Before starting a business, it is worth assessing the capital, assets and other resources needed to carry out the planned activity, the business and financial risks and the expected return on investment. Once all these aspects have been identified, it is useful to assess the possible forms of entrepreneurship.
When choosing the type of business, it is also advisable to consider whether the business is to be run alone or jointly with others, whether the entrepreneur wishes to be personally involved in the business on a day-to-day basis, and the extent to which he or she can assume the risks involved in the business: unlimited with his or her own private assets or only up to the amount of the assets invested, with higher start-up costs.
To make this decision, it is worthwhile to be aware of the characteristics of the different forms of entrepreneurship, their advantages and disadvantages.
To this end, the following sections describe the different types of business:
- private entrepreneur (in Hungarian: ‘egyéni vállalkozó’)
- sole proprietorship (in Hungarian: ‘egyéni cég’)
- companies (in Hungarian: ‘gazdasági társaságok’)
- cooperatives (in Hungarian: ‘szövetkezet’)
The rules applicable to sole entrepreneur and sole proprietorships are set out in Act CXV of 2009, while the main rules applicable to companies and cooperatives are set out in Book 3 of Act V of 2013 on the Civil Code.
I. Sole entrepreneur and sole entrepreneurship
1. Sole entrepreneur
The better known of the two forms of business is the sole entrepreneurship, which is a form in which a natural person may carry out economic activity for business purposes in Hungary.
The economic activity for business purposes is deemed to take place when the natural person carries out the economic activity on a regular basis, with a view to making a profit and acquiring wealth, and at his or her own economic risk.
Own economic risk-bearing means that the sole entrepreneur is liable for the obligations arising from this activity with all his/her assets. The sole entrepreneur is therefore fully liable for the activity carried out in this form. Thus, a sole entrepreneur cannot be a member of a sole proprietorship or a member of a company with unlimited liability.
A natural person may have only one sole entrepreneurship, but may carry out several activities in several establishments at the same time. The sole entrepreneur shall personally contribute to the activity, but has the possibility to employ employees on an employment or agency basis.
In order to start a sole entrepreneurship, the natural person shall submit a notification of his/her intention to do so to the body keeping the register (the Tax Authority). The notification is free of charge. The activity of sole entrepreneurship may start on the day of registration.
It is also possible to suspend the sole entrepreneurship for a period of 1 month to 3 years.
The sole entrepreneur may set up a sole proprietorship or a one-person limited liability company to continue his or her entrepreneurial activity. In the case of a one-person limited liability company, the founding sole entrepreneur may not be a member of a company with unlimited liability or establish a new sole entrepreneurship for 5 years after registration.
2. Sole proprietorship
A sole proprietorship may be established by a person registered as a sole entrepreneur. A sole proprietorship is created by registration into the Companies Register and requires the assistance of a lawyer. As a rule, a sole proprietorship may have only one member, and one natural person may be a member of only one sole proprietorship.
A sole proprietorship does not have legal personality, but it has legal capacity, i.e. it can acquire rights and obligations, enter into contracts, bring legal actions and be sued.
The sole proprietorship is liable for its obligations primarily through its own assets, but if the claims are not covered by the assets of the sole proprietorship, its member is liable for them without limitation through its own assets.
A sole proprietorship is created with a registered capital determined by the founder, the minimum amount of which is not set by law. If the registered capital determined by the founder is less than HUF 200 000, it shall be paid in full in cash to the sole proprietorship.
The member of the sole proprietorship decides on the matters that are the responsibility of the supreme body and may also manage the sole proprietorship.
A sole proprietorship may be transformed into a company.
II. Companies
Companies are legal entities established for the purpose of carrying out a joint economic activity in the course of a trade or business with a financial contribution of their members, in which the members jointly share the profits and bear the losses.
Typically, companies are formed with the participation of several persons, but it is also possible to form a single-member company in the case of limited liability companies and private limited companies.
