Pursuant to the current Commercial Code entrepreneurs may choose a form of undertaking according to their needs and possibilities:
- Public limited company
- Private limited company
- General partnership
- Limited partnership
- Sole proprietorship
The most essential difference between these commercial undertakings is liability.
The first two have limited liability – the owner is not liable for the obligations of the undertaking.
The other three have full liability – the owner shall be liable for the of the undertaking with all of his/her assets, except for a limited partner of a limited partnership, who will be liable only to the extent of his/her contribution.
That is why, for the undertakings with limited liability, a minimum capital (share capital or stock capital) is established, which will be contributed by the founder and which he/she will lose in case of failure. The personal property of the owner will not be touched.
A private limited company, unlike a public limited company, don’t need a start-up capital. It has a simple management scheme and limited liability of the owners. For a small entrepreneur, it will be the most suitable form of an undertaking. One or several legal or natural persons may found a private limited company.
A public limited company , like a private limited company, is a commercial undertaking with limited liability. It is an undertaking for larger-scale activities, which need a multi-level control and management scheme. The share capital shall be divided into shares, the minimum nominal value of which may be ten euro cent. One or several legal or natural persons may found a public limited company.
A general partnership is a company, in which two or more owners operate under a common business name. A shareholder of a general partnership may be a natural person or a legal person. All shareholders of a any general partnership, like a sole proprietor, are solidarily liable for the obligations of the general partnership with all of their assets – such solidary liability requires great trust between the partners. Therefore, very few general partnerships have been entered in the register.
A limited partnership is a company, in which two or more legal persons or natural persons operate under a common business name. At least one of the persons (general partner) shall be liable for the obligations of the limited partnership with all of the general partner`s assets. The number of limited partnerships registered in Estonia is even less than the number of general partnerships, for the obvious reason that such a hybrid (with a combined liability) is neither understandable nor acceptable.
Sole proprietorship. A sole proprietor is a natural person who offers goods or services for a consideration under his/her own name. Any natural person may be a sole proprietor and shall be entered in the Commercial Register at his/her request. A sole proprietor shall be liable for his/her obligations with all his/her personal property.
Bearing in mind the above, you have evidently decided to operate as a sole proprietor or to found a private limited company.
Let us take a closer look at the latter.
Before commencing compilation of documents, all the information required for registration of a company should be considered:
1) Business name – short, beautiful, striking names are almost impossible to register. The Commercial Code states that a business name shall be clearly distinguishable from other business names entered in the Commercial Register. A sign or combination of signs which consists of letters, words or numerals and is protected as a trade mark in Estonia shall not be used in a business name. There are some other restrictions, therefore it is highly recommendable to start by sending a name inquiry to the Commercial Register. That should give a 99% guarantee to the suitability of the business name.
2) Areas of activity – a sufficient number of, but not too many, activities should be listed. The registry card of a company should convey an impression of objectivity and reliability. There is a general misconception that if an area of activity is not listed on the registry card, one may not engage in it. However, activities for which an activity or operating licence is required, must always be listed.
3) Address – in case you do not yet know a location of your enterprise, I recommend to enter in the register, for example, the residential address of a member of the management board. As of 2001, a change of a business address in the Commercial Register is state duty free. So I recommend to bear that in mind and to update your data in good time.
4) Articles of Association – contrarily to the general opinion, it is my opinion that the wording of the articles of association is not particularly important. Naturally, it should be given careful preliminary consideration, but special extravagancies should be left out. The standard articles of association of consultation firms are quite good, seeing that in their preparation, the interests of future entrepreneurs have been taken into account, in order to allow them as many rights and liberties as possible within the framework provided by law.
5) Capital – most commercial undertakings are founded with a minimum capital. In such a case the “liability” stated above is smallest. In the course of development of the company and widening of its scope of activities, an increase of the capital will always be possible if required.
Preparation of documents (how and where to register)
One may prepare documents oneself, notarial acts must be drawn up by a notary. When the articles of incorporation have been drawn up, they shall be forwarded to the Commercial Register together with any supplementary documents.
The documents may be delivered by hand or sent by mail. In case you have prepared the documents yourself, I would advise you to deliver them personally, so that the registry secretary can check the availability of all the necessary documents. If you send the documents by mail, be sure to use registered mail. In the Commercial Register, the documents will be examined by an assistant judge.
If everything is OK, the assistant judge will then enter your company in the Commercial Register according to the data set out in the entry application.
In case of shortcomings, he/she will set a term for elimination of the deficiencies. In Tallinn, an entry in the register will be made in about working 5 days of submission of the entry application. In the other registration departments in Estonia, it will take even less time.
A judgment on entry will be sent to the legal or e-mail address of the company, a registry card may be ordered from the Commercial Register.
Those of you lacking time or technical possibilities to do all that themselves should use the help of a consultation firm, who will provide a complex service according to your wishes.
A consultation firm gives advice based on the distinctive character of the company, prepares all the documents required for entry of the company in the register, forwards them to the Commercial Register and, finally, hands the executed registry card over to you.
In addition, you can get recommendations for starting up your business and setting up your accountancy.
It may be useful for the founders to know that transactions may be made, e.g. agreements may be entered into, in the name of the undertaking being founded even before the company is fully incorporated (Commercial Code, §147).
In case the company will subsequently not be founded for some reason, the persons who made the transaction shall be solidarily liable for all the obligations resulting from the transaction.
When the commercial undertaking is finally incorporated, a bank account shall be opened and the undertaking shall be registered with the Tax Board. After that, monthly reports shall be submitted, even if no activity has taken place.