Company Formation and Constitution
Selecting a suitable form of corporate vehicle and adopting a suitable set of corporate documents is an important initial step for a new business
Company formation is the one of the very first steps in creating a successful business.
Important decisions must be made prior to formation, such as: what jurisdiction suits the business best? what legal form the business should take?
Selecting a suitable jurisdiction can be a demanding task. One may need to consider, among others, minimum local ownership and licencing requirements, corporate governance rules, taxation and many other matters. In fact, these matters will often lead to a broader question: does the new business require a group of companies? For a review of that topic, please see our Corporate Structures and Groups page.
Once a suitable jurisdiction is chosen, the promoters’ attention will turn to the appropriate legal form for the business. A jurisdiction will have typically just a few options to choose from; and such options would have been initially considered at the prior stage (when a suitable jurisdiction was being selected).
Of course, the prevalent legal form for a business is a limited company. Although the specific term used to refer to such type of company may vary, legislation invariably provides for a legal form of this kind. For some businesses, a limited liability partnership (LLP) can advantageous and LLPs are indeed often used for investment or consultancy businesses. There are also dedicated legal forms for non-profit organisations.
Just as the United Arab Emirates is known for the distinction between the mainland and free zones, many jurisdictions, too, will have designated geographical zone(s) within which beneficial taxation is offered. For more information on the position in the United Arab Emirates, please see our section on Business Relocation.
For the sake of completeness, it must be noted that a new business does not have to take the form of a body corporate. A non-incorporated partnership could also be a viable option.
Depending on the jurisdiction, a company might need to be maintained through a dedicated service provider, a corporate agent. The corporate agent will be in charge of communications with the local companies’ authority, will submit corporate filings, and, sometimes, maintain company records.
Once the jurisdiction and the corporate form have been chosen, there would be various filings to prepare and complete, typically including know-your-customer information for the owners.
A body corporate will have its constitution, which for the sake of simplicity, we will refer here as the ‘articles’. Statutes or regulations often provide for some form of model articles, which can be used by default, but this default option will be suitable only for simpler businesses. Specific changes to model articles will need to be considered depending on the circumstances, including the need to reflect any shareholders’ agreement provisions.
A body corporate will have some form of ‘equity capital’. The meaning of ‘equity capital’ differs by jurisdiction, but there appears to be two main approaches: the amount of equity capital is taken to be the limit on the owners’ (shareholders’) liability; or the amount of equity capital is taken to be the minimum balance sheet value of the company’s assets which the owners (shareholders) must maintain. Some jurisdictions require that the equity capital be paid either shortly upon incorporation or within the first months or year of operation.
Contribution to equity capital could also be made in non-cash form, such as shares, intellectual property or assets. Often a valuation of non-cash contribution by an independent appraiser will be required.
Company formation and articles may not be as exciting as negotiating a new corporate acquisition, but proper execution will require care and attention – both from the business promoters and their advisers.
