint-stock company), a distinct form introduced by the law of 10 August 2016, offers great freedom of organisation in the articles while remaining close to the SA regime. It depends in particular on your eligibility and your activity.

Decision tree: which form to choose?

If you are a natural person, starting a small non-financial activity and aiming for minimal capital, consider the SARL-S. If your shareholding will remain closed and stable, without significant fundraising, choose the SARL. If you plan to bring in numerous investors, free circulation of shares or a listing, choose the SA.

If you want the flexibility of the SA with a highly customised organisation in the articles, consider the SAS. If your activity is regulated (banking, insurance, funds), the form and the capital may be imposed by sector-specific regulation: have the choice validated. If in doubt, or where there are multiple shareholders, investors or a cross-border element, have the choice settled with the help of a corporate lawyer before signing.

Cerno Law Firm's takeaway

The choice between SARL and SA is not simply a question of capital. It has a lasting impact on governance, the circulation of shares, the confidentiality of the shareholding and the ability to finance or sell the business. The SARL protects a closed and stable shareholding; the SA opens access to capital and markets. Between the two lie the SARL-S, for a simple start, and the SAS, for a highly customisable SA.

The right decision is taken upstream, in the light of the actual project and its regulatory and tax constraints. An informed choice, set out in suitable articles of association and a suitable shareholders' agreement, avoids costly corrections later. Cerno Law Firm supports entrepreneurs, directors and investors in analysing the matter, choosing the legal form, drafting the articles and the shareholders' agreement, and following up the RCS and RBE formalities.