Different forms of business

Factors such as the number of founders, the required capital and its availability affect any decision on form of business. There are no set rules determining which form of business should be chosen. The most suitable and appropriate form of business must be determined individually in each situation. The following information is useful to know when selecting the form of business:

1. Number of founders

An individual engaged in business without a partner may do so in the form of a single-member company or as a private entrepreneur. Partnerships (general partnership and limited partnership) always require a minimum of two partners. When there are several founders, the alternative forms of business are a limited liability company and a cooperative. A limited liability company may also be a single-member company, or there can be several partners. The minimum number of founders for a cooperative is three.

2. Required capital and its availability upon establishing an enterprise

The amount of capital required for business activities depends on the type and scope of the activities. Acting as a private entrepreneur (so-called private business name) is usually appropriate if the amount of required capital is relatively small.

A general partnership can be established without monetary investments. Work contribution by the partners is sufficient.

In a limited partnership a monetary investment is required of the silent partner, while work contribution is sufficient for general partners.

Limited liability companies are the most common form of business in areas requiring large amounts of capital. The minimum share capital required of a limited liability company is prescribed in the Companies Act as EUR 2,500. The share capital must be paid to the company's account in full before the company can be entered in the trade register maintained by the National Board of Patents and Registration. For legal purposes, a limited liability company is established when it is entered in the trade register.

There are no minimum requirements concerning the capital of cooperatives. The type and scope of the cooperative's activities determine the required capital.

3. Division of responsibilities in an enterprise

A private entrepreneur is responsible for any liabilities of the business with his/her personal property. The partners in a general partnership and the general partners in a limited partnership have a similar personal responsibility. The partners in a general partnership and the general partners in a limited partnership may make commitments on behalf of the partnership. Thus it is particularly important to select the right partner in this type of business. The responsibility of shareholder in a limited liability company, and of a member of a cooperative, is limited to the capital they have invested in the enterprise. In practice, especially in the early stages of the business, the property of shareholders or members or guarantees by the shareholders and members may be required as surety for the enterprise's debts.

4. Flexibility of operations

A private entrepreneur makes all decisions himself/herself and is responsible for the activities with his/her personal property. The partners in a general partnership and the general partners in a limited partnership make decisions either solely or jointly. Limited liability companies and cooperatives are represented by their Boards of Directors.

In a limited liability company there is a certain amount of statutory paperwork to take care of. One Ordinary General Meeting must be held in each accounting period, unless otherwise stipulated in the Articles of Association.

In a cooperative decision-making is characterised by the requirement for democracy. Each member has one vote, irrespective of the amount of their investment.

Partnerships, limited liability companies and cooperatives may elect a Managing Director to see to the day-to-day management of the business.

5. Continuity of operations

A private entrepreneur's business operations are the most vulnerable on the death of the entrepreneur. In a partnership the share of the partner may be transferred to another person with the agreement of the other partners, if this has been agreed in the partnership agreement. In a limited liability company changes in the shareholders do not affect the existence of the company. While membership in a cooperative cannot be sold, the cooperative itself may be sold if the members reach a sufficient level of unanimity.

6. Profit distribution and loss coverage

A private entrepreneur retains any profits himself/herself, but is also responsible for the losses incurred by the business. In a general partnership profits and losses are distributed among the partners as decreed by law (Partnerships Act, 389/1988) or in the partnership agreement.

In a limited partnership a silent partner is first paid a share of the profits on his investment as at the beginning of the accounting period, as decreed in the partnership agreement. The remaining part of the profit will be distributed among the general partners in accordance with the partnership agreement. Silent partners do not contribute to the coverage of losses.

A limited liability company pays its shareholders a dividend. Only the profit of the previous accounting period and unrestricted shareholder's equity may be used for dividends. If the results for the accounting period were negative or the company has made losses in previous accounting periods, these must first be subtracted from the above-mentioned items. The company's restricted equity may not be distributed as dividends. In a limited liability company profits are distributed as dividends paid to the shares of the shareholders.

In a limited liability company a shareholder's losses will only amount to the investment, unless he/she has pledged a personal guarantee for the company's debts.

Instead of obtaining a profit for its members, the purpose of a cooperative is to offer services for its members. Only a limited consideration on capital invested in the cooperative is paid from the profits. The profits, or the surplus, may be distributed to the members as extra wages, interest on cooperative capital or return of the surplus according to the use of the cooperative’s services by the members, or as otherwise stipulated in the rules. Work cooperatives may pay extra wages to the members. Cooperatives are subject to a reserve requirement; part of the surplus must be transferred to the reserve fund, after the losses shown by the balance sheet have been subtracted.

7. Taxation

Tax treatment varies depending on the form of business. Direct taxation in particular may affect the choice of enterprise formation. The major direct taxes are the state income tax and wealth tax payable to the State and the municipal income tax payable to the appropriate Municipality. When determining the tax burdens falling on different forms of business, attention must also be paid to the tax burden of the entrepreneur. The joint effect only determines which form of business is the most profitable in terms of taxation.

Taxation