Sole traders, partnerships, co-operatives and limited companies are to be found throughout Europe and beyond, and in many cases their legal structure is similar to that of their British counterparts. Where differences occur, these are often a reflection of historical and cultural factors which find expression in custom and practice as well as in law. Examples of some of these differences are contained in the discussion below, which focuses on France, Germany, Denmark and Portugal.
Numerically, the French economy is dominated by very small businesses (i.e. fewer than ten employees), the majority of which are sole traders. As in Britain, these are owner-managed-and-operated enterprises, with a husband and wife often assuming joint responsibility for the business. Formal requirements in this type of organization tend to be few, although individuals as well as companies engaging in a commercial business are required to register before trading officially begins. Since this process is relatively simple and there are no minimum capital requirements nor significant reporting obligations, sole trader ships tend to be preferred by the vast majority of individuals seeking to start a business and they are particularly prevalent in the service sector. They carry, however, unlimited personal liability for the owner, whose personal assets are at risk in the event of business failure.
Most of the remaining French business organisations are limited companies, many of which are Petites at Moyennes Enterprises (PMEs) small and medium enterprises employing between 10 and 500 employees. These companies come in a variety of legal forms, but two in particular predominate: the Société àResponsabilitéLimitée (SARL) and the SociétéAnonyme (SA). A new company form, the Société Anonyme Simplifée was created by statute in 1994 and combines the legal status of a corporation with the flexibility of a partnership.
The SARL tends to be the form preferred by smaller companies, whose owners wish to retain close control of the organisation; hence many of them are family businesses an important feature of the private sector in France. This type of enterprise can be established (currently) with a minimum capital of €7500, cannot issues hares to the general public, has restrictions on the transfer of shares and is run by individuals appointed by the shareholders usually the shareholders themselves and/or relatives. In practice, these various restrictions help to ensure that the owner-managers remain dominant in the organisation and the appointed head of the company will invariably be the most important decision maker. Concomitantly,they help to provide the organisation with a defence against hostile takeover, particularly by overseas companies looking for a French subsidiary in order to avoid the special rules which apply to branches and agencies (e.g. a foreign parent company has unlimited liability for the debts of its branch or agency, since these do not have a separate legal identity).
The SA is the legal form normally chosen by larger companies seeking access to substantial amounts of capital. In the case of a privately owned company, the minimum capital requirement is currently €37 000; if publicly owned the minimum is€225 000 million. Where capital assets are substantial, this tends to ensure that financial institutions are large shareholders in SAS and many of them have interests in a wide range of enterprises which they often manage through a holding company(see below). One advantage of this arrangement is that it provides the financial institution with a means of managing its investments and of exerting influence over companies in which it has a large minority stake. Another is that it provides a means of defending French companies from hostile take overs and hence small and medium enterprises often seek backing from holding companies to help fend off foreign predators.
As in Britain, the legal basis of the SA provides for a clear distinction between the roles of the owners (the shareholders) and the salaried employees, and it is the former who appoint the company’s board of directors. In smaller companies, the chairperson and managing director is often the same person and many smallerFrench companies continue to have extremely strong central control, often by the head of the owning family. In larger companies, the two roles are normally separated, with the managing director assuming responsibility for the day-to-day operations of the enterprise and forming the link between the board and the company’s senior executives and managers, some of whom may have considerable delegated authority.
It is worth noting that in companies with more than 50 employees, there is a legal requirement to have elected work councils, and workers’ delegates have the right to attend board meetings as observers and to be consulted on matters affecting working conditions. In companies with more than ten employees, workers have the right to elect representatives to look after their interests and regular meetings have to take place between management and workers, over and above the obligation of employers to negotiate annually on pay and conditions. Despite these arrangements and the legal right for unions to organize on a company’s premises, trade union membership outside state-run companies remains low and hence union influence tends to be limited. Recent steps to encourage local agreements on pay and conditions seem destined to reduce this influence even further a situation which has parallels in Britain.
All major forms of business organisation are to be found in Germany, but it is the limited company which is of particular interest. Some of these are of relatively recent origin, having formerly been East German state-owned enterprises which have undergone ‘privatisation’ following the reunification of the country.