The members of a company can be both natural and legal persons. When establishing or joining a company, the member is required to make a financial contribution, which may be monetary or contribution in-kind. As a contribution in-kind, the member typically transfers some asset (e.g. real estate, car) to the company, but may also provide receivables, if the debt is acknowledged by the debtor or is based on a final and binding court decision. An essential rule is that the personal contribution or employment of a member in the company cannot be considered a contribution in-kind.
In a company, the members acquire shares in proportion to their financial contribution, but the company itself is the sole owner of the company's assets and is therefore entitled to dispose of them. The member may not dispose of the assets of the company as his or her own.
The profits of the company shall accrue to the members in proportion to their financial contribution and they shall bear the losses in the same proportion.
Companies can be distinguished according to whether the member has limited or unlimited pecuniary liability for the company's obligations which are not covered by the company's own assets. In the case of unlimited liability, the member is also liable with his or her own assets for debts which the company is unable to meet. Therefore, a natural person can only be a member with unlimited liability in one company at a time.
By contrast, the essence of limited liability is that, as a general rule, the member is liable for the company's losses only to the extent of the already provided financial contribution. Thus, the private assets of the member are protected even if the company becomes insolvent. It is important to note, however, that in certain cases the limited liability of a member may be 'breached': if the member abuses his limited liability and as a result, there are unpaid creditors' claims on the dissolution of the company, the member will be liable for these debts without limit.
The supreme body of the company is the decision-making body of the members, which decides on the company's fundamental issues concerning business and personnel matters (e.g. appointment of the managing director, approval of the accounts).
The management and representation of the company is carried out by the executive officer (typically the managing director) under an agency or an employment contract. The company may have one or more executive officers, who may perform their duties individually or jointly. The executive officer may not be instructed by the member, except in the case of a single-member company.
Companies are subject to formal requirements, so that a company may be established only in the form specified by law. The name of the company must include a designation of its form.
Forms of companies:
- general partnership (in Hungarian: ‘közkereseti társaság’),
- limited partnership (in Hungarian: ‘betéti társaság’),
- limited liability company (in Hungarian ‘korlátolt felelősségű társaság’),
- company limited by shares (in Hungarian: ‘részvénytársaság’).
The establishment of a company requires the assistance of a lawyer and the company must be registered in the Company Register. With the exception of a company limited by shares, the formation of a company is free of duty and publication costs.
1. General partnership (‘közkereseti társaság’)
A general partnership may be formed with the participation of at least 2 persons, in which case the members of the company undertake to make a contribution of assets to the company and to assume unlimited and joint and several liability for the liabilities of the company not covered by the company’s assets.
In the case of a general partnership, there is no minimum amount of financial contribution to be provided or capital required, so it can be established with a capital of HUF 10,000.
The supreme body of a general partnership is the general meeting of members, where all members have equal votes, regardless of the amount of their contributions.
The company is managed by one or more managing directors appointed or elected from among the members.
2. Limited partnership (‘Bt.’)
When a limited partnership is formed, the members of the partnership undertake to make a monetary or in-kind contribution to the partnership and at least one of the partners, the general partner (in Hungarian: ‘beltag’) undertakes to assume unlimited liability, jointly and severally together with the other general partners for the obligations of the partnership not covered by the partnership’s assets, while there is at least one partner, the limited partner (in Hungarian: ‘kültag’), who is not liable for the obligations of the partnership. A limited partnership can therefore be formed with at least 2 members: one general partner and one limited partner. The general partner has unlimited liability for the company's obligations, while the limited partner has limited liability.
The establishment of a limited partnership is possible with any amount of financial contribution, even with HUF 10,000.
One or more persons may be appointed to manage the company from among the general or limited partners.
3. Limited liability company (Kft)
A limited liability company is a business company formed through the provision of a registered capital made up of capital contributions of predetermined amount. The capital contribution is the financial contribution of the member (monetary or in-kind), the minimum amount of which is HUF 100 000. The total of the capital contribution is the share capital, which may not be less than HUF 3,000,000. The liability of the members of the company is limited, so that no member is liable for the obligations of the company with his or her own assets in addition to the already provided financial contribution.
