Shareholder or sole proprietor? Legal aspects

Many entrepreneurs choose to partner up to start a business. Because the relationship between the shareholders or founders is very important for the proper operation of the business, it is important to give it the due attention, including from a legal point of view.

Once a business idea begins to take shape or partnership discussions are started, the legal side of the relationship should also be taken into account. And since quite many newly established companies have several shareholders, we have synthesized the most important information about them. In general, in our country, the most commonly used forms of business association are limited liability companies (LLC, called SRL in Romanian) and non-profit associations.  

LLC or non-profit association? 

  • Number of members  

While LLCs can operate even with just one shareholder, non-profit associations require at least 3 partners.  

  • Share Capital  

Both types of legal entities must have a share capital, or an initial patrimony respectively, of at least RON 200. 

  • Income  

The shareholders of LLCs can get dividends (a part of the profit pro-rata with the contribution they have to the share capital, unless set out otherwise in the Articles of Incorporation). The same is applicable in case of losses - the liability for the losses is usually pro-rata with the contribution to the share capital, unless set out otherwise in the Articles of Incorporation.  

On the other hand, the partners of an Association (non-profit legal entity) cannot get benefits only as a result of their contribution as founding members/partners. An Association has a social purpose, while an LLC’s purpose is to make a profit. An association can however carry out an economic activity, but it must be secondary and closely related to the purpose for which the association was established. 

  • Expenses  

Expenses may be deductible or non-deductible for both legal forms, according to accounting legislation. 

  • Legal representative  

The legal representative of an LLC is the company’s director; the shareholders are liable only within the limit of their contribution to the share capital, with some exceptions, of course, when they can be held personally liable. 

The legal representative of an Association is the Chairman of the Board of Directors; the patrimonial liability of the members is not expressly provided for in the legal act regulating associations and foundations. In case of illegal acts (or faulty decisions leading to the insolvency of the association, for example), the members may be held liable. 

"The best option for a start-up is currently the limited liability company," according to Shirina Ștefănescu-Albu , lawyer. "As its name suggests, the shareholders benefit from limited liability, and LLC also currently benefit from a more advantageous tax regime. Also, since last year, LLCs shareholders can distribute dividends quarterly, not just annually, as was the case in the past". 

How having a co-founder can help you  

Starting a business comes with a lot to manage and implement, which can be overwhelming when you're running the business on your own.    

In general, when you start out with a co-founder, you put together complementary experiences and skills, provide emotional support during difficult times, and have the opportunity to advise each other when important decisions need to be made. Moreover, companies with more than one founder are more likely to obtain investments.  

What you need to know about association relationships 

A business relationship is, by its very nature, a strongly regulated one, based on contracts and legal procedures. A personal relationship on the other hand works more like a tacit agreement, and when the two overlap, tensions can arise. That's why, if you're thinking of starting a business with your life partner or any of your friends, you should take all this into account from the very beginning.  

If you are thinking about partnering with someone with whom you have no personal relationship (i.e. an investor or another entrepreneur), the lawyers recommend carrying out a due diligence regarding that person. However, regardless of the relationship you may have with the other shareholder(s), what’s is important is to agree on the terms and conditions of the collaboration before it begins. The shareholders can thus make sure that they are on the same page and have congruent expectations.  

Specialists recommend to conclude a Shareholders' Agreement which sets out some basic lines of the partnership (before signing the Articles of Incorporation and officially becoming shareholders). Many misunderstandings and tensions can be avoided if these principles are followed. It is important to have all aspects covered as thoroughly as possible, because any disagreements between the shareholders can affect the development, stability and very existence of a young business. 

What are the risks you expose yourself to if you choose to open a business with another shareholder?  

One of the big challenges shareholders who own 50% of the business each face is make decisions when they have differences of opinion. This situation can be prevented by establishing a shareholding ratio of 51%-49%, in which case the risk of the business being blocked due to misunderstandings between the shareholders is lower.  

Furthermore, even this may be a sensitive issue, it is important to have an action plan for situations such as the divorce of the shareholders or the death of one of the business partners. In the latter example, the company can continue its operation if the Articles of Incorporation include a clause of continuation with heirs or if the remaining shareholder decides to continue to operate the company as a single shareholder limited liability company. If the heirs do not agree to take over the shares, in accordance with the company's Articles of Incorporation, they can transfer such shares to the remaining shareholders. 

If, however, the Articles of Incorporation do not include a clause of continuation with heirs, they shall acquire by inheritance only the right to the equivalent of the shares owned by the deceased shareholder. If there are no heirs, the succession will be declared vacant and the inheritance, including the shares, will be taken over by the state.   

Is there such a thing as an ideal business partner?  

The ideal business partner is one with business experience, with a portfolio of successful businesses, with no history of bankrupt or inactive companies, with a clean fiscal and criminal record.  

If the potential shareholder is a legal entity, it is important to study both the legal aspects and the accounting, financial and fiscal aspects to decide if it is a valuable partner. Moreover, the way in which the company reported its assets, the way in which it protected itself from potential legal risks by agreements, the lack of an imminent risk of insolvency and other similar criteria must be analyzed. 

If the potential shareholder is your life partner or a friend, then you need to make sure that you enter the business relationship with congruent values and clear expectations and responsibilities, agreed upon by both parties.  

Peculiarities of becoming partners with family members 

While in a traditional job you leave your professional worries at the office after 6 p.m., entrepreneurship does not work in the same way. Even less so if the family you have at home is also your work team. 

The familiarity and love they have for their life partner, for example, can make entrepreneurs lose sight of the rational arguments above and start a business without a clear perspective on every party’s responsibilities. The impact of this decision can be negative - especially if interpersonally difficult situations arise: power struggle, divorce or death. That is why lawyers advise their clients to avoid such partnerships in the absence of a clear agreement on how responsibilities, decisions and profits will be shared. They always recommend concluding Shareholders' Agreements to cover all unexpected situations. 

Although it is not a pleasant exercise, the "worst case scenario" is very useful in these situations: it will guide you and give you important answers, such as: who the person who will make the final decisions is, what happens in case of the withdrawal/death of one of the shareholders or in case of a divorce.

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