Legal Form Decisions Flashcards
Legal Forms
- Public Law ( institutions; public corporations)
- Private Law:
- Sole proprietorship
- Partnership (Civil law partnerships (GbR); General partnerships (OHG); Limited commercial partnership (KG))
- Corporations (Private limited companies (GmbH); Public limited companies (AG), Societas Europeae SE)
- Foundations
Difference Sole proprietorship and Foundations
The degree of independence is a measure of the bond between the owner of the company with business assets.
Sole proprietorship - company has no operating assets by its own (building, a car, computer) - part of entrepreneurs private assets
Foundations - owner and the assets of the foundation are completely separated
(1) Subject of the company
Commercial/not commercial
- A merchant is someone who operates a commercial business (HGB § 1,1)
• Existence of a commercial enterprise
– Independent sustainable activity with the intention of making a profit
– Agriculture, forestry and freelance activities are generally not commercial enterprises.
• Business operation set up in a commercial manner (due to the nature or size of the enterprise)
Types of merchants:
• De facto merchant: „Merchant by virtue of actuation”
– sole proprietors
– commercial partnerships
• Merchant by legal form: „Merchant by virtue of legal form“
– Corporations
– Cooperatives
• Optionally registrable merchant: „Merchant by virtue of registration”
– farmers and foresters
– Smaller commercial sole proprietorships, without a commercially established business
Non- commercial:
Freelance sole proprietorships, civil law partnerships, silent partnerships, partner companies
(2) Legal capacity
- Legal capacity - extent to which they themselves and not their owners can participate in legal transactions as holders of rights and obligations.
– No legal capacity [Sole proprietorship, partnerships] - owners are holders of rights and obligations
– Partial legal capacity
[PArtnership] - enterprise can sue and be sued
– Full legal capacity [corporations] - company itself is the holder of rights and obligations -> legal entity, legal person.
Legal person only becomes capable of acting though its organs, which consists of natural persons
Changeability of equity structure
How easy is it to leave from ownership, etc:
entry, withdrawal, change, exclusion
Organisation
The legal form determines how the three areas of ownership, management and
supervision are organizationally embedded.
• Representation and management:
– Individual power of representation and management: Each managing
director may decide independently of the approval of the other directors.
– Collective power of representation and management: Each transaction
requires the consent of all other managing directors
• Linkage of management with ownership:
- Self-governing body: management must be carried out by the owner himself
– External governing body: management does not have to be owner at the same
time
Management vs. Representation
Management:
Top Mgmt - middle mgmt - employees
Representation - signing below 2.000 000
(7) Liability
- Unlimited( taking private assets):
– Shareholders/partners have unlimited and personal liability both with the assets of the company and with their entire private assets:
- unlimited (this means also liable with private assets)
- joint and several (everyone is liable for all depts)
- solidly united (together with the other partners)
- direct (to creditors)
– Sequence in which liability is invoked:
Direct liability: Company and partners are liable at the same time
• Subsidiar liability: the company is primarily liable; partners only liable if
company can no longer meet ist liabilities
- Limited ( only takes money, which company has)
• The liability of the shareholders/partners is limited and indirect
Profit and loss distribution
- Fixed interest rate on capital contributions
- Distribution in proportion to capital contributions
- Distribution by head
- Profit privileges (e.g. preference shares)
- disqualification
Co-determination
• Co-determination under labour law (works council)
• Entrepreneurial co-determination:
– Involvement of employees in supervisory boards or even management bodies of
companies
Dormant partnership (StG)
A dormant partnership is a partnership in which a person („silent partner“) participates in the commercial enterprise of another person with a contribution that is transferred to the
assets of the this person and not to the assets of the commercial enterprise.
Corporation
A Corporation is a legal entity à the holder of rights and obligations is not the individual shareholder, but the company itself. The corporation itself concludes contracts, holds assets and is liable.
- Designed for a larger number of shareholders
- Assumes primary capital-based relationship between shareholders and enterprise
- Does not assume continued affiliation of all shareholders
Foundations
• A foundation is a legally independent asset with own legal personality, whose assets are intended to permanently promote a purpose defined by the founder.
• Motives of private foundations:
– Promotion of idealistic purposes
– Livelihood
• Company shares should not be fragmented by inheritances
• Business continuity should not be jeopardized by poor management of heirs
or dispute among them.
– Family care
• As beneficiaries, heirs can be economically protected by the foundation’s
pension benefits.
