If you want to establish a company, you must make a decision on the form and extent of the business. Certain entrepreneurial criteria, however, have to be fulfilled. Running a business or any other type of acquisition of income is considered independent when done at one’s own risk, tools and media, when offered in public, when the entrepreneur him/herself is responsible for all costs, when he/she has taken care of his/her own social security and has insured him/herself against damage resulting from his/her own actions. You can exercise your business as a sole proprietor, or in the form of a single-member company, limited or unlimited partnership, limited company or as a cooperative.
Unlimited and limited partnerships, limited companies and cooperatives each have their own specific laws. To receive more detailed information on the types of companies we advise you to familiarize yourself with those laws. What form of business fits best for you, depends on your entrepreneurial purpose and has to be decided individually. In any case you should consult a tax advisor for a individual solution.
Single-member company:
A single-member company is the most natural form of business when the entrepreneur works alone and he or she has a permanent location for sales, purchases or similar activities and exercises business in the form of a company. A company is part of its owner’s business and financial resources.
When setting up a company, there is little paper work and other related duties, a registration and an announcement for the tax authorities on starting a business. In a single-member company an entrepreneur has got unlimited liability, which means that the person is responsible for his operations with his entire personal property. In practice this means that the person takes a big economic risk when starting a business.
Many of those who intend to become entrepreneurs justify choosing a single-member company with the fact that the scope of business will be small and there are no great losses to be expected. Many people also wish to try it out first with a single-member company and thus gain experience. When the business grows, it is easy to turn a single-member company into another form without heavy consequences as comes to taxation.
Unlimited partnership:
An unlimited partnership is the choice when the business is to be run together with someone else. In an unlimited partnership all the partners, two persons or more, are responsible for the company´s liabilities. An unlimited partnership is established by articles either orally or in writing. In practice, however, a written document is always applied and it must be attached to the trade register notice.
An unlimited partnership is based on firm mutual trust between the partners, and one should never enter into this kind of partnership with a stranger. The partners are not only responsible for the business with the entire property of their own but share the liability of any contracts made by their copartners as well. Typically, all decisions to be made in the company must be unanimous. A creditor is entitled to claim for remittance from any of the partners. Due to their personal responsibility, the partners can make private withdrawals from the company’s funds, yet in a way that does not go against the interest of their creditors.
A partner in the unlimited partnership has no obligation to invest money into the company rather has the right to invest only his or her work force into the company. This is the case, for example, when the business does not require making any investment rather is solely based on exploiting one’s own know-how (e.g. Internet service providers, home care companies, etc.). A partner in an unlimited partnership is first paid interest for the investment that is left at the beginning of the fiscal period. The partners can freely define the interest rate to be applied among themselves. To the sleeping partner, the interest is considered capital income. The remainder is then shared equally between the partners. In case of a loss, the sleeping partner normally does not take part in covering it, unless explicitly specified to do so.
Limited partnership:
A limited partnership can be established by at least one ordinary and one limited partner. The number of limited partners can be great since they do not take part in decision making. Both natural and juridical persons can act as ordinary and limited partners. The status of the ordinary partners is similar to that in an unlimited partnership.
There is no obligation for them to invest in the company anything more than their work force. Limited partners, instead, are in the position of investors, and are liable for the company only to the amount of their investments provided that they have not in any other way taken the liability for the company’s debts. When the partnership is established, the limited partners invest to the partnership in the form of money or apport property the amount of which is not restricted by any laws. On the other hand, the investment has to be meaningful to the company, which means that a very small fiscal commitment is in practice not acceptable. In the case of bankruptcy the limited partners will only lose their investment to the company.
A limited partner can work for the company – even as the executive manager – and have the responsibilities brought by the administrative authority he or she is entitled to in this position. The death of a limited partner does not lead into annulling the partnership. In this case, the law on partnerships is applied.
A limited partnership is typically a family-owned company in which the administrative authority and decision making lies in most cases with one partner, the general partner. In a family-owned partnership the role of the limited partner is often to stay in the background and, when necessary, to assist with one’s work force. This type of company is best suited for small companies in the service branch in which the aim is to gain flexible administration and it is possible to make withdrawals from the company without paying a salary. In case the partnership has got several general partners, the mutual trust becomes essential, just as is the case with unlimited partnerships.
In a limited partnership, the limited partner will first be paid interest on the amount invested at the beginning of the fiscal period. The remaining part of the profit will then be divided in equal shares between the general partners.
Limited company :
According to the law on limited companies, they are divided into public and private companies. Only the stock of the public companies can be submitted to public trading. The minimum capital investment of a public company depends on your countries law. Family companies and other small businesses are considered private companies. The entire capital stock must be paid for prior to registration to the company’s bank account.
A limited company can be set up by one or several persons. The promoters may be either natural or juridical persons. In other words, the number of promoters is not restricted. To set up a limited company, those involved have to compile a charter of foundation which contains the nominal value of the shares and detailed personal data of the promoters. The charter of foundation has to contain a suggestion for the Articles of Association. In the case of small limited companies, a ready-made basic the Articles of Association is commonly used, comprising the documents required by law, the business name, domicile, capital stock, nominal value of the shares, means of sending the invitation to the annual meeting, and the fiscal period.
Prior to the registration of the company, apport property must be in the possession and control of the company. Work effort cannot be consider apport to the company, rather it must be something that has some economical value to the company.
A constitutive meeting is held to make a decision on setting up a limited company. In small companies it is common to hold the board meeting in connection with the constitutive meeting.
