1 Company law 111 Tho legal form of a company 412 Regulatory competion 411.3 Foreign companies ‘summary Practice questions In this chapter we will explore itferont legal forms to run a business. Fst, ‘we will discuss unineorporate forms, such as the sole Proprietorship and ‘the partnership. Then, we wil fcus on incorporate farms, such as the private and public limited compary. To continue, some special legal forms wil be highlighted, such asthe foundation, the company limited by guarantee, the Societas Europaca and concerns. Diferences in flexibly in company law between legal systems may result in regulatory competition. Therefore, two examples of such competition will be To conclude foreign companies may be subdue to further regulations compared to domestic entrepreneurs. We wll ify explore this issue in the last section, The legal form of a company (One can run a business in ifferent legal forms. The choice of legal form Is important, because It determines how the business must be established And run, and who is able to what extent for business debts. In general, there isa diference between unincorporated and incorporated companies. inte first case, the company is conposed of natural persons, while in case ofthe latter ease the company has a separate legal ident. An unincorporated company Is composed of natural persons and Unienprtes has no soparate legal identity comPel any BUSINESS LAN Noort Ugever ‘As a matter of foc, these natural persons are the compary. This also ‘explains wry In most legal systems the liabily ofthese natural persons is unlimited. After all, when that which you are goes bankrupt, you go bankrupt. ‘An incorporated company is composed of shares owed by natural or legal persons but has its on egal identity. People or other companies may own an incorporated company by obtaining shares. However, the owned compary has a legal identity of ts own. Tis ‘explains why in mast legal systems ‘he labllty ofthe owners is limited. {After al, wen that which you awn gies bankrupt, you only lose that which {you own, but nothing more Itis important to note here that due to the historical development of compary la ts quite normal thatthe applicable rules on unincorporated companies can be found elsewhere than the rules on incorporated ‘companies. Unincorporated comparies exist as long as trade exists, and have always been regulated in the sahere of normal contract laws. For instance, a general partnership is usually founded on a private agreement between two or mare partners who share their resources to do business. ‘Such rules usualy have @ long history, and its origin may even date back to the Roman Empire. n contrast, ico porated companies are a product of the incustalrevoltion, and have emerged since the adoption ofthe French Commercial Cade in 4807. The need was fet to create legal constructions to protec imestors and society aganst the consequences of bankrupty of ‘such big undertakings (Hopt, 2006) 14.1.4 Unincorporated companies ‘The main characteristic feature of an unincorporated compar, a8 stated ‘above is thatthe company is ne separate legal entity. Instead, the owners ‘ate the company. As @ result of that they are personaly ible for any company debt. Personal ably means thatthe individuals of which the company is ‘composed are unveatietealyleble for any company debts This means that ably reaches bejond the scope of what Is invested in the company, and may affect al private means of the members ofthe company. ‘Sole proprietorship ‘The simplest form of an unincorporeted compary is that ofa sole proprietorship, also known as a soe trader, A sole proprietorship is a tgal fom of an unincorporated business that Is composed of one individal who is personally liable forthe company’s debts In genera, its mostly relatively easy to setup a sole proprietorship. In ‘comparison to other legal forms, there are ony a few prerequisites to register this legal form, if there are ary tal. For instance, in Sti Lanka, one has register a sole proprietorship at a Provincial Counc! inthe Registrar of Business Names, but only ifthe name of the business is diferent than the name ofthe ower. needs to be‘© noorahatutgevers bv comeany LAN 298 noted here however that only a citizen of Si Lanka may set up a le Proprietorship: a forelgner is obliged to incorpoate his business. ‘The added value ofthis typ of business is tha there are haraly any {ormaties involved, and I's therefore quite easy to set up the business. In ‘terms of taxation, the business is not considered asa separate legal entity, ‘and therefore al income earned by the business Is considered income tax, ‘and deat with according) In other words: there is no separate tax ‘obigation on behalf ofthe business. ‘The disadvantage Is tht the owner ofthe oneran company i ul liable for the business, and alts debs. This ibility may also involve the property and ‘means ofthe business omer’ family members under certain creumstances, ‘This is especialy the caso when the owner is marred to someone in fll patrimony: the property and means of the couple ae considered as one, ‘which may be used to sete the business debts, An example of this can be found in the case ‘Weding Pie Store (example 11.1). ‘The fact that a business isa sole proprietorship does not mean that the business