Criteria and consequences of your choice
The legal implications and the rules on the establishment of a company depend on the legal form adopted. You will manage a Limited Company differently from a PLC. If you operate in a Close Corporation, you are not obliged to consult your partners as regularly as in a Limited Liability Company. While, exceptions aside, you can always legally switch your company from one to a different type of society, the complex, cumbersome and high consultancy fees involved in the processing of procedures make it better to anticipate your future needs when choosing the legal form.
The minimum capital required is the minimum amount of money that the shareholders must deposit on the company’s account during its formation. This capital differs depending on the corporate form. In most cases, the capital requirement is low, which does not require for you to have significant personal funds to create your structure. In other cases, a substantial contribution is needed to create your company. You will need to have these funds available or team up with someone who has them at the risk of ending up as a minority shareholder.
The choice of the legal form can also restrict the number of partners. For some, the law will require a minimum and /or a maximum number of associates. For example, it may prohibit the creation of one’s own company, requiring a minimum of two partners or, conversely, limit the number of partners to a hundred.
If you want to be the sole owner of your company, pick a legal form which will authorize you to do so. If you plan to introduce your company to a stock market, you will have to be able to open it up to a very large number of people.
Sometimes, the laws will only allow certain types of business entity to enter into areas like Banking or Insurance. Make sure to ask about that.
The flexibility offered by the legal form you are considering is another criterion to take into consideration before making a choice. It may limit the freedom granted to the editor of the statutes to include a particular clause in them. Consider the current and future needs of the company you are looking to start, as poorly written statutes may lead to disastrous consequences.
While with some legal forms, the law will strictly regulate the content of the statutes, with other ones it will allow you to write them rather freely and include or exclude certain provisions. The company can then meet your specific needs, for example by adjusting the role of the leader in your statutes, if you and your future partners decide to run the company by soliciting them as rarely as possible.
Your company’s governance rules are another criterion to take into consideration, as they set the tone for how the company will be run, and establish the scope of the executive’s power.
Certain types of companies provide only one type of leader.
Other legal forms allow for the prioritization between different types of leaders, making it possible for a CEO to delegate a part of his functions to a general manager, for example. Listed companies offer a choice in the type of governance, attributing a role of control or decision-making power to a collegial body (composed of several people), and ability to take only a certain number of decisions to individual managers.
Discuss governance issues with your future partners so as to define the powers of the future leader and organize the associated control on management decisions.
Consider the opening of your company’s capital to third parties. Would you like to anticipate the entry of new partners within the company? We distinguish between “partnerships” and “capital companies”.
In partnerships, characterized by a limited number of partners, mechanisms (approval clauses, preemption, etc.) protect current associates against the entry of unwanted associates.
These companies agree to family structures that do not have large capital needs, and where the existence of entry barriers raises no difficulties.
In limited companies, it is easier to allow new shareholders and new investors to enter the company’s capital. If you know that your business will require a lot of investment, it is wiser to choose a legal form which prevents you from going through cumbersome procedures to bring new partners in. If you plan to proceed quickly with the introduction of your company on a regulated stock exchange market, pick a legal form authorizing the trading of shares in these markets.
Taxation applicable to officers (personal income tax) and the profits of the company (taxation of your company) may differ from one legal form to another. A specific corporate tax applies to certain companies. The other companies’ profits are treated as personal income from associates. The tax and social legislation can differentiate managers depending on the chosen legal form.
A manager may be liable to social charges (amounts due to the exercising of a salaried employment, to cover labor costs for the state, pensions, accidents, etc.), regardless of the fact that he perceives some remuneration or not. In other cases, being paid triggers taxation.
Keywords: lawyer, jurist, legal, Vaughan Avocats