What type of company should I create? Choosing the right Legal Form for your business
There are numerous times when, as consultants, we are called upon to answer the question, "what legal form should the company I am going to establish have?". This question, deeply rooted in every entrepreneur's desire for a stable foundation on which to develop their idea, primarily seeks clarity in the best legal framework for a budding business. The answer to this question is neither simple nor straightforward and requires a detailed examination of various aspects.
The answer to the above question lies at the point where 3 fundamental parameters converge: Firstly, the existing legal framework, secondly, the characteristics of the new business activity, and thirdly, the ambitions of the entrepreneur(s). This approach ensures the most stable foundation for development. Therefore, it's beneficial for every new and existing entrepreneur who wants to have an opinion on their choices to know the differences between the legal forms of businesses. Let's examine further:
Starting with the basics: Business vs Company
It is vital for every entrepreneur, whether experienced or newcomer, to understand the fundamental difference between a Business and a Company:
Business: Refers to a productive-economic unit. Essentially:
- Combines and utilizes various factors of production.
- Aims at creating products or services.
- Seeks to distribute products or services to consumers through the market mechanism.
Company: Refers to a partnership, consisting either of natural persons or legal entities, united by a common purpose. Important to note:
- Its purpose may go beyond profit, encompassing religious, political, or philanthropic goals.
- For legal recognition, its objectives must include economic benefits.
Classification of Businesses
Businesses, when categorized based on their type, can be classified into:
Sole Proprietorship:
- Represents the utmost simplicity in business structure.
- Established and managed by a single individual.
- High flexibility and quick adaptation to market changes.
Legal Entity Businesses:
- Created through the merger of individuals and/or capital with profit as the goal.
- The main categories include Personal and Capital Companies.
- Characterized by flexibility in capital accumulation, stable tax rates, and relative inflexibility in adapting to market changes.
Personal Companies
In these companies, the partners have a more personal relationship with their company, as they have personal liability for its obligations.
Main characteristics:
- Directly affected by events such as death, bankruptcy, and loss of legal competence.
- Partners are personally liable for all company obligations in full.
- All partners have equal rights and obligations, regardless of the amount and type of capital contribution (principle of equality), and are obligated to show faith in their mutual relations.
The most common forms of personal companies are the General Partnership (O.E.) and the Limited Partnership (E.E.), while Civil and Silent Partnerships are also classified as personal companies.
Capital Companies
Capital companies are not so personally connected with their partners, as the partners have a liability for the company's obligations proportional to their participation.
Main characteristics:
- Separation of personal and company assets.
- Transfer of company ownership is free.
- Death, bankruptcy, and loss of legal competence play no significant role.
- The company itself is responsible for its debts.
The most common forms of capital companies are the Public Limited Company (A.E.), the Private Capital Company (Ι.Κ.Ε.), and the Limited Liability Company (Ε.Π.Ε.), while European and Limited Partnerships by Shares are also classified as capital companies.
| Sole Proprietorship | General Partnership (GP or OE) | Limited Partnership (LP or EE) |
|---|---|---|
|
● Usually chosen for expected profits up to €20,000. ● Ideal form for very small businesses which are managed by a single person and seek maximum operational flexibility. |
● It is chosen as a legal entity when all partners desire equal treatment in terms of losses, profits, and obligations towards third parties. ● They seek flexibility in the payment process of collections and withdrawals. ● The primary goal is the distribution of profits every year at the lowest possible cost (it is exempted from dividend tax). |
● It is a better option than the General Partnership when one or some of the partners do not wish to bear responsibilities towards third parties beyond their contribution to the capital. |
| Public Limited Company (SA or ΑΕ) | Private Capital Company (ΙΚΕ or PCC) | Limited Liability Company (LTD or ΕΠΕ) |
|
● Easy addition of new shareholders and investors ● Better creditworthiness ● Double-entry accounting system ● Profit distribution based on the decision of the General Assembly ● Dividend tax 5% ● Difficulty in decision-making compared to personal companies. ● Required minimum capital €25,000 |
● Limited liability of partners ● Simpler and faster establishment ● Double-entry accounting system ● Non-capital and guarantee contributions ● Dividend tax 5% ● Relative difficulty in decision-making ● Easy capital change compared to the SA (ΑΕ) |
● Limited liability of partners ● Complicated establishment process ● Double-entry accounting system ● Dividend tax 5% ● Difficulty in decision-making, especially in the case of a single-member EPE (ΕΠΕ) where a notary's presence is required. ● Considered an outdated form of business as its place has been taken by Ι.Κ.Ε.. |
The importance of informed choice
When choosing a legal form for your business, it's important to consider financial, tax, legal, and administrative issues, always keeping in mind that after the commencement of operations, changing it becomes much more complicated. A well-informed choice can influence the long-term success of the business. It's therefore crucial to regularly evaluate your business and adjust your corporate structure according to your needs and objectives.
During the process of selecting the most appropriate legal form, an experienced business consultant can play a decisive role by combining long-term goals with the legal framework, to select a legal form that won't be a burden to the business.
MDC Stiakakis, with over 20 years of experience, possesses the human resources with the necessary expertise to guide the correct decision-making regarding the choice of legal form, both for new and existing business structures.
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The translations provided for the legal forms of companies are based on common terminology and the closest English equivalents. However, it's important to note that the exact legal and regulatory frameworks, as well as the rights and obligations associated with these forms, may vary significantly from one country to another. This article intends to inform the reader and in no way substitutes the specialized consulting services. |