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Business Organisations
Business organisations are extremely diverse and can be classified according to their legal form,
size, ownership or industry sector.

1. The sole trader

The individual carries on business in his or her name, so assumes all the rights and duties of the
business. If the business is sued for breach of contract (szerződésszegés), it means suing the
individual and if the business does not have the resources to meet any claim, the claim must be met
out of the private resources of the individual.
They have limited capital resources. Risk capital is provided by the proprietor or close personal
backers and loan capital is often made available against the security of the individual assets.
The sole trader may suffer by not being able to exploit the economies of scale
(volumengazdaságosság) available to larger firms; on the other hand, in many personal services,
smallness and the personal touch can be a strong selling point.

Advantages
The sole trader has:
 Freedom in running the business.
 Flexibility.
 Personal control over the business.
 Personal contact with staff and customers.
 He does not have to share the profit.
Disadvantages
 Sources of finance are limited (it is difficult
to borrow money).
 Therefore growth is restricted.
 There is limited scope for economies of
scale.
 He has to take full responsibility.
 There is no continuity (if he is ill, there is no
one to run the business).

2. Partnership (társulás, kb. BT)

Two or more persons combine their resources and expertise to form a business unit. Partnerships
are formed by contract between the parties. The main items in a Partnership Agreement are the
terms specifying e.g.:
 The nature of business and date of commencement.
 The amount of capital subscribed by each partner.
 The basis on which profits will be determined and allocated.
 Management responsibilities of each partner (sleeping partner = csendestárs: providing capital
but not taking part in the running of the company).
 Voting rights, the role of each partner, arrangements concerning finances, banking, book-
keeping, authority to sign contracts, etc.

Advantages
 There are additional sources of finance.
 Partners share responsibilities.
 Partners share losses too.
 There is more scope for specialisation.
Disadvantages
 Each partner is jointly liable for the debts
incurred by other partners.
 The withdrawal of any one partner or an
additional partner causes the automatic
termination of the partnership.

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Partnership is a common form of business organisation with accountants, solicitors, dentists,

language teachers, etc.

3. Joint Venture (közös üzleti vállalkozás)

Joint ventures are formed by two or more persons or companies co-operating in some special
business activity in which there is some risk of loss, but a reasonable hope of profit. The parties in
the venture share the costs and the profits in agreed proportions. This arrangement exists in
banking, insurance and publishing. Joint ventures are usually temporary, but they can become
permanent too.

4. Limited companies: private limited (Ltd.) public limited (Plc.)

The legislation of most countries allows for organisations to be created that have a separate legal
personality from their owners. In Britain: Ltd. (limited) or Plc (public limited), in the USA: Inc.
(incorporated) in Hungary Rt.
The act of incorporation creates a new legal entity distinct from the shareholders who own the
company. Companies can make contracts and they can sue and be sued.
The company is fully liable for its debts but the shareholders enjoy the privilege of limited liability,
which means that investors are only liable to lose the amount of money they have put into the
business and their private possessions cannot be taken away to meet the debts if the business fails.
The founders are required to lodge a Memorandum of Association and Articles of Association with
the Registrar of Companies (cégbíróság) and to pay certain fees.

Memorandum of Association (Társasági szerződés)

It includes the name of the company, its purpose, its registered office or premises, the amount of
authorised share capital, a statement as to what the limit of liability will be if the company is wound
up with unpaid debts, the object clause, i.e. the scope within which the company can exercise its
separate legal personality.

Articles of Association (Részvénytársasági alapszabály)

It regulates the relations between the company and its members and between the members
themselves, e.g. nominal capital (face value of shares), the issue and transfer of shares, the rights of
shareholders, meeting of members, the appointment of directors, etc.). It also sets out the right of
directors and shareholders.

There are additional requirements in relation to a public limited company. A private company
cannot appeal to the public to subscribe to a share issue. It must sell its shares by private
negotiations with individuals. A public company can offer its shares and debentures to the public.
The invitation to the public to subscribe to shares means that public limited companies are under a
greater obligation to disclose information, especially if they seek a quotation on the Stock
Exchange. Public limited companies are required to provide information to investors e.g. to the
public. They must produce the Annual Report which consists of the following financial statements:

 Profit & Loss Account (eredménykimutatás): records the revenue and expenses of the
company over a given financial period.

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 Audited Balance Sheet (auditált mérlegkimutatás): gives a snapshot of the firm’s financial
position; what it owns and what owes.
 Cash Flow Statement (pénzforgalmi kimutás): examines the changes in cash resulting from
business activities.

Company Administration

The shareholders are the owners; they have the ultimate say in the business but the running of the
business is done by directors who are elected to the board by shareholders. In theory control over a
company lies with the shareholders in general meetings.

 Annual General Meetings (dividends are declared).

 Extraordinary General Meetings to discuss special business (alterations to the Memorandum
and Articles of Association).

For most matters a simple majority is required to pass a resolution but certain issues need a 75%
majority.

Ltd.: advantages and disadvantages

Advantages Disadvantages
 Enjoys more economies of scale than  Shares cannot be offered to the public.
partnerships.  Accounts are not private.
 There are more capital raising possibilities.  It can prove to be difficult to raise capital.
 The business has greater continuity.
 Members enjoy limited liability.

Plc.: advantages and disadvantages

Advantages
 Enjoys economies of scale.
 Share transfer is easy.
 It is relatively easy to raise capital.
 The business enjoys maximum continuity.
 Members enjoy limited liability.
 It is relatively easy to borrow money.
Disadvantages
 Formation involves considerable
documentation.
 Share transfer can lead to take-over.
 There is too much red tape.
 There is a lack of privacy, annual report must
be made public.

5. Special forms of businesses

Multinational corporation: A company which is based in one country but also operates in a
number of countries where it owns factories and outlets.

Holding company: The leading company of a group of companies that holds all or more than 50%
of the shares of the other (subsidiary) companies.

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Charitable trust: A trust for relieving poverty, for the advancement of education or religion or for
the good of the public in other ways. They have to be registered, but normally they are not required
to pay income tax.

Public sector organisations: Governments have traditionally been involved in providing goods
and services that cannot be sensibly provided by market forces, for example, defence, education,
basic health services.

6. Hungarian company forms

The RT

The joint stock form (RT) is principally suitable for larger investments. Banking and insurance
businesses must be incorporated as RT’s. Minimum capitalisation is HUF20 million. All stocks
may be held by one shareholder, but this shareholder has unlimited liability in case of bankruptcy.
A designated certified auditor must be employed, and an annual audit is required. Control of the
company is vested in a board of governors answerable to the stockholders. Preferred stock may not
exceed 50% of capitalisation. Convertible bonds may not make up more than 50% of ordinary share
capital.

The KFT

The KFT is by far the most popular incorporated business form for both foreign and domestic
investors. A KFT cannot solicit additional shareholders publicly. The minimum capitalisation is
HUF 3 million. One half of nominal capital must be paid in at the time of registration, and all
remaining capital must be paid in within one year.

Partnerships (BT)

Partnerships may be established by Hungarian and foreign individuals or companies either by

themselves or together with Hungarian individuals or companies. Although the number of partners
is not restricted (BT) partnerships must have at least one unlimited partner. Management
responsibility falls solely on the unlimited partner(s).