may ony be run by one Individual. The legal form only sa something about the ownership, and not necessarily about employment. ‘This means that a sole proprietorship may hire employees. In practise, the ‘amount of employees wil be limited, since it wit masty be more convenient te choose another legal form for the company when the business grows. A very common phenomenon in the Small and Medium Enterprise world is ‘that a husband or wife owns a sole proprietorship and hires a family ‘member to work on behalf ofthe compary, Inthe U.S.A. itis even possible 10.cooWm the business ina socalled "husbandand wie sole proprietorship’ Technically the husband and wife can choose tc be 8 qualified joint venture. ‘Te consequence s thatthe Intemational Revenue Service (the Federal tax agency) wll not consider the couple as a partnership, but as two sole traders (Joint Committee on Taxation, 2007). Propet Wedding Pio Store to dio for ‘Oni runs her wn sole proprietorship called Wedding Pie Store, and uses the slogan ‘to cle for. She manly sells homemade wedding ples. Unfortunate, ‘one day she uses the wrong ingredients, and instoad of mik she puts yanige in one of herpes. As a result, the groom ofthe wedding des homo in nt of his very recent wife, The relatives ofthe groom sue ‘Wedking Pie Store’ and want an enormous damage compensation forthe loss of thet family member. In cour, the larger part ofthe claimed sum is awarded, and Wedding Ple ‘Store has to pay 6.5 blion Indian rupee. The means Oni allocated for her ‘company are insufficient to pay this sum. Therelore, she has to sel her car, ‘and most of her nonessential personal belongings such as Jewellery, ICT ‘and muttimesia tools, and some furniture to payoff the debt, Furthermore, ‘since she Is maid in full patrimony also her husband's car and expensive watches are sold to settle the debt. Please note that this legal form fs In some legal ystems also refered to as 2 ‘one man business (fo instance in the Netherlands). However, the same204 PARTS Pane ausINess Law ‘© Nooranat Ungerer by ‘term is used In other legal systems to refer to private limited company ‘owned by one shareholder (or instace Inde). Therefore, inthis book we avoid using this name. ‘The partnership ‘One could choose to combine their strength in terms of funding, knowhow, ‘talent and capabilties. Tis ean be done by establishing a partnership. [A partnership is a legal form of an unincorporated business that is ‘composed of more than one indvidual who ae personally lable for ‘the company’s debts. For instance, the Russian Chil Code stipulates that: “Ine patcpants ofthe general partrership shall ony bes he subsidy responsibit bythe parmershipsobigatons wih tor entre propor (Coapter 4, Arle 75 Cl Code of te Russian Federation) Usually, there are lifferent types of aartnerships. In South Korea law, we 00 @ perfect example of the most commen types of partnership, First, there isthe general partnership, called the Hapmyung Hoes, ‘This legal form is used for mecium and small companies in which the partners play 8 very ache role inthe organization of the company. In South Korea, the nature ofthe business Is not relevant: al kinés of actos can be conducted jointly through a Hapryung Hoesa, whether itis 8 coopertion amongst professionals, ofa collaboration to sel products. In some legal systems however, a dstnetion is made between partnerships for professionals (such as lawyers, nedcal experts, financial advisors ttcetera) and commercial activites. Tis the case in Germany, where there 's adstinction netween a professional partnership (Partnerschafgesellschat) ‘and a commercial partnership (fens Handelsgeselschaft) "Now, back tothe Korean Hapyung Hoes. The relation between the partners is usualy regulated by a partnership contac. The Korean Commercial Act sical stipulates what the rules ae when things are not regulated in such a contract. Most importantly al parte’s are authorized to manage the company, ‘and represent the compary external, Ina partnership contract however, this ‘authory canbe limited to some ofthe partners, andthe scope of thelr ‘authorty may be specified, For instance, as we can see in the case ‘Dress your Wedding, the partnrs may agyee on a threshold of money that each partner may spend on behalf ofthe company or exclusively restct company representation to ane or more partners in case of certain legal actions. Please note however that this partrership contract is mainly a contact that ‘governs the relation between the pértners. Extemal parties ae not bothered ‘00 much by its content. When one of the partners exceeds its competency ‘and this canna reasonably be known by the third party, the legal Consequences wil be borne by all the partners. This phenomenon has been fiscussed in chapter 8 in the contest of astensibie author. In tis light, the Korean Commercial Act stipulates that any restriction placed on the ‘autho of a partner may not be asserted agains a third person acting in 000 ath (At, 208). [nthe case ofthe wedding dress company (example 112.2), in situation 4, this means that al partners are lable for the purchasenoord ager Conway 298 ‘ofthe Porsche, even though Javera violated the partnership contract. Tis ‘ability is towards the third party selng the Porsche. However, ater the ‘matter