What is company formation? – a guide

Valerio Gaddi

In this article, we’ll guide you through everything you need to know and the crucial steps for those who want to establish a company abroad. From choosing a company structure, and registering the business to making it thrive and facilitating profitability.

Understanding company formation

The process of formally establishing a limited liability company (which we will focus on in this guide) is called “company formation”. When a company is formed and registered it will be considered a separate legal entity and distinct from its individual owners by the legal system.

Fundamentally, this means that the company’s finances, obligations, contractual agreements, as well as ownership of property and assets are entirely separate from its owners.

Unincorporated businesses, such as sole proprietors, are however not legally separate entities. If you choose to operate your business as a sole proprietor, there is no distinction between your personal and business assets. You also become legally responsible for the business’s affairs. This means you are obligated to pay the business’s debts if there is not enough money to cover the liabilities in the company.

Company formation – legal requirements

All companies engaged in business activities must be registered with the relevant authorities. Registration starts with submission of the necessary documentation to the authorities and the payment of the associated fees. Once all the necessary conditions are met, you will receive an official certificate of company formation.

You cannot legally operate your company unless these documents have been submitted to the relevant authorities. Violating requirements may result in penalties and charger.

To establish a limited company, you shall commit share capital into the company. The required starting capital varies between different countries and jurisdictions, such as the Nordic region.

Company formation – step by step

When starting a business, you have the freedom to choose from various organizational structures and business forms. Different business forms have different advantages and disadvantages, and what is best suited for your purposes largely depends on the focus and scope of your business. Different business structures and company forms come with their own rules and regulations, defying matters from how the business should be conducted to the amount of tax to be paid.

For instance, a private company can commence its operations as soon as it receives its registration certificate, unlike publicly listed companies that must undergo a longer and more comprehensive formation process. Before a company with share capital can open for business, additional procedures must be carried out. Here, we will explore the steps required to establish a new business.

1. Choose a company name and legal structure

The company name is a part of your business identity and an integral part of the company’s marketing efforts. Therefore, it’s important to carefully choose a company name to ensure that it conveys the right message. The name should also be easy to remember and not lead to unnecessary confusion. A generic company name will make it difficult for your customers to distinguish your business from competitors and, in the worst case, understand what the company does.

Once you’ve decided on a company name, it is worthy to promptly register and trademark the name. If you’re starting a limited company, in most jurisdictions, it’s mandatory to register the name, and the corporate form is usually part of the name.

Choosing a type company formation is also an important part in the early stages of establishing your business. What type of corporate formation you choose, will for instance impact the way your company pays its taxes and does its tax reporting.

A well thought through corporate structure ensures better sustainability of the whole business. A corporate structure in need of changes can on the contrary be a risk factor. Changing the legal structure and name for example can be complicated, time-consuming, and costly depending on local rules. In some cases, problematic consequences may arise if you want to change the legal structure, such as being forced to dissolve the original company. There can also be financial consequences in the form of additional taxes and fees.

2. Register your business

Registering your business with the relevant authorities is a mandatory step in business formation. The process for registering a business varies depending on the type of business and where you are starting the business. If you are not familiar with local regulations, starting a business in the Nordic region, our Nordic GEM team has seasoned professionals to help you with the company registration process.

Requirements to business documentation vary not only depending on where the business is registered but also the type of business form. For example, the requirements for starting a sole proprietorship are lower than for a limited company.

Typically required to start a limited company:

  • Company name
  • Company address
  • Purpose and activities of the company
  • Name and address of a legal representative who can receive and sign legal documents on behalf of the company
  • Names and addresses of founders and board members
  • Share capital

Smaller businesses like sole proprietorships and partnerships often only need to register their name with local authorities (e.g., the municipality).

The same applies to non-profit activities. However, if a business intends to operate for profit and have employees, it needs to be registered with tax authorities. As the process of registering your company can vary depending on the region, knowledge of the local jurisdiction is vital to ensure compliance.

3. Articles of association

The articles of association are a document that specifies the rules governing the company’s operations, defining the direction and purpose of the business. This document details how the business will be conducted within the organizational framework, how accounting will be managed, how board members are appointed, regulations for issuing shares, rules for shareholder meetings, and much more.

4. Opening a bank account

Opening a business bank account in a chosen local jurisdiction is important when expanding your business internationally, providing notable benefits like conducting lower commissioned transfers, paying our salaries, complying with local or business partner’s country requirements and streamlining overall tax processes.

Due to varying jurisdictional regulations, compliance requirements, KYC and business protocols in different regions, opening a bank account can be a complex and lengthy task. Therefore, a thorough understanding of the local jurisdiction regulations is essential to ensure compliance.

5. The Company Board

The company board (in case of a limited company) oversees company governance and is ultimately responsible for making strategic decisions regarding the company. Therefore, when forming a company, appointing the right board is crucial from the governance perspective . The number of the required board members varies between countries and jurisdictions.

In many jurisdictions, the board needs to consist of at least one board member. In case of several board members one of the board members usually serves also as the chairman.

Our dedicated accounting and legal teams, located in all the Nordic jurisdictions, help with bank account opening and more incorporation matters. We work with companies in a wide range of business industries, including new entrants and established businesses helping to start and expand within the Nordic region, and understanding our client needs depending on their business area. Read more about our services.

Valerio Gaddi
Valerio Gaddi
Valerio comes from legal roles with big, global players – among them – one of the biggest service providers in the World. He is also knowledgeable with data protection and GDPR. Valerio is fluent in Italian, Swedish and English. A cheerful jokester and a lover of dogs.

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