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Comparative analysis of legal entities in Latvia

Legal entities in Latvia are specified in the Commercial Law of this country, since this Law regulates any commercial activity and is one of the main norms in this field. In accordance with the Commercial Law an entrepreneur is a natural person (individual entrepreneur) registered in the Commercial Register or a legal entity (private company or capital company) also registered there. The types of business activity are: self-employed persons, individual entrepreneurs (IE), private company (full and commandite) and capital companies which includes limited liability companies (LLC), small limited liability companies and joint stock companies.

According to the Commercial Register of Latvia by March 31, 2013 it is registered (not excluded):

individual entrepreneurs – 12123;
full companies – 417;
commandite companies (societe en commandite) – 104;
limited liability companies – 106815;
joint stock companies – 346.

As it stated above any person practicing business (businessman) shall be registered in the Commercial Register

1. Regarding an individual entrepreneur the following data shall be registered in the Register:

  • firm name;
  • first and last name of the entrepreneur, personal identification code (if there is no a personal code, then date of birth, number and date of an identification document, country and authority issuing the document);
  • registered address;
  • the name of the branch if it is different from the name of the firm and the branch’s registered address.

2. Regarding a private company the following data shall be registered in the Register:

  • firm name;
  • type of private company;
  • the amount of money deposited by each commandite members and the common amount;
  • first and last name, personal identification code (if there is no a personal code, then date of birth, number and date of an identification document, country and authority issuing the document) of the commandites and members of the private company taking personal financial responsibility; and for legal entity its registration number and registered address;
  • first and last name, personal identification code (if there is no personal code, then date of birth, number and date of an identification document, country and authority issuing the document); for legal entity ‘the firm’ registration number and registered addresses of those members of the private company who are authorized to represent the private company with indication whether they can represent the company together or separately;
  • registered address;
  • if the private company incorporated for a certain term, then the term within which it shall be acting;
  • the branch’s name if different from the main private company’s name and the relevant registered address.

3. Regarding a capital company the following data shall be registered in the Register:

  • firm name;
  • type of capital company;
  • first and last names, personal codes, (if there is no personal code, then date of birth, number and date of an identification document, country and authority issuing the document) and the positions of the managing persons or the council members if the company has any);
  • the right of one or several persons the members of the board of directors to represent the company one by one or together;
  • the amount of original capital with separate indication of the signed and paid amount;
  • this item excluded;
  • registered address;
  • if the capital company is incorporated for the certain term, then the term within which it shall be acting;
  • the branch’s name if different from the main capital company’s name and the relevant registered address .


ENTREPRENEURS

Individual entrepreneur

An individual entrepreneur is a physical person registered in the Commercial Register as an individual entrepreneur (Art.74, Commercial Law). The physical person must be registered in the Commercial Register as an individual entrepreneur if annual turnover of his/her commercial activity exceeds 200 000 Lats (LVL). Individual entrepreneur is responsible for his/her commitments by all his/her personal movable and immovable property. The term for the financial claim connected with the commercial activity of an individual entrepreneur is 3 years after exclusion of the said entrepreneur from the Commercial Register.

Full company

Full company is an association of individuals having the aim of commercial activity using common firm , in which on the basis of common agreement two or more members have been united not limiting their responsibility towards creditors of the mentioned company.

For registration of the full company in the Commercial Register it is necessary to submit a statement in which the relevant information shall be provided (Art.8, the Commercial Law). The statement shall be signed by all the members of the company.

The agreement of the company is regulated by the Civil Law of the Republic of Latvia . Each member of the company shall participate in it with his/her contribution. In accordance with the Civil Law the contribution can be either money or commodities or legal rights or labor. It allows somebody to participate in the company not having money. One can participate in the company contributing a promissory note or a computer, furniture etc. Since the Civil Law was accepted long ago in 1937 its articles seem archaic, so the labor is used as a kind of contribution, so you can provide some accounting or juridical services to the company and it is considered as your contribution. All kinds of contribution are estimated in money equivalent in order to determine contributions of each company member.

In full company there is ban for competition, which means the a member of a full company cannot participate in other company or conclude any deals it the same field of industry where operates the full company without consent of other full company members.