with the tir party Is settled, could very wel be that Fansisoa and Constanza sue Javiera for breaching the partne'ship contact, In case of damage cause by one of the partners on behaif ofthe company to. third party, all partners are joint lable (Ar. 210 Commercial Act of Korea). This means thatthe thi party who sufers the damage may clam the full damage compensation from any ofthe partners. The same goes for the settlement of a debt on behalf ofthe company. The suffering party therefore does not have to claim equal parts ofthe sum fom the partners ‘one by one, but may just demand payment ofthe fll some by any ofthe partners. When the company assets prove to be inadequate to pay the ‘damage compensation or the debt, the partners are personally liable (Ar. 242 Commercial Act of Korea), and thelr private means could be used to pay the damage compensation or det. Inthe oa ofthe wedding cress ‘Sompars, this means that in situation 2, the three partners wil have to use thee private means to settle the deb, Figure 14.4 shows a schematic overview ofa general partnership eune 21.1 A goneral partnership Partner 1.BUSINESS LAW Noordnat Ungerer by Dress your wedding, Fransisca, Constanza and Javora area general partnership ‘Dress your Wedding”. They sel chic but affordable madern wedding dresses. Business Is good and therefore they decide tc invest n thelr own real estate in Valparaiso. Since then, business is sven better than before. The general partnership is established ina partership contract, Several aspects of ‘ther business are regulated in this contract. For instance, the partners are not allowed to spend more than 680.000 Chilean pesos por week on behalf the compary without the consentof the other partners. Furthermore, Fransisca and Constanza vest 200 millon Clean pesos each, while Javiera invests her knowhow instesi of money. After all she knows. everyting about fashion, and has avery strong network inthe wedding seene, Also, the partners agree that due to her skis and knowhow, only Javiera may represent the company in case of purchasing wedding dresses. Furthermore tis agreed thatthe partners get a salary of 14.000 pesos per ‘month when the net profit exceeds $2.000 Pesos. Ifthe profit i lower, his ‘sum will be cvided by the three parners in equal proportion. When the ofits higher, will be used for new investments. Situation 2 ‘One day, vies has a mood swing and impulsively buys a brand new Porsche on behalf ofthe compary. "he costs are 475 milion Chilean ‘e508, The Porsche sel is unaware ofthe partnership contract, and teannot reasonably know that Javier's representation author is limited. Situation 2 ‘The ladies dd not pay one of thelr supplies, not even after a formal notice ‘of breach of contract. The dresses that were supplied however have all been sold by ‘Dress your Wedding’. The debt is 80 milion Chilean Peso’. ‘The company unfortunately does net have enough means to pay this debt. Second, there isthe limited partnership, called the Hapja Hoesa. In fact, the same rules apply a in general partnership, However, next to ‘the normal partners, there may be partners with imitedliabilly. These partners are not involved in the management of the business, but merely Contribute financially n essence, this legal form is @ general partnership with one or more Investors. The ‘noma’ partners who run the business are personally able, but the investors enjay limited lial. In fue 12.2 you may find schematic overview ofa limited partnership.(© Noordhot tgeves coupuer aw 297 | = 11.1.2 Incorporated companies ‘An incorporated company as several main characteristics. Cahn & Donald (2024) sings ne main ears: ‘A company is legal personality, and has therefore the same rights and duties ag a natural person. + There I limited liabilty This means thatthe shareholders may atthe ‘most lose their Investment in the company in case of bankruptcy, nothing ‘more. Tis also means thatthe board of cretors in pineple is not lable on behalf of te company This Is the reason why an incorporated company is also reterted to as a limited company. + There are transferable shares: shareholders may sell their share Inthe company to someone ese Tks ea be In waa Genser or Ue Stock exchange. + There isa centralized boar of directors, who govern the company on bhai ofthe shareholders. + The owmership ofthe company is shared amongst the shareholers, in proportion to the value of the share. eure 212 A limited partnership ‘wo aspects here are of particular importance. Fist, one may separete ‘ownership from managing the company. This is done in case of botn the pvate end public imited companies. In contrast, as we have seen above, {his is not the case in a limited partnership, a general partnership ara sole Proprietorship. Aimed compary hes its own managing board that operates separately snsssnant from ther shareholders, Please note that this ie mainly the legal stucture, "8 In which thee is a group of owners (shareholders) that appoint on their bea @ board of directors (a management) Ths does nt necessarily ‘mean that the shareholders may net appoint thamselves as managing board. Shareholders appointing themsehes as management board is, due to the private nature ofthe company, much moe common in case of &USINESS LAW Noordhoff Utgever bu Private limited