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17 Apr
STARTING A BUSINESS? – OR HOW TO CHOOSE THE APPROPRIATE TYPE OF A COMPANY
  • BY: Марина Мучакова
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STARTING A BUSINESS? – OR HOW TO CHOOSE THE APPROPRIATE TYPE OF A COMPANY

Do you want to register your own company? First, you must choose what it should be. In this article, we shall dwell on the kinds of traders and we hope that the information given below will be of great avail to you, when making your choice.

In the beginning, we shall explain the meaning of a “trader”!

Every person, who has no specialized knowledge, can imagine a seller. It is normal. The term “trader” has wide application in conversational situations. Specialists use this concept in the narrow meaning of this word about a person, who provides commodities or services against payment. The term trader means also other things, but at present we shall not elaborate on them.

The competent public officials apply the relevant Bulgarian legislation strictly to traders and their line of business and they must fulfill a series of normative requirements. It is detailed in the Commercial law (of course, there are also other laws).

A trader, in terms of the narrow definition of this word, can be not only a natural, but also a legal person. As far as traders-natural persons are concerned, it is worthwhile to dwell only on one type and it is a sole trader (ST). Hereinafter is given a short description, without going into unnecessary detail.

A SOLE TRADER or ST

1. A concept

Whenever we speak or write about a sole trader, inevitably, we use the concept of a “trader”. A “trader” is legal quality, which is a natural person should acquire, in order to become a sole trader. One prerequisite exists for this purpose (in other words, there is a compulsory requirement, which is incorporated in commercial legislation). This prerequisite is expressed in:
-a natural person MUST be able-minded (must have turned 18 and mentally healthy). Thus, one automatically arrives at the conclusion, that the applicable Bulgarian law does not recognize traders, who have not come of age/minor traders, as well as traders placed under detention.

-besides that, such a natural person must have a place of residence in our country.

Whenever a natural person (a man) receives recognition of the quality a “trader”, it expands his legal capacity. A natural person acquires the right to close trade deals and to take part in sales turnover as a party under a legal commercial relationship.

It is important for you to have in mind, that whenever a natural person gains recognition of the quality a “trader”, it does not create automatically a new entity. The entity is the same, but it has wider “rights”, if I may write it in this way. It is important for us to note it, because we shall read later on in the same article, that for legal persons the situation is much more different.

In view of the fact, that no new legal entity comes into existence, we arrive at the second conclusion. A sole trader is not a legal person. He is a natural person-a trader, who is liable to a specific mode of registration.

In order this registration to begin and end successfully, one must fulfill certain requirements:

- one must not be in solvency proceedings;

- one must not be a not reinstated in his rights insolvent person;

- one must not have been sentenced for bankruptcy.

At the filing of the application for registration, one declares these circumstances in a statement-a free text and submits it together with the application for registration.

(Notes: One-man companies, set up under the rules of Decree 56 are considered to be Sole Traders. The name of a natural person is added to the registered company name (a trader), if at foundation such was not added).

Bulgarian Commercial law establishes 2 criteria, in order a certain person to be able to become a trader. The first one is to do/make “by profession” some of the deals stipulated in article 1 of Bulgaria’s Commercial law and the second one is conduct his business in a commercial way.

According to these 2 requirements, sole traders can, absolutely conditionally, be divided into 2 kinds:

1. according to their occupation and 2. according to the pattern of their activity.

As we have already mentioned, in order a sole trader to be able to registered himself, one should be recorded into the Commercial register. One files an application, using form A1, with the Registry Agency at the Ministry of Justice, where one fills in the full name of a person, the company name and a head office, a management address, a line of business and others. One person can register only one firm as a Sole Trader.

2. A firm

In case of a firm, we mean the name, under which a trader performs business activity. There are set requirements for it, which should be satisfied. For example, it must contain without abbreviations the full name of a natural person – first and family one. One can add to them optional contents, which might represent the additional name/appellation of a product, enterprise, service, geographical area and others. A firm can be used only for commercial deals. By means of it, a natural person cannot participate in civil legal relationships as a non-trader. A firm is a business entity different from a natural person.