In this type of companies for making a decision it is indispensible to have consent of all the members who was the relevant right or the majority of votes of the members provided that it stipulated by the corporate agreement. In any full company as well as in commandite company there is no special provisions for managing the company, such provisions exist in capital companies, namely: they have board (or council) of directors.

Profits and losses in full company are shared in proportion according to contribution of each company member. For the company’s commitments its members are personally responsible by all their property. A full company is discontinued upon end of a term for which it was created by the decision of the company members or by initiating the bankruptcy procedure or by the court judgement.

The term for financial claims towards the company connected with commitments of the company is 3 years after end of existence of the company which means after excluding the company from the Commercial Register if the shorter term is not stipulated.

Commandite company

Commandite company is an association of individuals having the aim of commercial activity using common firm in which on the basis of common agreement 2 or more physical persons (members) have been united at the condition that financial responsibility of at least 1 member towards creditors is limited by the amount of his contribution but the same of other members is not limited. If the company started its activity before registration in the Commercial Register, then each commandite who agreed with a deal is responsible as other company members that means with no limits of responsibility.

For registration of a commandite company like for registration of full company it is necessary to submit the statement containing all information as written in Article 8, Item 2 of the Commercial Law and provide for the each commanditte: first and last name, personal identification code (if there is no personal code, then date of birth, number and date of issue of the identification document, the issuing country and authority), in case of legal entity its name, registration number and registered address.

Comparing with capital companies this kind of entities does not have board (council) of directors any decisions are made like in full company, namely: either by consensus of all members who have the relevant rights for making decisions or by majority of voted of all company members provided that it is stipulated in the appropriate agreement.

A commandite (company member having limited liability) does not participate in business correspondence and clerical work of the company. In commandite company there is no ban for competition as in full company excluding the situations when a commandite is allowed by the appropriate agreement to participate in business correspondence and clerical work or if he/she can influence by some other means on the business correspondence or clerical work of the company. A commandite has no rights to represent the company in relationships with any third parties

Regarding profits and losses a commandite company is similar to a full company excluding the fact that a commandite participates in losses only by his/her part of contribution.

In case of death of a commandite is/her heir(s)-at-law can become a member of the company, so, if the company had only one commandite, after his/her death the company continues and does not change its activity.

Capital company

Capital Company is a commercial company whose core capital consists of share capital or total nominal value of the shares. Capital companies are divided into limited liability companies and joint stock companies. The founder of the company may be a natural person, legal person or a partnership. The minimum number of founders is one person.

Member of a company of this type shall not be liable for the obligations of the company, and the company is not liable for the obligations of the member, i.e. damages caused by the company to a third party is responsibility of the company only, and not its members. In this case the company members take risks of capital invested into the company. Commercial law provides the opportunity to establish liability company, where at least one member is personally liable for the company's obligations with all his assets.

There were amendments to the Commercial Law adopted in 2012, and a new section titled “Limitations for dealing with founder, or member, or member of the board or council of a company, and with a person implicated". The new term "implicated person" means a person connected by kinship to the second degree with founder or member of the board or council of a company, so it could be spouse or a person you are in a common household. "Implicated person" may be another business entity, the greater part of the shares or capital of which is owned by founder or member, or member of the board or council of the company. Third embodiment of the "implicated person" - is the founder, or member, or member of the board or council of a company that is founder or member of the board or council of another business entity. Commercial law provides that for the first two years of a company, when making a deal with the founder, or member of the company, or a person implicated, the acquisition of property, the value of which exceeds one-tenth of capital, is only possible with the consent of the meeting of shareholders, or approval of the deal at the members meeting. To make a deal with a member of the board or council of the company, and with an implicated person, approval of the deal is required also or consent to it. In this case, the deal concerned member of the board does not have the right to vote, as well as his relatives to the second degree of kinship, his spouse or the person with whom they share a common household.