company, Incase of « public limited company itis rather unusual, and sometimes even undesirable. After ll a shareholder in the public domain will usualy hold shares of more than one compary. Being @ member ofthe board of one of their may cause a conflict of interest ‘Second, the financing ofthe company is done through shareholders. One ‘may mit the fnancing to interna stareholders (in case of the private limited compary) or raise mary threugh public financing (a publi inites ‘compar. The essential feature ofa private limited company Is thatthe shares are privately onned by a particular group of shareholders. This means that shares are not funded ty pubile means, but by private means. In contrast, a public limited company Is financed by publle means. Actual, itis a lgal form of ‘crowafunding’ in which anyone who would be interested ‘may buy a share ofthe compary ant consequertially become a shareholder ‘This explains the name ‘public imitee company. This ‘crowatunding’ can be facilitated by using a stock exchange as a forum through which the shares can be sold and bought by anyone who Is interested, Please note that only a small percentage of publi inited companies soll their shares at a stock exchange. However, since it are usualy the bigger multinationals who do 80, ‘the value oftheir shares anc the petormance of our economies are usually inextricably linked, and therefore an indicator of economic growth (or the posite), vate limited company ‘private limited company isin somelegal systems also refered to a8 @ limited labilty company. An example of this is South Korea, where the Korean ame of a limited ably company is used the Yuhan Hoesa. Another example is the Spanish the Sociedad de Responsabildad Limitada (S.R.L). In Korea, the Yuan Hossa is understood as a hybrid company frm that finds mide ground between a partership anda limited compary. This, legal form nas the characteristics ofa partnership, but the partners are limited able, as in aliites compar. The owners in Yuhan Hoesa are inolved in the dally affairs of the company, and run the business acttey. Furthermore, the shares of the partners cannot be transfered without the consent of at least 75 per cent Of tho other partners, and there can only be a maximum of 60 partners. These are important ciferences compared to the rules for a public limited company, and contribute to uphold te character of a small or medium partnership. This logal form ofa conpany is often used incase ofa family business. In case of the Spanish Sociedad de Responsabilidad Limitada(S.R.L), the shareholders are not necessary imolved inthe dally affairs ofthe ‘company. They appoint a management board, which could consist of atleast fone director, wth a masimum of 12 90ard members. Just Ike the Korean Yonan Hoesa, there ae significant legal restraints to transfer shares of a Sociedad de Responsablidad Liniteda to another shareholder. Therefor, ‘also this form is suitable for small and medium enterprises ora family business. However, the S.F.Lis als) sometimes used as a legal form by foreign entrepreneurs. The reason forthe latter is thatthe lel requirements to set op a SL. are not 3s complex asthe requirements to set up a public ited company Forinstance, the minimum capital toNoort ier conPawr Lay 299 ‘eglster this business form ie 3,000 euros. To ester a public mites company, 60.000 euros is required (of which 25 percent must be avaliable Immediately at the moment of registering. Figure 14.3 shows a schematic overview of a pate limited company. ‘aune 3.3 A private limited company Public limited company ' public limited compary isthe legal frm used for bigger companies which ‘are financed through public means. The shareholders of such a company {ould be anyone, or any organization, There are differences per region as to what kind of shareholders a compary has. Fr instance in the U.S.A. and the UK, shares are oaned by individuals, whereas inthe European mainiand itis more common that banks, inestment funds or other organizations own ‘8 compar In Inca, Its mare common that famiies own public limited Companies, wherein China the state plays @ more fundamental role as a ‘major shareholder (Crane and Matten, 2015). A public limited compary may sel their shares on stock exchanges, but itis usually not required to do so.Sota ausmness LAW © Noordhof gers The largest multinationals ofcourse do sell their shares at stock exchanges, Examples of public imited companies ae the Korean Chusk Hoes and the ‘Spanish Socledd Anénima. In the Korean Chusik Hoesa we sea very clear distinction between ‘management and ownership. The shareholders are not involved inthe day to day decisionmaking processes, and have appointed a management board on ther behaif to do so. Most, the general ideas, principles and ‘ules that apply within the company ae written down in founding ocument, usually referred to as ‘articles of incorporation. The exact felationship between the shareholders and management board is mostly ‘specified inthis document. In general however, we can say thatthe shareholders can exercise influence through ther power to appoint or dismiss @ management board, and tough their general meetings in which the shareholders have a sayin the general, fundamental ection of the ‘company. During the so-called ‘ordinary meetings! the shareholders adopt the annual fnaneial statement and make decisions about thelr share, such {as the payment of dvicend, othe irerease of the amount of shares, During the ‘extraordinary meetings, the shareholders are authorized to discuss watever is in the articles of cooperation, This might lead ta an amendment to these aricles. twill be not surprising that these kinds of decisions do not relate tothe day to day functioning ofthe company, but rather relate to ‘the more general rection, In the context ofa public limited company It isnot unusual to appoint 3 supervisory body that auclts the performance of the board of directors on behalf ofthe shareholders. After ll the bgger the erganization, the more diverse the composition ofthe shareholders may be. is than not always possible to regulary check whether he management acts inthe interest of the shareholders, inline wth the aicles of incorporation. To this end, Korean law requires each public ited company to appolnt atleast one statutory auttor (Park, 2011). This autor checks the performance ofthe ‘management and reports tothe shareholder. n ls capacty as statutory ‘uate may attena board meetirgs and request tnat tne management reports tothe auditor about certain decisions. The Spanish Spanish Sociedad Andaimashows us that one will need to be serious to estabish this kind of @ business. A minimum captal of 60.000 turos is required. However, it needs tobe noted here that ony 25 percent (ofthis amount needs tobe avalabe at the moment of incorporation. Also here, the shareholders exereise ther power through ordinary and ‘exvaordinary meetings, comparable to the Chusik Hoesa. To make sure that Gecisions are indeed in order to adont 2 decision, atleast 25 per cent of the shareholders should participate in the voting. When the decision livolves an amencment to the articles of incorporation however, 50 per cont ‘should vate In the later case, two thirds of the attending shareholders ‘Should agree on the amendment. Figure 11.4 shows a schematic overview ofa publ limited company.( Noordoff User bv compan aw ‘poume 144 A puble limited company 301 ‘Superson bose C= Boas of rectors [| Stale 11.1.3 Special legal forms ‘Some legal forms ofa business do not fall under the ‘usual’ categories as iscussed in section 11.1, but re worthwhile exploring. In this section ‘therefore we discuss the foundation, the company limited by guarentee, and ‘the Secietas Europaea and concems. Foundation Sometimes one would need a legal form in the pursult of a social goal ‘Amongst others, 2 foundation could be used. The concept ofa foundation has efferent meanings throughout te works Ir Norway fo instance, ‘foundation is composed of predominantly financial means that ae to be used fora defined (social) purpose. These means usually result rom gits ‘and donations, and are controlled by the foundation. The foundation as ‘such does not have any shareholders, as ina limited company, but is most Certainly a separate legal personaly Asa resut, the controle ofthe aundation are nat personaly able for ary possible debts. Please note, that itis not forbidden to make prof through a foundation. However, given ‘the fact that a foundation has no shareholder and is funded by donations ‘and git, the main motive will mostly be to reakze a socal goal In Nonway, '2 foundation must be registered inthe Foundaton Register, and are ‘supervised and controled by the Norwegian Foundation Authority (Foundation Act of Norway, 2001), The economic power of foundations ‘Should not be underestimated. tis not unusua that banks of ‘multinationals invest significantly ina founcaticn as a part of thelr ‘corporate socal responsiblity programme. Nes to that, massive donations by private incviduals to tackle certain problem or find a cue fora disease results in huge organizations, In size and management comparable to & ‘multinational company.usIess Law onosrdnot Uigere by ‘Company limited by guarantee ‘variation to @ limited company is thecompary limited by guarantee. In ‘essenca, the shareholders do not necessarily rvest inthe compary inthe ‘orm of stocks, but instead promise fo be liable fora certain amount of ‘money n case of bankruptcy This cempany form is mostly used for companies outside the Wading profession, and are moce likly to be used in tase of non-profit organizations. Exanpls are char organisation, schools and heath care institutions (Minkang, 2006). in that sense, the goal of @ compary limited by guarantee might be the same ofthat of foundation, This company form can ke found amongst others in Great Britain, Hong Kong and Nigeria, Societas Europaca In Directo No 2157/2001 of & October 2001, the European legislature ‘created the possibly to establish European puoi limited company: the ‘Societas Europeae(SE}. The main idea s that companies in different legal systems can run their afairs under the wings of ane single European ‘company form, The SE can be installed in four situations (Ar. 2, Directive 2457/2001) {+ An existing public limited compary with subsidiary establishment in ‘another Member State ofthe European Union. 