In numerical terms it is the private limited company (GesellschaftmitbeschränkterHaftung– GmbH) which predominates and which is the form chosen by most foreign companies seeking to establish an enterprise in Germany. As in Britain, this type of organisation has to be registered with the authorities and its founding members must prepare Articles of Association for signature by a public notary. The Articles include information on the purpose of the business, the amount of capital subscribed, the members’ subscriptions and obligations and the company’s name and registered address. Once the registration process is complete usually a matter of a few days the personal liability of the members becomes limited to the amount invested in the business. Currently, the minimum amount of subscribed share capital required for registration is €25000, half of which must be paid up by the company itself.
Large numbers of GmbHs are owned and run by German families, with the banks often playing an influential role as guarantors of part of the initial capital and as primary sources of loan finance. As in France, this pattern of ownership makes hostile takeovers less likely, as well as ensuring that the management of the enterprise remains in the hands of the owners. Significantly, the management of a proposed GmbH is subject to quality control, being required to prove that they are qualified for the task prior to trading. This requirement stands in stark contrast to arrangements in Britain, where no such guarantees are needed, other than those implicit in a bank’s decisions to help finance a proposed venture on the basis of a business plan.
The procedures for establishing other types of business organisation are similar to those of the GmbH, although in the case of the public limited company(Aktiengesellschaft AG), the current minimum amount of capital required at startup is €50 000 in negotiable share certificates. Unlike British companies, the AG usually consists of two boards of directors, one of which (the supervisory board)decides on longer-term strategy, while the other (the managing board) on centrates on more immediate policy issues, often of an operational kind. Normally half the members of the supervisory board (Aufsichtrat) are elected by shareholders, while the other half are employees elected by the workforce, and it is the responsibility of the board to protect the interests of employees as well as shareholders.
Such worker representation at senior levels is an important element of theGerman system of business organisation and even in smaller enterprises workers have the right to establish works councils and to be consulted on social and personnel issues and on strategic decisions. Equally, all employees have a constitutional right to belong to a trade union most of which are organised by industry rather than by craft or occupation, as is largely the case in the United Kingdom.Consequently, German companies typically negotiate with only one union; usually in an atmosphere which stresses consensus and an identity of social and economic interests, rather than conflict and confrontation.
Corporate finance is another area in which German experience differs from that in the United Kingdom, although the situation has changed to some degree in recent years. Historically, in Britain a substantial amount of company finance has been raised through the stock market and this is also the case in the United States and Japan. In Germany (and for that matter in France, Italy and Spain), the banks and a number of other special credit institutions play a dominant role, with bank loans far outstripping joint-stock financing as a source of long-term capital.
Traditionally, German banks have been willing to take a longer-term view of their investment, even at the expense of short-term profits and dividends, and this has benefited German companies seeking to expand their operations. In return, the banks have tended to exert a considerable amount of influence in the boardrooms of many German companies, usually by providing a substantial number of members of a company’s supervisory board, including the chairperson.
Denmark, like France, is a country whose economy is dominated by small businesses, many of which are sole traders. As in other countries, there are very few regulations governing the establishment of this type of enterprise, other than the need to register for VAT if turnover exceeds a predetermined limit and to meet taxation and social security requirements. In keeping with practice throughout Europe and beyond, sole traders have unlimited personal liability and this imposes a considerable burden on the organisation’s owner and family, who often run the business jointly. The same conditions also apply in the case of Danish partnershipswhether formal or informal with the joint owners having full and unlimited liability for all debts accruing to the organisation.
Limited companies in Denmark also reflect practice elsewhere, being required to register under the Companies Act and having a legal existence separate from the owners and employees. Three main types of limited liability company can be distinguished:
A brief look at Portuguese business organisations reveals a range of legal structures which includes sole traders, joint ventures, complementary groups, unlimited companies, limited partnerships and public and private limited companies. In the case of the latter, capital requirements tend to be an important distinguishing feature with the Public Limited Company or Corporation (SociedadeAnonima SA) having a much larger minimum capital requirement than the private company (SociedadePor Quotas or Limitada LDA) as in other countries.
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