The transfer of a firm is possible. It can be made together with the enterprise of a sole trader. A the transfer of an enterprise, we presume the transfer of a firm, unless something else has been stipulated.

In conclusion, it can be pointed out, that the right of a firm is a subjective right of a trader, as it is an intangible, transferable and inheritable right.

3. Deletion

The commercial law stipulates only the most atypical cases of deletions, namely:

-at the termination of a line of business;

- at the trader’s death;

-at his placing under detention. It happens at the request of a guardian or a trustee.

What activity can you perform by means of a business entity named a Sole Trader?

In reality everything for which the applicable Bulgarian law does not require another legal person. For this reason, it will be easier to go into particulars about what you cannot do. You cannot perform banking and licensing activity, you cannot register a pension, health insurance fund or an insurance company in the form of a sole trader, as you cannot also practice a liberal profession.

A sole trader obligatorily issues cash slips and/or invoices for the services provided by him and maintains proper accounting records of his activity. He bears responsibility unlimitedly for closed deals and assumed by him obligations. What does unlimitedly mean? Every trader bears responsibility at the fulfillment of his obligations. Responsibilities are different, but always are evaluated in terms of money. In brief, responsibility at the nonfulfillment of a contractual obligation can be determined in a pecuniary amount. It can be fixed (it seldom happens in practice) or determinable. Most often, the mechanisms of determination are the clauses about punitive interest rates and penalties in the contracts, which traders sign. If such clauses are missing, the applicable Bulgarian law also elaborates on responsibility. For certain traders, the applicable Bulgarian laws sets the limits in terms of responsibility- which means up to the amount of company property (we have its whole property in mind). This property is always different from the property of a company owner. In the case of a Sole Trader, it is not so. We place the equal(s) sign between the property of a sole trader and that of its owner, no matter what the origin of such property is. It is important to be sequestrable/liable to seizure (Sequestrable property is defined in Bulgaria’s Code of Civil Procedure).

Another different detail at a Sole Trader is taxation. It is stipulated in Bulgaria’s Corporate Income Tax Act. I shall not go into particulars. A tax return about the declaration of taxes is filed. Its template is published in the Official Gazette (OG) of the Republic of Bulgaria and on the official website of the National Revenue Agency. The sole traders, who stopped temporarily their activity (sleeping traders) not every year file tax returns, unlike legal persons. Whereas, annually the forms of tax returns are amended, it is best to keep track of them attentively.

There are sole traders – public entities. I shall not dwell on them. I shall pay special attention directly to trade companies.

At present, Bulgarian legislation stipulates several kinds of a trade company and they are detailed in the applicable Bulgarian law and they are: a limited liability company (LLC/single-member LLC), a limited liability partnership (LLP), a general partnership (GP), a limited liability partnership with shares (LLPS), a joint-stock company (JSC, single-member JSC) and a cooperative (which is not precisely a trade company according to the narrow definition of this word, but is entitled to perform commercial activity). You cannot register a kind of a trade company, which does not exist according to Bulgarian legislation as a corporation, a trust company, a holding company and others. A consortium is an allowed kind and mode of legal amalgamation of traders, but it will not be reviewed in this article.

The common thing between them is that most of them (there are exceptions, which we shall review below) are formed by dint of a contract for a company. In view of this fact, we shall define first the concept of a “Contract for a company”.

In the beginning, we shall mention that a “company” is a consensual contract (derived from consensus - consent), by dint of which two or more persons agree to have something in common, in order to attain a purpose allowed by laws. This definition completely coincides with the modern ideas about a civil corporation.

The prototype of modern trade companies came into existence during Middle Ages under the name of “komenda” and represents the prototype of limited partners in a limited liability partnership.

Much later, a general partnership was formed. The heirs to a trader or to “komenda” operate in this mode, as they continue and develop what he has begun.

The common thing between a limited liability partnership and a general partnership is that they are based on the personal participation of partners. It defines them as companies of a personality or as “personal” companies.

