The law stipulates various legal forms of business entities. Which is the most appropriate in your particular case? What do you have to take into account when making your choice? Why is it important what legal form you choose?
The Trade Act (TA), being the major statutory instrument for regulating trade activities, says that you can choose from the following legal forms:
- Trader – natural person – Sole Trader (ET);
- Trade Company (ТD) – limited liability company / sole member limited liability company (OOD / ЕООD), general partnership (SD), limited liability partnership (КD), partnership limited by shares (KDА), joint-stock company / sole member joint stock company (АD / ЕАD).
- Holding company/consortium
What do you have to take into consideration when choosing a legal form?
[list-ul type=”star”][li-row]Number of members/partners: if you want to perform business activities as an independent entity you can register as ET, ЕOOD or EAD. However, if you are not alone in your business undertaking, you have to choose a trade company such as OOD, SD, KD, KDА (at least 4 partners) or AD. If you are to have partners, we strongly recommend a very careful preparation and execution of the articles/memorandum of association, which is to clearly regulate your business relations ad separate them from your personal ones.[/li-row][li-row]Available capital: if you are not in possession of or your business does not require a large amount of capital you may choose to register an ET, OOD / ЕOOD, SD or KD. ET, SD and KD do not have a minimum capital requirement upon association. To establish an OOD / ЕOOD there is such requirement, though only a formal one: just 2 BGN. If your scope of activities and business scale require more capital investments you had better choose a KDА or AD / EAD. Sometimes it is recommendable the company to be established with a capital larger than the required minimum (for instance with OODs / ЕOODs to register a 100 BGN capital instead of the minimum required 2 BGN).[/li-row][li-row]Requirements to the registration: under TA traders have to register by being entered in the Trade Register (ТR) at the Registry Agency. Registering an ET is easier and simpler than registering a TD. Registration of all TD requires signing articles/memorandum of association by the partners (or by-laws of shareholders / members). Registration charges are also different, the one for registering an ET being the least expensive.[/li-row][li-row]Liability is a very important issue. A trader can hold unlimited, limited and/or joint liability for any debts incurred. We have unlimited liability when a single person is held liable with all his personal property for any incurred debts to its non-confiscable amount. Unlimited liability applies for ET, SD and part of the KD and KDА members. We have limited liability with trade companies that form their capital through their partners’ contributions. Then each partner is held liable for the company debts to the amount of their contribution to the company capital. In this case there is absolute differentiation between personal and company’s property. Partners in OOD / ЕOOD, АD / EAD and part of the KD and KDА members hold limited liability. Joint liability can arise only in case of partners. When a partner holds joint liability this liability refers to the entire debt of the company, regardless of the time such partner entered the company. Members of OOD, SD and part of the KD and KDА members are held jointly liable.[/li-row][li-row]One should also take into account that registration as ET does not result in the establishment of a new legal entity. ET is a natural person acknowledged as trader. Hence the bond between ET and its owner’s personality. All trade companies are legal entities. A new legal entity is separated from the personalities of its members (or sole owner). It has its own business structure, autonomous property and is recognized by law as an independent bearer of rights and obligations.[/li-row][li-row]Taxes and social security contributions due: they are calculated in different ways for ET and trade companies. The main reason for that is that ET is a trader as a natural person and the rest are independent legal entities. ET is taxable with a patent tax if it performs certain activities specified in the Local Taxes and Charges Act, or with a tax on profit at a 15 % rate. It also has to pay social security contributions on profit. All the other kinds of traders, apart from those involved in gambling and betting or operating ships, are subject to a 10 % taxation on profit. When all those other traders pay the profit they have made (distribute dividends) to their natural person owners, tax on the distributed dividends is due at a 5 % rate. In most cases the legal form of ЕOOD or, in case of partner(s), OOD, is more beneficial and favorable from the point of view of taxation.[/li-row][/list-ul]
The law allows one person to participate in as many companies and partnerships as such person wants. Companies and partnerships may be established by both natural persons and legal entities.
The law allows a company or partnership, after being established, to be restructured into any other type.
The choice of legal form for making business is an important one since this form will determine your business’s opportunities and restrictions, liability, taxation, etc.