Corporate Law Summary

Definition of Company (Partnership or Corporation)

  • Established under civil law/commercial law
  • Association of members
  • Common purpose
  • By legal act (e.g., contract)
  • Company vs. other legal institutions: marriage, foundation (trust), mutual contract, co-succession in law

Kinds of Partnerships

  • Civil law partnership
  • General commercial partnership
  • Limited partnership
  • Limited partnership with a limited company as general partner (tax transparent but limited liability)
  • LLC

Kinds of Corporations

  • Private limited company (Sp. z o.o., GmbH, UG, Ltd., Inc., S.à.r.l.)
  • Stockholding company (SA, AG, societé par actions; not necessarily listed, Corp. or Inc.)
  • Publicly listed companies (SA, AG, societé par actions, plc, Inc.)

Kinds of Other Entities

  • Silent partnership
  • Branch, representative office
  • Cooperative
  • Association

Comparison of Partnership and Corporation

Liability of shareholders/partners

  • Partnership: Unlimited, joint, and immediate liability of partners for total debt; exception: limited partner: liable up to the defined (partnership contract in England)/registered (National Court Register; Commercial Register in Germany) liability; prerequisite of limitation: registration of liability amount; if the contribution was made, basically no liability, unless it is repaid: liability to the extent of the amount of repayment.
  • Corporation: Limited to the registered capital; if the capital contribution was made, basically no liability of shareholders, unless it is repaid: liability to the extent of the amount of repayment; the corporation is liable to the extent of its assets.

Tax

  • Partnership: Subject of taxation: partners and not partnership; but exceptions for VAT and trade tax (Germany); taxation of the profits of the permanent establishment (the same applies for branch) in international tax law; see check-the-box for LLC (USA).
  • Corporation: Corporation is subject of taxation; besides there is a taxation of dividend payments to the shareholders; see check-the-box for Corp. (USA).

Capital Contribution and Capital Maintenance

  • Partnership: Basically no special rules (at least one of the partners is liable w/o limitation)
  • Corporation: Strict rules on capital contribution and capital maintenance

“Flexibility”

  • Partnership: Basically no form requirements for establishment, amendments, accession of partners and dissolution (but contribution of real estate and establishment of limited partnership (Poland) needs notarization; few legally mandatory rules (to the benefit of creditors).
  • Corporation: In Poland and in Germany mandatory requirement of notarial deed in order to establish a corporation and to amend its articles of association; mandatory filing of establishment and amendments of articles of association to the National Court Register (Poland) or Commercial Register (Germany);
  • Partnership: although there are company registers as well (Companies House in the UK and in the US (e.g. Department of State - Corporation Bureau in Pennsylvania); no form requirement of notarization in the UK and in the US for establishment and amendments;
  • Corporation: mandatory legal rules especially with respect to the stockholding company in Europe and listed companies in general in order to protect the creditors and the co-shareholders (basically there is only liability of the corporation limited to the corporation’s assets); most statutory rules are mandatory except for explicit legal rules allowing deviations;
  • Corporation: with respect to limited companies: deviation from statutory rules admissible, unless provided for otherwise explicitly or implicitly (highly disputed)

“Corporate Governance”

  • Partnership: Basically management and representation by all partners jointly (exception for limited or silent partner), but usually agreement of partners and deviating rules (e.g., on management and authority (sole or joint) for selected partners)
  • Corporation: Third-party managers (executive and non-executive directors and/or officers; management and supervisory board members) no instructions to board members of SA/AG by general assembly or supervisory board admissible but approval catalog (shareholders or supervising board) with internal effect not affecting external authority (validity of agreements in case of non-compliance with approval requirement) but only internal power (in case of excess: damages claim against managers);
  • Corporation: The shareholders’ assembly of a Sp. z o.o./GmbH is entitled to give instructions to the management.

Decision-making

  • Partnership: Principle of unanimity, i.e., basically veto by each partner, but amendments in partnership agreement are usual and sensible in order to avoid deadlocks
  • Corporation: Majority, but partly qualified majority legally mandatorily required in order to protect co-shareholders, e.g., in case of amendment of the articles of association, domination agreement, merger, delisting

Duty of Faith/Duty of Care

  • Partnership: Partners have a special duty of faith/duty of care vis-à-vis each other; definition and establishment of duties in partnership agreement.
  • Corporation: Only limited exceptions according to which the duty of faith/duty of care exceed the general principle of good faith applicable in civil law; subject to agreement on duties in articles of association and shareholders’ agreements (e.g., no obligation of shareholder to refrain from competitive activity, no obligation to finance etc.).

Members

  • Partnership: Basically status quo of members (partners): dissolution in case of exit of partners/no entry of new partners; liquidation as a result of dissolution; but partly deviating statutory provisions and usually rules in partnership agreements.
  • Corporation: Exit and entry of members (shareholders) are in line with the standard type of a corporation whose existence is independent from the individual member; but deviating rules in articles of association and shareholders’ agreements; threshold of notarization for transfer of shares in limited company (Germany and Poland) in order to avoid trading of such shares.

Liability for Debt of a Corporation

  • Basically liability to creditors of corporation only of the corporation itself with its assets; no liability of shareholders and managers (directors and officers; board members)
  • Exceptions
    • Liabilities during the period between the legal act of establishment (see Art. 161 Polish Commercial Code: legal capacity of the “pre-corporation” after the legal act of establishment) and the registration of the corporation
    • Board Members or representatives acting for a corporation (Art. 13 § 1 and Art. 161 § 3 Polish Commercial Code; Sec. 11 para. 2 German Act on Limited Companies until registration, in some countries, e.g., in England: unlimited liability of the managers and representatives acting; no legal capacity of the corporation before registration; but registration in England within 3 days).
    • Shareholders for a negative balance of assets of company as against registered capital at the time of registration
    • if no filing for registration: unlimited liability of managers, representatives, and shareholders (protection of creditors)
    • before act of establishment for “pre-establishment entity”: unlimited liability of managers, representatives, and shareholders
    • Recommendation: no business before registration; purchase of shelf-company
    • domination agreement
    • surrender-of-profit agreement
    • parent controlling, if management of controlling parent controls the business of controlled subsidiary continuously and in a comprehensive way and there is no evidence that damages would have occurred in an identical scope if managers of controlled company had acted for the controlled subsidiary without undue influence of controlling parent
    • piercing the corporate veil
  • cases of acting against good faith (lack of capitalization of subsidiary; representation by shareholder or managers to third parties generating trust; evasion of liability by forming subsidiary; non-compliance with corporate governance and formalities, with rules on financial record keeping and rules on intercompany finance relationships)
  • confusion of private and business assets
  • willful conduct causation of damages through transfer of property to the disadvantage of company (“Trihotel”)