Term and legal definition of Company
The term “Company” originates from the Anglo-American legal system and is widely used in international legal practice to refer to certain forms of enterprises, corporations, or business entities. There is no direct equivalent term in German law; therefore, the precise meaning must be determined within each legal system and its context. In the Anglo-American context, “Company” generally refers to a legal entity pursuing economic purposes, regardless of whether it is a corporation or partnership.
Distinction from other types of companies
In German law, the concept of a company is precisely regulated (§§ 705 ff. BGB). The “Company” most closely resembles corporations such as the stock corporation (AG) or the limited liability company (GmbH), but in international business it is often interpreted more broadly and can also include other forms such as the Limited Liability Company (LLC).
Types of companies and legal foundations
Company under Anglo-American law
Under common law, a Company is primarily defined as a business entity with its own legal personality. Key legal sources are the UK Companies Act 2006 in Great Britain and the various ‘Corporation Codes’ in the US.
- Private Company Limited by Shares (Ltd.)
This type of company is comparable to the German GmbH, but sets partially different requirements for minimum capital and incorporation.
- Public Limited Company (plc)
Comparable to the German AG and authorized to issue shares on the stock exchange.
- Limited Liability Company (LLC, USA)
A hybrid between a partnership and a corporation with limited liability.
Establishment and formation of a Company
The following steps are usually required to incorporate a Company:
- Drafting of articles (Articles of Association, Memorandum of Association)
- Appointment of a registered office (Registered Office)
- Appointment of shareholders and bodies (Directors, Secretary)
- Entry in the public register (Commercial Register, Companies Register)
The registration gives the Company legal personality and makes it a limited liability entity.
Legal personality and liability
A Company is, as a rule, a separate legal entity, can acquire property, sue and be sued in court, and enter into contracts. Shareholders and directors generally do not have personal liability for the Company’s obligations; their liability is limited to their contributions.
Corporate bodies and representation
Statutory organs include, for example, the Board of Directors and, in public companies, a General Meeting. The powers of representation and duties of the Directors are primarily governed by law and the articles of association.
Rights and duties of shareholders
- Voting rights at general meetings
- Right to dividend distribution
- Information and inspection rights
Duties of directors
- Duty of loyalty to the Company
- Duty of care in business decisions
- Accounting and disclosure obligations
Corporate law particularities
Principle of separation
A key characteristic of the Company is the separation principle between the shareholders and the company assets, which forms the basis for limited liability (Corporate Veil). Piercing the corporate veil is only possible in exceptional cases, such as abuse of rights.
Minimum capital, financing and capital measures
Many legal systems require minimum capital for the incorporation of certain forms of Companies. Financing may occur through equity (e.g., issue of shares/interests) or debt (loans, bonds). Capital measures, such as capital increases or reductions, are subject to formal legal requirements.
Accounting, disclosure and publicity
Companies are required to prepare annual financial statements and, depending on their size and legal form, to publish them. These requirements serve creditor protection and inform shareholders.
Accounting standards
- International standards (IFRS, US-GAAP) for internationally active companies
- National regulations such as the UK Companies Act, HGB (Germany)
Business succession, transformation, and dissolution
A transfer of rights in a Company is typically possible through transfer of shares. Transformations (mergers, demergers) take place in accordance with the relevant national transformation acts. Liquidation of a Company is governed by mandatory legal rules for creditor protection.
Company in international context
Due to global economic activity, the Company is the central legal form of international company law. For cross-border transactions, key issues include the recognition of foreign Companies, freedom of establishment (especially in the EU internal market), taxation, and jurisdiction.
Recognition of companies in Germany and the EU
Foreign Companies with their seat in the internal market are generally recognized in Germany and other EU countries under European primary law (Centros decision of the ECJ). Thus, their legal capacity, liability structure, and internal organization remain intact.
Tax treatment of Companies
Companies are generally subject to corporate income tax. Additionally, depending on the country, withholding tax, value-added tax, and other business taxes may apply. Special rules apply in international tax law regarding permanent establishments and cross-border profit distributions.
Summary
The Company is a key term in corporate law with diverse interpretations in international law. It is characterized by legal personality, limited liability, and the separation of assets. Different legal forms such as Ltd., plc, or LLC are subject to their own rules for formation, organization, and accounting. International agreements and European law play a significant role in their recognition and treatment under German and European business law. Tax classification varies according to national law and tax treaties. Thus, the Company remains an indispensable concept for international business law transactions.
Frequently Asked Questions
What legal requirements must be met to form a Company?