Registration process of a capital company is more complex than registration of general partnership or limited partnership, and is divided into several stages. To establish a capital company it is necessary to prepare memorandum and articles of association. The registration process starts with the preparation and signing of the memorandum and articles of association, then the founders create a management board, and, if applicable, appoint an auditor. After the management board is established, and the capital stock is paid, the property investment shall be valued and paid. Then the state fee for entry in the commercial register and fee for the official publication of the data are to be paid. Only after that the application can be submitted for registration in the commercial register. The application shall be signed by all founders and have constituent documents (memorandum and articles of association) annexed to it, as well as certificate from a bank or other proof of payment of capital, proof of the value of each property contribution, the written consent of each council member to be a member of the council, the written consent of each board member to be member of the board, and the board message on the legal address of the company.

The founders and board members are jointly and severally liable to the company for the losses caused by the actions of the founders and board members. For board members, as well as with general partnership, there is a prohibition of competition, i.e. without the prior consent of the council or meeting of members they are not allowed to make deals on their own behalf or on behalf of a third person in the commercial activities of the company, and to be a member of the board of another company, operating in the same area of business. Member of the board may not also be a complementary person in a partnership (that does not limit their responsibility with their own contribution), or a participant with additional responsibility in a capital company, carrying out its activity in the area of commercial activities of the company. If a board member does not comply with above said prohibition of competition, the company may claim damages or recognizing the transactions concluded in the name of company, and the rights to the revenue, or its transfer to the company.

Capital company makes annual report every year, and it is checked by an auditor. Auditor shall be appointed in accordance with the memorandum, and elected at the members meeting.

Capital company ceases its activities by resolution of the shareholders of the company, or decision of the court, or starting bankruptcy proceedings, at the expiration of the period specified in the articles of association, on reaching the goals set out in the articles of association, and in other events when law or articles of association require to do so. In 2013, the amendments entered into force to the Commercial Law, which provide for the termination of a capital company by the decision of the commercial register and the tax administration.

Limited liability company

The minimum amount of capital in a limited liability company is 2000 LVL, but the commercial law has undergone amendments in 2010, which provide that capital assets may be less. If the fixed capital of the company is less than 2000 LVL, then legal reserve should be made for each year, which is 25 percent of the net profit of the year.

Articles of association of a capital company shall specify the amount of fixed capital, as well as number of shares and their nominal value. In LLC company all shares are the same par value, with non-fractional value in LVL, and can’t be split, i.e. one share cannot be 1,5 LVL. The share entitles a member of the company to participate in the company management, to share profit and property in the event of winding up of the company. Register of the company’s members is maintained to account shares, which keeps records about the company’s members and the number of their shares.

Member of the company may dispose of shares, appointing his own price for the share. The members of company have a right of first refusal to purchase shares that they can implement within one month from the date of application for the alienation of shares in the company board. Member of the company may gift, exchange or otherwise dispose of shares, not including sales, only under the resolution of other company members.

Company management is carried out through members' and board’s meetings, as well as through council of the company, if it is established. The company establishes a council, if Articles of association provided so.

Company’s management board is the executive institution, which manages and represents the company.

Meeting of the company has the exclusive right to change the Articles of association, and increase or reduction of the fixed capital, and election and recall of members of the board and council, approval of the annual report and the profit sharing and other issues.

Council is a supervising institution, which represents the interests of the company members in the periods between meetings and oversees the work of the board. Similarly, the council of joint-stock company works.

Joint-stock company

Fixed capital of a joint-stock company is at least 25000 LVL. As with a limited liability company, the fixed capital of a joint-stock company is divided into parts that are shares. Share is the confirmed participation of a shareholder in the share capital of company, and also, depending on the category of the share, it entitles to participate in the management of the company.

Shareholder may freely dispose of the shares, but memorandum can provide special provisions for the disposal of registered shares, such as shareholders’ approval for the sale or the right of first refusal.

Joint-stock company is managed by shareholders' meeting, management board and council of the company. The competence of the shareholders' meeting is to decide on the annual report on the use of profit, changes in the memorandum, an increase or reduction of capital, etc.

The Council is the supervisory body of company, representing the interests of shareholders in the period between meetings, and oversees the activities of the board. The council elects and dismisses the members of the board, considers the annual report and proposal of the board on the use of profit, approves the decision of the board to increase the capital, etc.

Management board is the executive institution that manages and represents the company.

Members of the board and council of the company are being paid for their work.