When starting a business the entrepeneurs often need to choose how they wish to shape their enterprise. Should the company be run as a sole proprietorship, a commercial partnership, a private limited company or a public limited company? Also when a company is run for a number of years the question may arise on how to continue. This choice of a legal form may be made at the start of the entrepreneurship, but it may also be made at a later time, for instance when it is sensible to consider the risks of the business or the relevant fiscal regime.
Motives for a legal form
The choice of a legal form is often determined by the fiscal regime relevant to it. The legislator has a special fiscal regime for various legal forms; other less important motives may also play a role in the choice of a legal form. These other motives will be set out here to provide an impression which choices entrepreneurs that are involved with their company are faced with. The most important legal forms, such as the sole proprietorship, the commercial partnership, the private limited company and the public limited company will be explained here, along with the liability of these various legal forms.
The sole proprietorship
By far the majority of businesses are run as sole proprietorships. In this legal form there is no separation between the private capital and the company capital. When the proprietor is held liable he will be liable for his whole capital, including his private capital; the bankruptcy of an entrepreneur will also result in his personal bankruptcy.
The Commercial Partnership
The commercial partnership is an association of persons between two or more individuals who jointly contribute money, goods or labour in order to distrubute the benefits resulting therefrom. The agreements, for instance about the division of profits, the duration and purpose between the associates are laid down in a contract. This contract will determine the legal relationship between the associates in question and it is therefore very important that such a contract is drafted with surgical precision.
In a commercial partnership the capitals are separate. Directors of the business may seek recovery on these separate capitals. In the event that the commercial partnership is no longer able to comply with its obligations, the associates will be jointly and severally liable for the shortfall. The insolvency of the commercial partnership will also result in the personal bankruptcy of the associates.
The Private Limited Company and the Public Limited Company
As the private and public limited company are so closely related, these two legal forms are explained together here. Both are independent bearers of rights and obligations allowing them to independently participate in legal transactions as parties having legal rights. Besides this, both are legal entities with share capital. In case of a private limted company there is no issue of shares, whilst the public limited company does have share certificates. The most important difference between these two legal forms is that the shares of a private limited company cannot be transferred freely. Moreover, the shares of the private limited company are registered, so it cannot issue bearer documents. The shareholder is not personally liable for any matters carried out in the name of the private limited company and cannot be forced to pay calls on shares in excess of the amount he is obligated to, according to those shares.
In case the private limited company and public limited company can no longer comply with the obligations towards creditors, the respective companies will be liable for this. So liability rests not with the shareholder or director. In case the legal entity goes bankrupt, this does not mean that the shareholder or director befalls the same fate, since both the private and public limited companies are parties having legal rights.
Directors of a private limited company and also of a public limited company, for that matter, carry huge responsibility. Directors must always make sure that both the legal obligations as well as the obligations under the articles of association are complied with. In case a director is accused of improper management of the private or public limited company, or he is personally at fault in a serious manner towards his performance as director, he may be held personally liable.
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