1+ Two or more existing limited comganies who want to merge into one legal entity: the SE + Two or moce puble limited companies in diferent Member Statos ofthe European Union who wish to enter In joint venture, The joint venture is. then restores as a SE. + Tar nr moze limited companies wno establish a holding company fo their national companies inthe form of an SE. ‘To sot up a Societas Europese, a minimum capital of 120.000 euros is required (Nt. 4, Directive 2157/20Ct), and the legal structured is entirely _Eoverned by European law, This unique legal form can be used to form European concerns amongst companies without the necessity to overcome: legal bartiers between counties. Jon venture ‘Sometimes, two or more businesses want to join the forces for a particular project. Usually joint venture Isa temporary cooperation between ‘companies to share a certain expertse ar resources in the expectation of joint prof (king, 2013). Joint ventures can be used for resesrch purposes, for Instance when ‘several automobile producers develop @ new engine block together, or when ‘2 pharmaceutical company wants tomake Use of another company’s patent in order to develop a new medicine. joint venture may also be used to do business abroad without the need to setup a subsidy establishment in ‘the other country. Instead, a company could set up a joint venture with an ‘existing company in that county In sxample 11.3, we see a joint venture between a cotfee producer and a sevice caterer. ‘Te participating companies could use a legal form to form the joint venture, which wil most kel be a limited company, in which the parelpating companies own the shares.However, tis not alvays necessary to create an entie new legal entity for ‘such an adventure. In that case, the involved companies might sign ajant venture agreement. n essence, the Joining companies keep their own egal form, an allocate part of their resources er knowhow to contribute to the joint venture in compliance with the joint venture agreement. In the ‘agreement, tis regulated what resources wil be allocated tothe joint venture, now the prof wil be divided, how the joint venture wil be ‘managed, and how the settlement of possible debts will be arranged. The Joint venture in itself is then nota legal form, but an agreement between ‘wo legal forms. Nespresso Café Combining coffe & catering In 2015, Nespresso set up a join venture with food caterer D0&C9 in Vienna. Through tis int venture, both companies want to combine the high quality coffee produced by Nespresso wit the operational expertise and knowhow in the food service business Industry by DO&CO. in essence, Nespresso delivers the product, and DOSCO is responsible forthe catering in the so-called ‘Nespresso Café’ (Nestle, 2015). concerns [Ashareholde is not necessafly a natural persan, but could also be another ‘company, a bank, the state or an investment fund. A a result, companies an own companies, especialy in the case of rublc limited companies. A ‘company owning more companies 's most refrred to as a holding company, The chain of companies that relate te one another in terms of ‘ownership is called a concer. For instance, the Outen company Ahold is a holding compary for famous brands such a Alzert He, Bal.com, Etos and Gall & Gall. each case, Ahold owns @ majoiy of the shares ofthe listed companies, ae we can eee in figure 41.6, eure at. A concern =e] [lm] [le] feearr 3 eUSIESS LA ‘eNooranttugevers be Regulatory competition Legal systems have diferent grades of flexbilty in compary aw. In case of ‘th larger public limited companies 1 may make a ference in which ‘county the company is registered, Within the United States of America, for instance, publ inited companies have registered en masse in the Stato Delaware, since this state offers the most flexible company laws, a8 we may 00 in example 24.4 Aso regarcing taxation, there might be regulatory competition. It is no secret thatthe Netheriands is tax haven for mary mulnationals, a8 We ‘may see inthe news item, This attracts lt of companies who are registered inthe Netherlands, but donot necessarily employ business, ‘ative in that country. Such companies are also called ‘malox ‘companies’. Some consultancy companies even specialize in advising \wealtry people or companies on how to use legal constructions in other Courtries to make use of more flex tax laws In April 2026, the Panemese consultancy company Mossack Fonseca made the worldwide headlines by accidental leaking the names of ter clients: the so-called Panama Papers, Ths resulted ina gbbal discussion on the ethics of ‘tax ‘avoidance’. While in essence, these kinds of constructions are not necessary ilega; they mast certainy are morally questionable. Delaware companies In the U.S., the compary law inthe State of Delaware has been one of the ‘most attractive aw systoms for business for a long time. Since the talstence of limited companies, thers has been a certain competion ‘amongst the U.S, States in atvacting the most companies by adopting ‘company laws that ae favourabe to businesses. This competition seems to bbe won by Delaware. For companies tere are four reasons to rogister as Delaware compary: easy registering, flexible and advanced laws, @ ‘specialized court system, and the brad application of Delaware law cleewhece in the US. First ts relatively easy to register a foreign company in tho state. After al: "hay person, partnership, association or corporation singly or joy