Note that a limited company becomes a juridical unit first after it has been entered into the trade register. The shareholders are responsible for the operation of the company until registration, and any assignments (such as contracts) should indicate that they have been made in the name of the limited company to be set up. After registration, the limited company, becomes a juridical subject, i.e. it has legal capacity and is responsible for its contracts and assignments. The capital stock has to be entirely paid for by the time when the limited company is registered.
A constitutive meeting is held to make a decision on choosing the members of the executive board as well as accountants. In addition, the statutes are also agreed upon. After setting up a company, you must make a register of members which lists all shares or share certificates in numerical order, the date of issue, and the name and address of the shareholder. A shareholders register must also be maintained.
The company´s routine business is run by an executive manager. In addition to the executive manager, an executive board is responsible for running the company. Decisions concerning the company are also made in the annual general meeting in which shareholders may use their rights. The annual general meeting must be held within six months from the termination of the fiscal period. The items discussed are, for example, approval of the final accounts, resolution on conceding freedom from liability, and resolution on acts upon profits or losses made by the company.
The shareholders are not responsible for the operation of the company with their personal property rather to the amount of invested venture capital only. However, it is quite common that when a company is set up, a loan must be taken e.g. to pay for the capital stock and investments, which means that the company’s loans have to be guaranteed in person. A limited company may have shares with different rights which means that either the votes brought by a share is different or the rights brought by it when sharing property of the company is different. In small companies, however, all shares usually bring the same rights to their owners.
The partners can withdraw property from the company as wages or through the allotment of profit. In most cases, a partner is an employee of his own company which means, for example, that mileage compensation and travel expenses are paid to him/her just like to any employee of the company. In other words, employer’s standard wage expenses are being paid for. The distribution of dividends is decided by the annual meeting. Giving up one’s partnership is easy, since the stocks are typically freely deliverable. The change of partners has no impact whatsoever on the operation of the company, which among other things makes free stock trading possible.
There are various ways to increase the capital stock, such as subscription issue, rights to options, convertible loan stocks, stock dividends, and subordinated loans. The partners can make mutual partner agreements. In a partner agreement an agreement is made on the change of ownership, development of operation, board members, etc. It is also common to make an agreement about the disputes between the partners.
In a limited company, mostly a double-entry bookkeeping is required. Accountants are chosen in the annual general meeting , and their task is to examine the final accounts, bookkeeping as well as administration of the company.
A company must have at least one accountant. The accountant cannot be the executive manager or any board member, any person keeping the books or an employee of the company. According to the company law all companies must announce their trade register number, the company’s name, address and domicile in their letters and forms. This requirement concerns all such correspondence which may involve legal consequences.
Any person joining the administrative bodies of a company is required to give their acceptance and personal identity code in writing. This concerns also the executive manager, the accountant and their substitutes. The accountant´s personal details, the fiscal year and closing of accounts are also subject to registration.
Limited companies are divided into public and private companies. It can be set up by one or several persons. The shareholders are not responsible for the operation of the company with their personal property rather to the amount of invested capital only.
Cooperative:
A cooperative is a community the number of members and amount of cooperative capital is not predefined. The purpose of a cooperative is, to support the economy and profession of its members, to practice business in such a way that the members will make use of the services provided by the cooperative or other services that the cooperative arranges by a daughter community or other means.
A cooperative can be established by natural persons or communities, foundations, or other juridical persons. A founder has to take membership in the cooperative.
The members of a cooperative are not responsible for the liabilities of a cooperative in person. The founders must compile a charter of foundation, and it is to be dated and signed by the founders. Members of the cooperative´s council are chosen by the annual general meeting. The board members must receive a dated and signed approval to enter the positions. A cooperative must have a council unless otherwise specified in the rules.
A cooperative can have an executive manager if so stipulated in the rules or decided by the council. The council must see to that a list of members is being kept. The list shows his/her name and address, the number of participation shares, and the date when he/she became a member. A member has got the right to give up the membership by submitting a notice on it in writing, as required by the law.
It is also possible to expel a member due to his/her neglected duties brought by the membership. The rules of the cooperative may also serve as the source for other criteria for expelling. A membership cannot be transferred to someone else.
The annual meeting of a cooperative has to be held within six months from the end of the previous fiscal period, unless an earlier date has been specified. In the meeting, the closing of the accounts, auditor´s report, and a possible board members’ statement will be presented.
An extraordinary meeting has to be held whenever the board or council finds it appropriate. To become a member of a cooperative, one is to take one share and to submit the required participation share. However, it is possible to define in the rules that a member has to take several shares when joining the cooperative or in the course of the membership, or that this obligation is eventually reduced during the membership.
It is also possible to require that a member has to submit a connection fee when the membership begins or when the number of shares is increased. The fee is not returned unless otherwise specified in the rules.
Society:
A society is always founded to fulfill one or several predefined goals. The purpose and forms of action must not be contrary to law nor offend good manners. For a society, a charter of foundation signed by the members must be made. The members of a registered ideological society are not personally responsible for the society’s liabilities made in the name of it. The compulsory bodies of a society are annual general meeting, an executive committee and accountants.
An ideological society becomes a juridical person at the time of registration into the Society Register. If founded solely to gain profit or some other type of economical benefit, the society cannot be registered into the Society Register. The primary purpose of a registered society cannot be to practice a business or to gain profit. In case a society practices a business that is related to its secondary purposes, it must also be registered into the Trade Register.