Approximately during 16th-17th century with the development of capitals, techniques and the necessity for the accumulation of financial means in a certain company, a new kind of a company was established and it is JSC-a joint-stock company. There is no need for the personal participation of partners in it. This circumstance characterizes it as a new type of a company-of capital and not of a personality. For the first time, the legal basis of JSC has been introduced in France.

A cooperative partnership developed in parallel with JSC. This kind was formed, in order to provide economic prosperity to the poor.

The last legal kind of a company is that of limited liability companies and it is a great achievement of German jurists.

THE DEFINITION OF A TRADE COMPANY

Under Bulgaria’s Commercial law, a “trade company” is defined as the amalgamation of two or more persons for the making of commercial deals with common means.

A trade company possesses several typical features, as a generic concept:

- It is a merger. The merger is achieved through a contract for a company. In its essence, this contract is a multilateral contract. The interests and goals of partners coincide and it is the reason why a legislator has defined them precisely as “partners” and not as “parties”.

-The amalgamation is of 2 or more persons, as it is carried out on the principle of voluntariness. Not only Bulgarian, but also foreign able-bodied and able-minded natural or legal persons can take part in a company.

- the amalgamation must be for the closing of commercial deals. It distinguishes a trade company from a civil corporation. The economic goal distinguishes it from nonprofit legal entities, which are set up and subordinated to another law (Law on nonprofit legal entities).

-The amalgamation and the making of trade deals is based on partners’ common means. Common means are raised through financial and non-pecuniary installments.

-Trade companies are legal persons, which means, that they ARE PERSONIFIED. Under our legislation, there is no adopted rule, which would allow the existence of non-personal entities/unincorporated companies. Although, for the purposes of sales turnover, traders are given comparatively great liberty at negotiations, the legal basis for the formation of trade companies introduces a registration and permit mode and legal types are detailed in the applicable Bulgarian legislation. It means that legal kinds, different from statutory ones, are not allowed.

A trade company personally establishes legal relationships with third persons, through its business units and management bodies. It possesses property that is different from the one of partners. A trade company bears individual responsibility, as it has an own name, a head office, a management address and so on.

The above-mentioned trade company is a trader. The legal and organizational kind of its line of business is completely sufficient for the acquisition by it of commercial quality.

TYPES OF TRADE COMPANIES

In the beginning, we shall focus our attention on a civil corporation. It is not commercial, as I have already mentioned above, but it is a mode of amalgamation and it is nice to pay attention to it, so that there will be no confusion of concepts.

- a civil corporation pursues business goals and Bulgarian or foreign natural or legal persons can also take part in it. A civil corporation is set up by dint of a contract for a civil corporation, which is not subject to registration. A civil corporation is not a legal person. Being non-corporative, a civil corporation has no Articles of Association and management bodies.

The kinds of trade companies under the Commercial law are:

GP – a general partnership;

LLP – a limited liability partnership;

LLC – a limited liability company;

JSC – a joint-stock company

LLPS – a limited liability company with shares.

They can be divided into “types” according to many different criteria, like for example:

- according to a business organization. Here, 3 subtypes exist – personal (GP and LLP); capital ones (JSC and LLPS); companies of an intermediate team (LLC). The latter types can be related to capital ones.

The last legal kind, which we shall review is that of a cooperative. It is a voluntary association of natural persons. It is detailed in Bulgaria’s Cooperatives Act. It can have variable capital and membership. Members pool/unite and through mutual cooperation perform business activity. A cooperative is not a trade company, but only a trader.

THE FORMATION OF A TRADE COMPANY

The persons, who set up a trade company, are its founders. Depending on the kind of a trade company, this procedure proceeds differently. Broadly speaking, we can point out that it proceeds at two stages.

The first stage is the drawing-up and adoption of Articles of Association by founders. In practice, quite often the preparation of this public act is assigned to an external contractor and the above-stated adoption is expressed in the putting of signatures by founding members onto the contract for a company and a company foundation statement, by means of which they declare, that they have approved of them. An important issue in this case is who can be a founder. These can be able-bodied and abled-minded (over the age of 18 and mentally healthy) Bulgarian or foreign natural persons or legal persons, who of their own free will get united under a common firm, with common means and for the making of commercial deals. The applicable Bulgarian law gives great opportunities for participation in the formation and work of trade companies.

