5 important corporate issues to consider when starting a new business
According to commercial regulations in many common law jurisdictions, Directors have a duty of care requiring them to act in good faith for the company’s best interest, and using reasonable consideration of all available options before acting.
In court, such duty can be interpreted to mean acting in order to make a business successful. I.e. increasing income, and earning as much revenue as possible and also ensuring that all decisions will give the business the right tools to continue making profit in future. It is actually unlawful for Directors to consider the interests of society and the environment in any way that conflicts with making money.
In Cyprus, corporations have similar legal standing as humans, they can legally own property, commence legal proceedings, own shares in other companies, and even exclusively own other companies (holding companies) as per Chapter 113 of Cyprus company law. Companies can claim the right to a fair trial, to freedom of expression, and to property rights. This can make it extremely difficult to take corporate powers to court, since companies not only have these rights, but can also afford the best lawyers to defend them.
Therefore, when starting a new business venture or project, there are a number of deliberations to be made in order to ensure success. Having commercial legal standing should not be taken lightly and not being thorough when incorporating may lead to difficulties later on. Often, a start-up is the result of a great concept with the drive and financial support to create it. See below the considerations that should be established to ensure you have taken the necessary steps to protect yourself and your new business.
1. Choosing the type of business entity
A start-up must decide on the type of legal structure or entity that the company will be; to incorporate or to remain as a sole proprietorship. Many entrepreneurs will postpone incorporating their business to avoid the costs associated with this process. While delaying incorporation saves money in the short term, invariably, the delay may also create legal risk.
Incorporating a business early on offers significant advantages for founders and subsequent partners. A corporate entity provides liability protection and tax savings through benefits and deductions that are not available to sole proprietorships or partnerships. Additionally, if you are looking for investments, an incorporated business is more attractive to Shareholders given the limited liability and transferability of shares. Investors often prefer working with established firms as they have an established share structure with different classes of shares.
2. Location of incorporation
The commercial laws of each jurisdiction vary wherever you chose to incorporate your business. Each country has a different set of rules which will directly affect taxing, running costs, and essentially how the business will be governed. Making this decision is perhaps the most vital for your company. As with any new business, it is always logical to either incorporate in the country that you currently reside in, where your main operations exist or elsewhere that have tax and cost benefits such as Cyprus, or the Seychelles.
By choosing to do business in another jurisdiction, you inevitably become subject to that jurisdictions’ company laws and legal regulations, which must be adhered to in order to keep the company in good standing. Many Business Owners will simply choose to incorporate in the country where their main business processes are carried out. Although this may be the simpler option, depending on where they are located, it can mean a slow incorporation time and excessive audit requirements that can be burdensome to comply with.
If you can afford the incremental cost, relocating may be a wise business move. You may also want to consider whether an offshore parent company structure would be beneficial. Although the analysis can be complex, incorporating your company elsewhere such as Cyprus or Belize can reduce the tax burden substantially. Contact us if you have questions about your options.
3. Naming the company
Sometimes, new Business Owners aren’t aware of the processes involved in naming and registering their company. For example if you are looking to incorporate a company in Cyprus, the name cannot be the same or even similar to another entity on the company registrar’s file. Unless you are functioning as a sole proprietorship under own name, you will need to register your business name in the jurisdiction in which you plan to operate in.
To register a company’s business name it must meet these requirements:
- Firstly, the name must be unique, this will be used to differentiate your proposed name from the names of other businesses.
- Secondly, it may help the business to include a descriptive component to the name or to help advertising via a search engine or on signage.
- Finally, the last word in the name of an incorporated company must show the abbreviation stating the business structure or type of legal entity such as LLC or PLC.
4. Structuring the ownership
It is important to have a sound understanding with your co-founders regarding the terms of your business arrangement. So much time is spent in courts around the world resolving professional relationships that were poorly planned or documented. As long as you are prepared to document basic processes, a legal contract exists for almost every situation and type of relationship in the business world.
The equity (including stock and options) of your company can be owned in different forms and subject to various conditions. The simplest way to structure the ownership of your company is to make fully-vested stock shares in exchange for a purchase price. However, this approach doesn’t always work for every company’s situation.
A Shareholder Agreement is a great way to document a business
Most disagreements can be avoided through control documents such as shareholders’ agreements or founder vesting agreements. Additionally, a clear definition of responsibilities, rights and expectations can help the understanding of what may happen in the event of certain contingencies or issues arising.
As the company grows in size and value, the founders have a greater interest in protecting against death, fall outs or other unforeseen events. If there is no shareholder or member agreement in place, it is not too late to create one. Eltoma can assist with this, click here to read more.
A shareholders’ agreement is a contract that is signed between some or all of the shareholders of a company that states certain key issues such as the management positions and basic running operations of the company, the shareholders’ rights, and limitations regarding the shares of the company. It should also comprise dispute resolution provisions and contingency plans in case of any disagreement between the founding parties. Think of it like a signing a prenuptial agreement before marriage!
5. Protection of intellectual property
Most companies have intellectual property (IP) which is used to create and store the value of the company. This intellectual property may include copyrights, patents, trade secrets, trademarks or even domain names. Perhaps you have a “secret ingredient” that gives your products or services a competitive edge over other companies.
Discovering a way to protect these intellectual property rights early can be critical to the lasting value of your company. This can be achieved by all company founders assigning their intellectual property to the company and renouncing all moral rights for their work on the company on the time before and after the incorporation.
Different types of intellectual property rights can protect you in different ways:
1. Patents may be somewhat expensive and time consuming to obtain however the power to stop others from practicing your business creation can give your company a competitive edge over other new start-ups that have the same ideas as you.
2. Copyrights© and trademarks™ can prevent competitors using your ideas to potentially even earn profit at your expense.
A sound portfolio of intellectual property rights can build and secure value in your company. It will also protect the value of the company, making it more attractive for potential investors.
When choosing a lawyer or service provider, consider their level of expertise beyond general commercial law. It is beneficial to work with a team who understands the industry and the unique challenges facing any offshore company. Finding a service provider or lawyer who recognises the specific needs and the growth cycle of start-ups or SMEs will help protect your company as well as maximising the long-term success of your business.
The information in this article should not be used to replace legal aid. Please contact us to speak to a qualified Lawyer or Legal Advisor.
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