with ‘others, and without regard to such parson’ or enity’s residence, domicile ‘or state of incorporation, may incorporate or organize a corporation under this chapter (Section 101, General Corporation Lan’. ‘To establish a company, one only needs a registered office aderess and a reglstered agent i that stato, but does not necessary nave to do business in Delaware (Section 131-132 Genetal Corporation Law). Asa result, more ‘than 50 per cent of all public limited companies inthe United States are registered in Delaware (State of Delaware, Department of Stat, 2015). ‘Second, in Delaware, company law is known tobe ofa high ously, ‘advanced, and flexible (Black, 2007), The Legislation focuses on reducing Teeulations that st some point intrfre in ding business on the one hand, ‘and promotes regulations that facilitate smooth business on the other For‘© Noordoff ungeversbv Compa vay 305, Instance, under Article 102 (7) ofthe Delaware Corperation Law, a ‘compary may mit or restrict ably oftheir managers. This was @ direct response to the fect that in the absence of such a rule, businesses were confronted with high costs for liability insurances for thelr management. Its also noteworthy to mention that ts an ivormal tradition in Delvare ‘thatthe legsiatre will consult the Corporatior Law Section ofthe Delanare Bar Associaton before adopting ary company fm This means that those layers that work daly with company legislation can comment and advise on new company laws. ‘Third, the Delaware Court systom is famous for its Court of Chancery, having |risccton in company law meters. This courthas produced very detaled ‘and specialized case law on almost all provisiens of Delaware company legislation. As aresut, the court is atthe fore¥ont of ving erection tothe development of U.S. company ia Unlike most other courts in Delawre, this Courts a court of equity, meaning that it delves judgement without 2 jury but with trained andl ecucted judges only (wn courts. delaware.gov, 2018), Fourth, 38 a resuit ofthe fact that a malory ofthe U.S. based companies | now a Delaware company, most other U.S. Sates have incorporated the Delaware company laws in ther own legal system. This means that in practice, Delaware compary law is new applied inthe entire United States (Cann & Donald, 2010), ‘ux EcoNoMI6T, 10 ocroRER 2015, Corporate tax avoidance Sul stipping the net avoidance by big corporations. The three Onaroundaboutnear oneofthemain countries attract a huge amount of foreign roads into Amsterdam ssa drab office directinvestment (se char), but much of block which ishometo hundredsof _eflows back ou again, withthe money ‘multinaionals-on paper Interwust the ultimately financing factory-building and firm whose ag luters outside, provides the like in another part ofthe world. By registration fr local subsidiaries ofthe big, routing such investments via taxhavens, companies, and ther ancillary services. multinationals ean save ona varety of Butmany ofthose multinationalshavee taxes, perfectly legally. The havens say ‘minimal physical presence there. that all they are doing is providing a G3 ‘business flendly climate. But erties, ‘The Netherlands, and otherlow-tax including the United States Senate and hhavens such as ieland and Laxembourg, the European Commission, say they are hhaveatracted much criticism fom other undermining the global taxbase and countries for thelegal loopholes they helping big firms to avo paying thelr flr Teave open to encourage sch ax share.06 FARTS cD usINESs Law © Noord Utgeve be Foreign companies When someone wants to run a businass in another court, the entrepreneur wll nt always have the luxury to choose between all the legal forms of a compary, As we have seen above, the aw of Sri Lanka for Instance does nat alow a foreigner to run an unincorporated form of a business. When a foreigner wants to setup a new enterprise in Si Lanka it ‘shouldbe an incorporated business Central Bank of Sri Lank, 2042). In general, therefore, ft will not be surprising that foreign entrepreneurs wil ‘mostly use an incorporated form to an a business abroad. ‘Another issue arses when an existing company wants todo business in sanotner country. Usual, egal systems also regulate now foreign businesses may conduct economie atts in their country. To stck to the example of Sri Lanka: a freien compary may choose to set up an establishment in Sri Lanka. This is dane to register as a socalled “overseas Company. Another options to limit your business activities by Going business without a permanent physical establishment, but being, represented in Si Lanka to faciitate business. This i then called an ‘offshore company’. Bath must be ircorporated company forms.