The second stage is the entry/recording of a company in a commercial register. The documents about registration are filed with Bulgaria’s Registry Agency together with application for an entry, using a form. There, they are reviewed by a public official in charge of entries, who enters/registers the company or gives instructions for the corrections of made errors or issues a refusal of an entry (depending on the mistakes made).

GP

GP incorporates only unlimitedly liable partners in its make-up, as at least two persons must take part in its make-up (which means, that they can also be legal ones). In practice, It is a rare case in in our country. I shall not elaborate on the details about the setting-up and functioning of this kind of a company. I shall lay emphasis only on some specific features of the company:

-GP is personal. It means that the participants in it are included with a view to their personality. If we make a more in-depth analysis of the concept “with a view to a personality”, we can arrive at the following conclusions: that the participants possess a specific vocational qualification, knowledge, skills, authority and others, which only a concrete person can have. They are emphatically personal, which means that they are not handed down from generation to generation and they is no way for them to be transferred to another person. In short, if a partner decides to leave a company, then it can be closed down, regardless of the other partners’ wishes.

-the partners in GP are unlimitedly liable, which means that they are responsible for the liabilities of GP jointly and in an unlimited way with their whole sequestrable property (similar to ST above).

- Management: decisions are taken with a majority, as every partner is entitled to one vote. In short, there is no advantage of capital, as this company is non-capital.

LLP

A mode of existence similar to that of GP holds true for it, as it has one specific feature. There are two kinds of partners in LLP – limited partners and general partners. The only difference lies with responsibility. Fully liable partners are unlimitedly responsible (just as it the case with GP) and are the only ones, who are entitled to take part in the management of LLP. Limited partners have the only obligation for a share installment and as a rule do not take part in management. They get a share of a profit, which is proportionate to the financial means invested by them.

LLPS

This kind of a company is a hybrid between personal and a capital one. It possesses features similar to these of joint-stock companies, as we shall elaborate on them hereinafter. The partners in LLPS can be natural and legal persons, as it is prohibited for some special legal persons to be unlimitedly responsible persons. These are for example, municipalities and banks. The difference from an ordinary LLP consists of the fact, that company capital is distributed into shares. LLPS ensures the greatest possible security to creditors, because their receivables are guaranteed on the one hand by company capital and on the other hand – by the property of unlimitedly responsible partners. We assume, that LLPS is a trade company of large capital, but in comparison with a limited liability company and a joint-stock company, it is seldom established.

JSC / single-member JSC

A joint-stock company is a trade company, whose capital is distributed into equal parts-shares and which is responsible for its liabilities only with its property. At the founding assembly, its founders make decisions about: 1. the formation of JSC; 2. about the adoption of rules; 3. its shares are recorded, as a supervisory board and a board of directors are elected. The first two decisions are taken unanimously and the remaining ones with a simple majority. The founding assembly:

1. takes a decision about the foundation of a company;

2. adopts rules;

3. establishes the amount of expenditures for setting-up;

4. elects a supervisory board, respectively a board of directors.

We know two modes of JSC management – single-level and double-level. I shall not go into unnecessary detail.

The following things are necessary for the entry of JSC into a commercial register:

1. rules must have been adopted;

2. the whole capital must have been recorded;

3. the stipulated in the rules part of the value of every share must have been paid in, but not less than 25% of the nominal or envisaged in the rules issue value of every share;

4. a board of directors, respectively a supervisory and management board must have been elected;

5. other legal requirements must have been fulfilled.

The joint-stock company is comparatively the most appropriate company mode of the attraction and functioning of big in amount capital. By means of it, one limits the business risk of participants at the performance of given activity, as to some or another extent, it is transferred to the creditors of JSC. It gives an opportunity for relatively the most facilitated transfer of equity participation to another persons, as well as for its inheritance. In case of JSC, there is almost complete separation of a company as a legal entity from the participants in it.

