Legal requirements to create a company Fiche ARTCADEMY

Legal requirements to create a company

BL_5

Title: Legal requirements to create a company

Keywords: Legal forms, licenses, formalities, taxes

Author: AE

Languages: English

Objectives/goals:

To analyse what are the main legal requirements to create your company. To review general formalities involved, where you can get assistance and updated information at European Level.

Descripcion:

The European Union is aware of the difficulties across all member states when entrepreneurs wish to create their companies. Recent Commission Communications and strategies have unveiled all these mismatches such as regulatory burdens that entrepreneurs must face from the beginning of their project, red tape that affect directly to microenterprises in their daily operations and so on. Member states have been invited amid other actions to “reduce time for licensing and other authorisations necessary to start a business to one month”. Progress has been made in some countries, but more efforts need to be put in place to achieve this goal.

As important as fulfilling all legal requirements is the strategic decision on how your idea is going to see the light in the market, this is, is going to be legally constituted. Several alternatives are at your disposal, from Limited Company to sole trader alongside social economy. We will deal with the factors you might take into consideration when selecting your option.

One of this option is, at European Level, the European Company, introduced in 2004 that aims to unleash the potential of the Single Market for companies with activity in more than one EU country. We will review its main tenets so that you get acquainted with this type of company.

Finally, please be aware that in most of the issues concerning legal requirements for the creation of a company and therefore in this training fiche, rules do not apply to all member states. In fact, current regulation related to this topic is not harmonised. Thus, you will have to search at national contact points to check out for specific national legislation.

Contents

• Legal requirements for the creation of a company.
Generally speaking the main legal requirements to create your company will depend upon the business structure you consider for your business idea. Some of the factors that might have an impact on that decision can be the following:
- The extent of your obligations or liabilities within your company operations.
- The number of promoters of your business initiative. Some legal forms might require a certain number of partners taking part in order to reach legal registration minimum.
- Tax regime and fiscal obligations might also become a relevant factor when making the choice. It is not certainly the same situation at the start of your company, where the turnover is low and hopefully starting to grow than when you run a consolidated company reaching certain income thresholds.
- Type of activity might also influence your decision. In the sector we are addressing with this training fiche, crafts and CCIs, sole traders and limited companies are quite used though social enterprises are also being employed to operate in this sector.
You can find bellow a chart with the maincompanies’ types you can encounter and some of its main characteristics.
LEGAL FORM BUSINESS LIABILITY
SOLE TRADER You take your own decisions. Your run your business.
Generally speaking, they are easier to set up as they require less formalities. You have personal responsibility for your business debts and obligations.
LIMITED COMPANY They are formed by the directors of the company. In some cases, it might be only one director. They are more complex to set up than the former. As a Director your liability for debt will be limited to the capital you have invested in the business.
SOCIAL ENTERPRISES (COOPERATIVES) It is required a number of partners and the elaboration of the statues of the company. Each member of the cooperative has a vote. Generally, the liability is also limited to the capital invested at the start of the company.
Please, bear in mind that a wider range of types may apply depending on the country you wish to set up your business. For that purposes, we advise you to get in touch with national agencies that will provide assistance in these matters. Alternatively, you can have a look at Your Europe portal, where links to national support agencies for businesses are supplied and very useful. http://europa.eu/youreurope/business/start-grow/start-ups/index_en.htm#
Taking into account the differences in legal requirements that may arise depending on the legal form you have picked and the country you wish to set up your business, here are some formalities you may need to fulfil if you are thinking of starting your business:
Register for the appropriate Social Security System. In some cases, national authorities have in place specific Social Security Schemes for individuals to register to, either as sole traders or as directors of limited companies. In some other cases, these directors are classified as mere employees and therefore they need to be registered as such. Some member states apply turnover thresholds over which there is an obligation of registration. Again, you should contact national authorities to check out for the best formula.
Taxes and annual accounts. You need to register your company at your national tax office. Understanding your taxes obligations is key to ensure you run your operations smoothly and without any problems with tax public administration. Do not underestimate them. It is important to keep accurate records of all your operations, expenses and profits, as you will have to pay accordingly. At this point, professional advice from an accountant might be worthwhile as we do not have to be experts in all matters, and this is a complicated one. Not in vain, the Commission suggests that reducing tax compliance costs would improve the business environment for small firms and in its 2020 Entrepreneurship Action Plan, makes an invitation to member states to “…make the national tax administration environment more favourable to early stagebusiness. Reduce the cost of tax compliance by simplifying tax filing and taxpayment…”
Application for licenses. There is considerable variation in the number and type of licences required across the different member states. It also depends on the type of activity you are undertaking. The licenses may also stem from different administrative level, local to regional and national. However, you should take them into consideration as the lack of them may result in delays for the start of your operations.
Register for VAT. As you probably know by now, VAT stands for Value Added Tax, which is charged upon sales throughout the European Union. VAT is what you “extra” charge to your customers (output tax) and it is also what you “extra” paid to your suppliers (input tax). The difference is what you get – VAT refunds- or have to pay to your national tax administration.
The standard rate for VAT depends on each country national authority, though the European VAT Directives set the minimum standard VAT rate. In 2016 is at 15%. The 28 member states are otherwise free to set their standard VAT rates from that amount on. There are goods with a lower rate or even exempt items. The EU also permits a maximum of two reduced rates.You should check what rate applies to the goods you produce or the services you deliver. In some member states, for instance, cultural services have a lower VAT rate as it is an indirect way of promoting this sector.
You can register to get your VAT number from your national tax office. Normally, if you are registered for VAT and you make sales to other businesses, you must issue a VAT invoice — either in paper or electronic form. VAT is normally added to the price of the goods or services on your invoice. Your VAT identification number must be shown on all invoices you give to customers, as well as the amount of VAT being charged and other standard items. Though this rule has exceptions.
For cross border – VAT, when you buy or sell products or services within other EU countries, different rules apply. New legislation is currently in force for this type of VAT that aims to tackle fraud in cross border transactions. A distinction needs to be made whether we are dealing with goods or services. You do not charge VAT If you are selling products to other businesses with valid VAT number. If they do not have it, then you must charge it. They must provide that information beforehand or, alternatively, the EU has a database where you can verify businesses VAT number existence (VIES).
If you are selling your product to end users, you need to register in the country you are selling your product and charge the VAT in force in that country. You do not have to do so if the total amounts of sales in that country do not reach a limit set by each country that can be either 35.000 € or 100.000 €. For instance, in the countries where OER Craft project partners come from, the limit is, in all of them, of 35.000 €. Any sales over this amount will imply for your company to register for VAT in the country and apply the national rate, with the implications you might foresee.
On the other hand, if your company provide services, which is the case for many cultural and creative industries, you do not charge VAT but your business customer will have to pay it with their national applicable rate (reverse charge procedure). In any case, you can still deduct the VAT you had to pay in order to provide the services for that customer. Again, if it is an end-consumer the one you are providing your service for, you can charge VAT at your country rate, except for telecommunications, broadcasting and electronic services where the rule is to apply the consumer tax law.
All these rules have many exceptions. As you can see it might be worthwhile to look for professional assistance and expertise to help you through with these administrative issues
• The European Company.
The European Company, or Societas Europaea, consists of a public, limited-liability company regulated under EU law. It is a good idea for companies that have different activities in different EU countries. It also allows you to change your head offices to different countries without the need to dissolve it and start over again in another one and therefore reducing the costs.
Another interesting feature of this type of European company is that their employees must get involved in its management. However, to set a European Company up might be a bit expensive as one of its legal requirements is a minimum capital of 120.000 €, which is not very easy for the type of entrepreneurs and sectors we are dealing with in this training fiches. Nevertheless, it is worth noting because it represents a first attempt of setting a legal form beyond national legislation and that should be the trend for the rest of company’s types.

