Demystifying European Company Law

Demystifying European Company Law

Demystifying the intricate web of European Company Law has been a persistent challenge for businesses and legal professionals alike. Navigating the complex regulations and requirements across various European jurisdictions demands comprehensive expertise and a nuanced understanding of regional nuances. In an effort to provide clarity and actionable insights, the legal experts at SpotLegal.io have compiled a comprehensive guide unraveling the intricacies of European Company Law. This informative piece aims to decode the legal landscape, shedding light on crucial concepts, compliance standards, and essential considerations for businesses operating within the European Union. Explore this expertly crafted resource to gain a deeper understanding of the legal framework governing European companies and empower your business with the necessary knowledge for navigating this dynamic and evolving environment.

According to data provided by the EU (source), there are currently around 24 million companies in the EU, of which approximately 80% are limited liability companies and around 98-99% of limited liability companies are small and medium-sized enterprises (SMEs).

Companies are a legal creation of our society, that enables us to constitute a separate legal entity, “owned” by its founders and/or shareholders, with its own legal existence, separate from that of its shareholders, and it is the dominant business structure in capitalist economies because of its undisputed advantages.

European Company Law

  1. Limited liability

In principle, the shareholders of a company cannot be held personally liable for the activities of the company.

So, if you build a software that crushes the users computers , the company will be liable towards the users. If the company goes bankrupt due to the users’ claims, then the investors in the company are protected (and would only lose the money they invested in the company).

2. Defined ownership rules

An ownership interest in a company is represented through shares. Shares carry legal rights prescribed by law, which provide certainty to their holders, investors and other stakeholders in the company. Correlatively, shares entail obligations for their holders.

Companies can issue more shares to raise money and secure the funding of the business going forward.

Companies continue to exist after an owner dies or goes bankrupt, shares can be passed down to heirs, or distributed to creditors, according to the law, the articles or by-laws of the company, and according to separate private arrangements.

3. Framework for investing in your business

Companies are generally taxed at a lower rate than individuals, resulting in higher retained earnings for investment in the business.

There are also challenges founders and shareholders face with companies, and these typically relate to:

  • How to get money out of the company
  • The inability to use losses in the company to offset personal income
  • The costs related to forming, operating and maintaining a company

However, if you’ve founded or are in the process of formation of a company and are a startup that is aiming to grow fast & efficiently, it makes sense to run your business as a company since:

  • You enjoy legal protection – if your business is sued, you, your co-founders will be protected from personal liability
  • If fundraising is your strategy, your investors will expect that you formed a company and that you present your company formation documents for investigation (due diligence)
  • You avoid the need for any tax planning for moving any assets into a company at a later stage (transfer pricing, related-party transactions)
  • The intellectual property your business creates (all your employees, team members, including founders) will be owned by your company

In conclusion, your 1st step to become a market leader is forming a company. A limited liability company.

Leveraging Your Intellectual Property

Form your company as soon as possible, even before having a prototype, a minimum viable product, or a go-to-market strategy. The sooner, the better. All the assets that you will be creating alone or together with the team will need to be within the ownership of the company and to benefit from legal protection as such.

Moreover, in all EU jurisdictions, conducting economic activities requires authorization with a trade registry (or courts) and registration for tax purposes.

To form a company within the EU is now simple. Let’s take the example of forming a limited liability company in Romania. You need as little as 1 RON, the registration takes 3 business days and you can do everything remotely/online.

The choice of where to form and register a company is up to you, due to the guaranteed fundamental freedoms within the EU (freedom of movement of persons, services and capital, freedom of establishment), but it will be influenced by where your business will have its head office or main registered office.

Corporate governance

Corporate governance deals with how does a company effectively function? How does it make decisions?

Improving corporate governance

The basic structure of a company is:

  • Founders and shareholders
  • Directors – who may or may not constitute a Board
  • Officers – who perform the day-to-day management and operations of the company
  • but also, Employees
  • Accountants and auditors
  • Customers and suppliers
  • Society, governments, the environment

As a founder, mastering CG is the next level in your market leadership, understanding, organizing this part, leveraging it, and ultimately leading confidently your company.

CG essentially is the way in which a company manages the relationships with and between its directors, management, shareholders, auditors, and other stakeholders. In other words, CG is the way in which a company behaves.

Good CG creates a framework for building long-term trust between the company and its stakeholders. Bad CG can lead to failure of the company, and in extreme circumstances to criminal charges against members of the management.

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