It is possible for JSC to be single-member one, which means that all shares belong to only one person (natural or legal) – the so-called single-member JSC.

LLC/single-member LLC

A limited liability company (LLC) is established by two or more partners, with capital formed of their company installments. Such capital cannot be less than 2 (two) Bulgarian levs and may represent a non-pecuniary installment. Each of the partners is responsible for company liabilities up to the amount of his share installment. A company manager can be a person different from capital owners or simultaneously can be a partner and a Manager. It is possible for a limited liability company to have two or more Managers and they can manage it together and individually. The setting-up of a limited liability contract is carried out by signing a company contract, which stipulates partners’ rights and obligations and the main business activity, which they will perform. A company name must be unique on the territory of the Republic of Bulgaria and must contain LTD abbreviation. At the filing of applications for the announcement of circumstances or public acts with the Registry Agency, decisions about them are made with a written statement of the general assembly, through which each of the owners gives his written consent to the taking of a decision and its announcement.

Setting-up

A company contract (at LLC), respectively the Articles of Association (in case of single-member LLC) are drawn up in writing. A founder may be represented by an attorney with a notarized power of attorney. A company contract must contain:

* a firm, a company head office and management address;

* a line of business and a contract period;

* the name, respectively the firm of partners;

* the amount of capital;

* the time limits and the conditions for paying-in capital;

* the amount of the shares, by means of which partners will take part in the company capital;

* details about management and the way of representation;

* the advantages of partners, if they have been agreed/approved;

* other rights and obligations of partners.

Advantages:

* the partners are responsible for company liabilities only up to the amount of their equity participation in it;

* comparatively great confidence on the part of creditors;

LLC can be registered by 1 founder-a natural or legal person, which means single-member LLC.

TRADER’S OBLIGATIONS:

Whenever you start your own business, it is better to know what obligatorily you must do, in order to avoid financial sanctions. I stipulate hereinafter the basic obligations of traders.

1. You must obligatorily register yourself as a person, who performs commercial activity. If you register yourself as a natural person (the so-called liberal profession in the register of business entities), every year you must file an annual tax return about your incomes and you owe a 10% tax on them. If you have registered a company, you must submit reports to the National Revenue Agency (NRA), the National Social Security Institute and the Statistical Institute. The reports must be announced at the Registry Agency.

2. If you appoint a staff, you must announce employment contracts at NRA. Your workers can be admitted to their workplaces only after they get a copy of the notification to NRA, that they have been appointed (notification under article 62 of Bulgaria’s Labor Code).

3. Every trade company is obliged to maintain regularly proper accounting records. For this purpose, it must turn to an accountant, appointed under a labor or freelance contract at the company or to use the services of an accounting house. Every trader alone decides on which option is better. For more information, please, look here.

4. Traders must have an electronic cash register or all payments must be made through their bank accounts. Traders are obliged to issue invoices for performed services. Every company or sole trader must have a seal at its disposal.

5. Trade companies and sole traders announce obligatorily a management address at the Registry Agency and at their choice, a mailing address at NRA (whenever this address is different from their management address). At this address, the competent public officials can always find a worker or an employee or his attorney, who will be responsible for a company and will answer all inquiries made to him.

6. Last but not least, one has the obligation to pay in social security, health insurance and pension contributions. Not only a trade company staff is subject to social and health insurance. Social and health insurance must be provided also for managers. The same also holds true for working partners. For more detailed information about this issue, it is best to ask you accountant or to get in touch with us, using our contact details.

The following sources of information were used for the writing of this specialized article: author’s own materials, quoted materials from Wikipedia, bogatstvo.net and bg-pravo.com.

We hope that we were useful to you.

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About Марина Мучакова

Marina Muchakova is a member of Vesta Consult's team. She studied in the legal school in University of Sofia city "St. Kliment Ohridski" and specializes mediation of commercial disputes, representation before arbitration courts and relations between employers and personnel, tax consultations. Languages: English- proficiency ; Russian- basic ; German- basic

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