To form a Company, such as a GmbH or AG in Germany, a number of legal requirements must be met. First, the incorporation documents, especially the articles of association or memorandum, must be notarized. The founders must agree on key details such as the company name, registered office, business purpose, and share capital (at least 25,000 euros for a GmbH, at least 50,000 euros for an AG). The share capital must either be deposited in the business account before registration or, to the required amount (for cash formation, at least half for a GmbH), be proven. Afterwards, the company must be entered in the commercial register, for which various documents such as the list of shareholders, managing directors’ appointments, and any required permits (e.g., for regulated trades) must be submitted. The Company only comes into legal existence upon registration. In addition, tax registrations at the tax office and registration with social security authorities are necessary. Depending on the legal form, specific regulations, for example regarding co-determination or publicity, must also be observed.
What liability rules apply to the directors of a Company?
Directors of a Company (for example, of a GmbH) are subject to specific liability rules. Outwardly, liability lies primarily with the company, but directors may be held personally liable for breaches of duty. This includes in particular breaches of statutory obligations such as timely filing for insolvency, payment of taxes and social security contributions, or compliance with laws and regulations. Internally, directors are liable to the company for damage caused by culpable (intentional or negligent) breaches of duty. D&O insurance can to some extent cover personal liability risks, but does not relieve them of statutory responsibility. In the event of insolvency, personal liability may arise in cases of delayed insolvency filing or breaches of the duty of care, which may also entail criminal responsibility.
What publicity obligations apply to Companies?
Depending on their legal form and size, Companies are legally required to disclose certain information. These publicity obligations include the publication of annual financial statements and, if applicable, management reports, especially for corporations like GmbH and AG. Reports must be submitted to the business register, where they are accessible to anyone. Small companies benefit from relief and may only have to file a short balance sheet or an attachment, while larger companies must disclose more comprehensive documents and may need to have them audited. Violations of publicity obligations can result in fines imposed by the Federal Office of Justice. In addition, there are further notification and disclosure requirements, e.g., in case of a change of managing directors or shareholder structure (transparency register).
What participation rights do shareholders of a Company have?
Shareholders of a Company (for example, of a GmbH) have extensive participation and control rights. These include the right to attend and vote at shareholders’ meetings, the right to make motions and obtain information, and the right to pass or propose resolutions, for example, regarding profit appropriation, the appointment and removal of directors, and amendments to the articles of association. For certain actions, such as capital increases or reductions, qualified majorities up to unanimity are required. Shareholders may also demand access to the company books and documents and request the appointment of a special auditor. The scope of participation rights can be specified in the articles of association; however, certain core rights, especially control rights, can only be restricted within narrow legal limits.
How is a capital increase in a Company conducted?
Capital increases at a Company are strictly regulated and take place over several steps. For a GmbH, a shareholders’ resolution by qualified majority (at least three-quarters of votes cast) is first required, determining the amount and terms of the increase. The resolution must be notarized. Then, the new capital is paid in, either as a cash or non-cash contribution. The new shares are allocated accordingly. Subsequently, the capital increase must be registered with the commercial register; all supporting documents, such as the capital increase resolution, proof of payment, and, if applicable, reports on contributions in kind, must be submitted. The capital increase is only effective upon registration. For a stock corporation, similar strict requirements apply, with additional specifics such as pre-emptive rights for shareholders and prospectus obligations.
What are the tax obligations of a Company?
A Company is subject to various tax obligations, which differ depending on legal form and business activities. These mainly include corporate income tax (for corporations), trade tax, value-added tax, as well as wage tax and social security contributions if it employs staff. After incorporation, the company must register with the relevant tax office within one month and will receive a tax number. Regular filings and advance payments are required, for example, VAT prepayments, corporate income and trade tax prepayments. At year-end, corresponding tax returns and the financial statements must be submitted to the tax office. Violations of tax obligations may result in significant financial and criminal consequences (tax evasion).
Under what circumstances can a Company be liquidated?
Liquidation of a Company takes place in a legally prescribed procedure to ensure the proper winding up of the business. First, a resolution to dissolve the company must be passed by the shareholders or general meeting (in the case of an AG), notarized, and registered in the commercial register. The company then enters the ‘liquidation’ phase, during which liquidators are appointed to take over management tasks. These must publicly invite creditors to file their claims (creditor call). The company assets are then realized, all debts settled, and any surplus distributed to the shareholders. The liquidation lasts at least one year to ensure creditor protection. After completion of the liquidation, the Company is removed from the commercial register. Some tax and legal obligations may continue to exist after deletion (e.g., retention obligations for books and documents for up to ten years).