© Noordott unger bv Summary » One can run a business in an unincorporated o incorporated legal form. + An unincorporated company is composes of natural persons and has ro separate legal identity. + An incorporated company is composed of shares owmed by natural or legal persons but has its own legal identity, » In unincorporated logal forms, the individuals of which the company is ‘composed are unrestctedy lable forthe compary debts. Tis is called personal abil. >» The simplest form of an unincorporated company is that of a sole proprietorship, also known as a soe trader. ‘+ A sole proprietorship is legal form of ar unincorporated business that Is composed of one individual who is personally lable forthe company’s debts ‘+ Usually there are only few prerequisites to setup a sole proprietorship. + The business isnot considered as a separate legal entity, and therefore all income earned by the business Is considered income tx ‘+ the entrepreneur running a sole proprietashia may hire employees. » A partnership is a legal form of an unincorporated business that is ‘composed of moe than one individual personally lable forthe ‘companys debs. > There are afferent types of partnerships: the general partnership and the limited partnership > In Some toga systems, the general partnership Is subdivided in a professional and a commercial partnership + In.a genera partnership, the partners play an active role Inthe coxganization ofthe company. +The intemal affairs ofa partnership are vsually regulated in & partnership contract. This includes rues af spending and representation on behalf ofthe partners. + Incase of damage or debt, ll partners are joint lable. > Ina limited partnership, the same rules appy as ina general partnership. However, next tothe normal partner, there may be partners ‘wth limited labily. These partners are not ivoWed inthe management ofthe company,parr 3 BUSINESS LAW Noort Ungerer be An incorporated compeny has five main features: + The company is a logal personaly. + There are vansterable shares. 1 There is centralized board of directors. {+ The ownership of the company is shared amongst the shareholders, in proportion to the value ofthe share. > Ina priate limited company, the shares are not easly tansferrable, In public limites company, the shares are publicly transferrable. This ‘ould be done at stock exchanger. > A foundation is used as a loga fom to realize a social goa that does not necessarily relate to prof » company limited by guarantee can also be used for socal purposes the shareholders agree to be liabk fora certain sum in case of bankruptcy, > The Societas Europeae Is @ European public imited company. » loin venture is a temporary cocperation between companies to share a Certain expertise or resources in the expectation of joint profit > Companies can own other companies, and establish a concern of ‘companies, > Different grades of tex In company law leads to regulatory competion. > When an entrepreneur wants to set up a business in another country, he ‘may have to actin compliance wit ational rules and regulations. ‘Most likely the entrepreneur wil have to use an Incorporated legal frm.oorsotf Utgever bu 309 Practice questions Open questions “MinJun and Seo-lun are normal partners in @ Hapja Hoesa (limited partnership), named ‘| nongdam Ionia’. Ther rch aunt, JoWoo, promises to Invest 43.000 South Korean Won (SKW) in ther company. She does not participate in any management decisions however, and merely wants @ return on investment. n their artnership contact, i stipulated that MinJun and See-un have to agree on all purchases that excaed the ‘threshold of 2.000 SKU. One day, Seo-1un purchases @ new cleaning machine on behalf of" nongdam lida’ fr @ sum of 3.000 SKW, The selling company does however never receive ay payment. The sales manager decides to visit the establishment of “| nongdam lonida’ and is received by MinJun. As It appears, MinJun was never consulted forthe purchase ofthe cleaning devee, and has no idea. The manager of the ‘eling party demands immediete payment from Min Jun, I need be out of his own private assets, MinJun is not amused, and is wondering what todo, To what extant can the sales anager indeed demand MinJun to pay the sum? Please explain, ‘Would it make any difference ifthe sales manager was aware ofthe partnership agreement of I nongdam ibn"? Bad tings are coming for nengdam nid. ft seems thatthe company is notable to pay ther creditors erymore. Asa result, the company is declared bankrupt To what extent are the partners liable forthe debt? Please explain the main dfererces between a private and public limited company? Essay question ‘As discussed In the chapter, regulatory competition may lead tothe Phenomenon that companies ty to register in the country withthe most Texble or favourable rules. Results aro the socalled ‘Delaware compa’ and the ‘panama papers’. Write an essay In which you deserbe theuses LAW ‘eNoorshot genes by possible postive and negative effect ofthis, and conclude with your own pinion on the matter ‘Multiple choice questions: Running an unincorporated company leads to 2 personal lability limited fabity fault based lisilty Which option is incorrect? [A sole proprietorship ‘2 has no employees 'b does usualy not have a separate obligation to pay tax ‘© can usually not he registered by foreigner ‘Which ofthe following companies wil nt be able to set up a Societas Europeae? ‘An existing pubic inited company with subsidiary establishment in anather Member State ofthe Eurepean Union b Two oF more private limited compen in one Member State ofthe European Union who want to do business In another Member Stato {© Two oF more public limited companies in diferent Member States ofthe European Union wh which to enter in a jint venture | foundation ‘8 may not make profit 'b does not have a prof aim {© has a primary goal to make profit