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Results

Our main interest with this training fiche is that you can have an overview of the basic legal requirements around Europe you need to fulfil if you are thinking of starting a Company. As we are aware that within this short space we cannot provide a complete information on this matter, our aim is as well, to provide the leads and contact information in case you need to know the requirements in detail.

Member states and the European Union have acknowledged the need to reduce and facilitate the legal requirements for starting a business. They are aware of the critical role that SMEs play in the economic growth and employment generation all throughout Europe. The Commission together with member states are monitoring start up time costs at national level. As a summary for the OER Craft partners’ countries this is the information on these two questions from an study on compliance by Member States on the time needed to get licences and permits to take up and perform the specific activity of an enterprise (2014):

TIME

COST

BELGIUM

1,5 days

517 €

CYPRUS

1-3 days

311 €

ITALY

1 day

2.000 €

ROMANIA

1-3 days

300 €

SLOVAKIA

10 days

166-332 €

SPAIN

3 days

464 €

Indicators

Congratulations!! You have decided to take your business idea forward and create a company. If this is the case, you have fulfilled the different steps we have talked about in this training fiche on basic legal requirements.

You have taken on board the different options with regards your business structure, such as if you are going on your own, sole trader, or you are accompanied by other partners. You must be aware of the implications of the choices you make to this respect, in terms of, among others, your responsibility on the business debts.

Just before starting your operations, you have registered for the appropriate Social Security Scheme as part of your legal status and have applied for the required license if that is the case for your business activity.

Regarding Tax and accounts you have your systems in place and you have made the necessary communication to the Tax Administration in charge. In relation to keeping your accounts, the EU encourage member states for micro companies to apply simple rules. Micro companies to this respect are those which have less than 10 workers with a balance sheet below 350.000 € and a net turnover below 700.000 €.

As we are dealing with crafts and cultural and creative industries, it is paramount to take into consideration the protection of your trademarks, copyrights and patents. We have dedicated a training fiche to these purposes. We encourage you to have a closer look to this topic.

Another aspect you should take into account is whether you need an insurance or not for the development of your business operations. There are some insurances that the law demands you have, and others which you should take out as a matter of your own protection. Again, it depends on the type of your activity. In some cases, it can also be a legal requirement.

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