A limited liability company is therefore required to have a minimum amount of capital, but the law allows the company to be formed with this amount being paid by the members only later. In such a case, the members shall make the contribution no later than three months after the adoption of the accounts for the second full financial year, covering twelve months.
An essential restriction is, however, that the member is not entitled to dividends until he has made his full contribution and that the member is liable for the company's debts up to that amount.
The set of the rights and obligations related to the capital contribution is called a quota (in Hungarian: “üzletrész”), which is in line with the capital contribution.
The supreme body of the company is the general meeting of members, at which, as a general rule, the members have voting rights in proportion to their quotas. The general meeting elects the company's executive officer (one or more managing directors), who may be a person who is not a member of the company.
A limited liability company can also be formed by a single person, in which case a single-member company is created.
4. Company limited by shares (‘részvénytársaság’)
A company limited by shares is a company, which operates with a share capital consisting of a predetermined number and nominal value of shares. The sum of the nominal value of all the shares is the share capital of the company limited by shares. The obligation of the shareholder is to deliver the nominal value or the issue value of the share. The shareholder is not liable for the obligations of the company limited by shares.
The form of a company limited by shares can be public or private. A company whose shares have been listed on the stock exchange is considered a public company limited by shares (in Hungarian: ‘nyilvánosan működő részvénytársaság’ or 'Nyrt.’), and a company whose shares have not been listed is a private company limited by shares (in Hungarian: ‘zártkörűen működő társaság’ or ‘Zrt.’).
The share capital of a Zrt. may not be less than HUF 5,000,000, while the minimum amount of share capital of a Nyrt. is HUF 20 million.
Shares are registered negotiable securities with a nominal value, representing membership rights in the issuing company limited by shares. In the case of a Zrt. the share may be produced by printing or in dematerialised form, whereas in the case of a Nyrt. the shares must be produced in dematerialised form.
A public limited company may issue different types of shares:
- ordinary share;
- preference share;
- employee share;
- interest-bearing share;
- redeemable share.
Ordinary shares are shares that do not belong to any other class of shares. A preference share grants the shareholder a specific advantage over other classes of shares, such as a right to dividends, a share in the distribution of assets, a priority in appointing an executive officer or a member of the supervisory board, a priority related to voting rights, a right of first refusal, or several of these at the same time.
The supreme body of the company is the general meeting of shareholders.
As a general rule, the management of the company is carried out by a 3-member board of directors, which functions in a collegiate form and takes its decisions by a simple majority of the members present. In the case of a Zrt., it is possible to decide that the the powers of the board of directors is exercised by a chief executive officer.
In the case of a Nyrt., a supervisory board and an audit committee are mandatory in addition to the board of directors. The supervisory board is a body set up by the shareholders to supervise the management of the company in order to safeguard its interests and is therefore entitled to examine and express its opinion on proposals submitted to the supreme body. The audit committee assists the supervisory board and the board of directors in monitoring the financial reporting system, selecting the auditor and cooperating with the auditor.
III. Cooperative
A cooperative is not a company, but a legal entity established with capital consisting of the financial contributions of its members, operating according to the principles of open membership and variable capital, and carrying out activities to meet the economic and social needs of its members. The cooperative may be engaged in sales, purchases, production and providing services.
The obligation of the member is to make a monetary or in-kind contribution and to make a personal assistance as defined in the cooperative’s articles of association. The member is not liable for the obligations of the cooperative.
Both natural and legal persons may be members of the cooperative, but the number of legal person members may not exceed 1/3 of the total number of members.
In the case of a cooperative, the minimum amount of registered capital or the financial contribution of the member is not defined, but there are several rules governing the proportion of contributions:
- the contribution of one member may not exceed 35 % of the capital,
- the amount of the contribution of the members with legal personality may not exceed 1/3 of the capital.
The main decision-making body of the cooperative is the general assembly, which consists of all the members. The cooperative shall be managed by a board of directors consisting of 3 members.
The cooperative shall be established with the assistance of a lawyer. The establishment of the cooperative shall be registered with the court of registration.
dr. Bedő Eszter, attorney
Forgó, Damjanovic &Partners Law Firm
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