Two friends decide to open a restaurant together. One contributes money, the other brings their culinary expertise. They draw up articles of association, deposit the share capital and register their company. This scenario is based on a specific provision of French law: Article 1832 of the French Civil Code, which lays the foundations for every company.
Contributing to losses: an obligation that is often misunderstood
Most legal guides explain contributions and the distribution of profits. Fewer spell out what it actually means to contribute to losses. Paragraph 3 of Article 1832 of the French Civil Code provides that shareholders undertake to contribute to losses. This wording can sometimes worry people starting a business.
In practice, this obligation does not mean that a shareholder has to reach for their cheque book every year if the company loses money. Case law has clarified that, unless the articles of association provide otherwise, the obligation to contribute to losses takes effect at the time of liquidation. While the company is operating, a shareholder may see the value of their shares fall, but they are not required to cover losses as they arise.
To better understand companies under Article 1832 of the French Civil Code, it is important to distinguish between two things: the legal obligation to bear one’s share of the losses and the point at which that obligation becomes enforceable. This distinction changes how a prospective shareholder perceives the risk.
Article 1832 of the French Civil Code: what the provision actually says
Here is the core of the provision. Paragraph 1 of Article 1832 states that “a company is formed by two or more persons who agree by contract to allocate assets or their industry to a joint undertaking in order to share the profits or benefit from the savings that may result”.
Four essential elements can be identified in this sentence:
- Multiple shareholders: at least two people must come together. Exceptions exist for the EURL and SASU, but the general principle is that a company is formed collectively.
- Contributions: each shareholder puts something into the common pool, whether money (a cash contribution), an asset (a contribution in kind) or their work (a contribution in industry).
- A joint undertaking: the shareholders work together towards a shared goal, rather than each pursuing their own interests.
- Sharing the results: profits and losses are distributed among the shareholders according to the rules set out in the articles of association.
This provision acts as a filter. If any one of these elements is missing, the structure cannot be classified as a company under French law.
Single-member companies and Article 1832: an exception expressly provided for by law
Wondering how an EURL or SASU can exist if Article 1832 requires multiple shareholders? The answer is in the provision itself. Since the law of 11 July 1985, Article 1832 has specified that a company may be “formed by the act of will of a single person, in cases provided for by law”.
A single-member company does not contradict the provision; it is a regulated exception. The legislature chose to allow a sole entrepreneur to benefit from the protective framework of a company (separate assets, limited liability) without requiring a second shareholder.
This option is strictly limited to the legal forms provided for by law. You cannot set up just any type of company on your own. A SNC, for example, still requires at least two shareholders.
Contribution in industry: the special case of know-how
Of the three types of contribution, a contribution in industry is the least intuitive. A shareholder who contributes their industry makes their skills, experience or work available to the company. This contribution is not recorded in the share capital.
A shareholder making a contribution in industry receives shares, participates in profits and contributes to losses. However, their shares cannot be transferred and are not included in the share capital. This is an important distinction to understand before drafting the articles of association.
Company agreement and affectio societatis: the condition Article 1832 does not mention
Article 1832 is silent on an element that case law and legal scholars consider fundamental: affectio societatis. This term refers to the shareholders’ shared intention to work together on an equal footing in the company’s interests.
Without this shared intention, a simple loan agreement or commercial arrangement could be reclassified as a company, leading to considerable legal problems. Affectio societatis acts as a safeguard: it distinguishes a company from a simple financial arrangement between parties.
In the event of a dispute, the courts consider whether this intention genuinely existed when the company was formed. Disagreement between shareholders, however serious, is not enough to dissolve a company. To obtain a court-ordered dissolution, it must be shown that the company’s operations have become deadlocked, not merely that the shareholders no longer get along.
Companies and associations: the dividing line drawn by Article 1832
Why is an association governed by the 1901 law not a company? The answer comes down to one word: profit. Article 1832 makes the sharing of profits or savings an essential element of a company. An association may generate a surplus, but it is not allowed to distribute it among its members.
This distinction has practical consequences. If an association starts distributing its profits among its members, it risks being reclassified as a de facto company, with all the resulting tax and social security obligations.
Article 1832 of the French Civil Code therefore does more than define what a company is. It also draws, by implication, the line between different types of organisations under French law. For anyone starting a project, rereading this provision before choosing between a company, an association or operating as a sole trader remains a useful habit.
