The overall stages of the formation of the company
Start-up of the company
When starting up a business, one of the most important considerations one should make is how the risks of business operations are handled.
In this connection, by risks, we primarily mean claims by creditors.
One way to deal with these risks is to set up a limited liability company, e.g. in the form of a private limited company (an ApS) or a public limited company (an A/S).
In principle, creditors can only make claims against the company if the company is established in one of the above-mentioned forms.
In several situations, however, as a business owner, you will have to personally guarantee the fulfilment of the company’s obligations, e.g., to obtain financing in the bank. In that case, the bank’s claims can also be directed against the owner – regardless of whether the company is run as a company with limited liability.
If you as a capital owner have to repay a guarantee in the company, you obtain a claim against the company for the amount you have had to pay – a so-called recourse claim.
If the company has not been able to honour the creditor’s claim, it usually unlikely that it can pay the recourse claim. Thus, the owner might incur a loss, corresponding to the claim he has made against the company.
Here, it is of crucial tax technical importance how much of the company’s share capital you own. If you own 25% or more of the share capital or more than 50% of the voting rights, then the loss is not deductible.
If you do not exceed any of the above thresholds, the loss is fully deductible.
The formation of the company can generally be divided into the following stages:
- Drafting and signing a memorandum of association, the company’s articles of association and a register of shareholders
- Issuance of the shares and payment of the share capital
- Holding of the inaugural shareholders’ meeting with a view to the election of the company’s management and possible auditor
- Notification to the Danish Business Authority regarding the registration of the company.
- Registration of the company
However, the individual points are typically clarified and handled during one single meeting.
Requirements for the founders
One or more founders can set up a limited liability company.
A founder must not be undergoing reorganization or bankruptcy proceedings.
If the founder is a natural person, the person must be of legal age and not be under guardianship.
If the founder is a legal entity (i.e. a company) the founder must be authorized to acquire rights, enter into obligations and be a party to legal proceedings. Thus, a public or private limited company that is itself in the process of being established may not establish a company, as the company does not yet have any legal capacity.
What is a Memorandum of Association?
The founders must sign a memorandum of association, which must contain information about:
- Name, domicile and, if relevant, CVR number of the founders of the capital company,
- The subscription price for the shares,
- The deadlines for the subscription and payment of the shares,
- From which date the foundation shall have legal effect,
- From which date the foundation shall have effect for accounting purposes,
- Whether the company shall bear the costs of the foundation and, if so, the estimated costs.
The memorandum of association must also contain provisions on the following matters if a decision has been made to this effect:
- Special rights or benefits that shall apply to founders or others
- Entering into an agreement with founders or others, whereby a significant financial obligation can be imposed on the capital company,
- If shares can be issued against deposits of values other than cash,
- Whether the company’s annual report must be audited, if the company can opt-out of auditing in accordance with the Danish Financial Statements Act or other legislation,
- The size of the portion of the subscribed share capital deposited at the time of incorporation.
Subscription and payment of share capital
The formation of a private limited company (ApS) requires a minimum of the share capital of DKK 40,000.00. The establishment of a public limited liability company (A/S) requires a minimum share capital of DKK 400,000.00.
The share capital can be raised by cash payment and non-cash contributions.
Below you can find more information about the formal requirements and the procedure for subscribing and paying/depositing the capital.
Subscription of the share capital
Subscription of shares must be made on the memorandum of association. In connection with establishing a public or private limited company, the person who subscribes for shares must thus be identified on either the memorandum of the association itself, in the shareholders’ register or on a subscription list.
The shares cannot be subscribed for without reservation or at a discount. On the other hand, you may subscribe for a premium.
As was previously the case with private limited companies, it is not a requirement that the founders subscribe for the entire share capital. Still, ultimately, the founders decide whether the subscription of shares can be accepted.
Specifically regarding non-cash contributions
All values that can be the subject of an economic assessment can be used as non-cash contributions. This can e.g. be a production machine, a personally owned and operated business, real estate, etc.
However, non-cash contributions may not consist of an obligation to perform work or provide services.
To ensure that the invested asset is valued correctly, it is required that an assessment report is attached to the memorandum of association.
The assessment report must be prepared by one or more independent and expert assessors (typically auditors) and must include:
- a description of each deposit,
- information on the method used in the assessment,
- indication of the consideration determined for the acquisition, and
- a statement that the calculated economic value of the deposit at least corresponds to the agreed remuneration, including any nominal value of the shares to be issued with the addition of any share premium.
Assessments must not have been made more than four weeks before signing the memorandum of association. If the deadline is exceeded, the assessment must therefore be made again.
Payment of the share capital
At least 25 percent of the share capital must be paid in at all times, but never less than DKK 40,000.00 (the minimum share capital of a private limited liability company). Thus, the payment required for a public limited company with a capital of DKK 400,000.00 is at least DKK 100,000.00.
However, if all or part of the share capital is paid in, in the form of values other than cash (non-cash contributions), all the share capital must be paid.
The company cannot be registered unless the required share capital has been deposited.
Unpaid share capital may be required to be paid in by the capital company’s management on demand, after which the remaining share capital must be paid within two weeks.
The rights of a capital owner exist in full, regardless of whether the shareholding is fully paid in. Suppose a capital owner has failed to comply with the management’s request to pay the remaining capital. In that case, the capital owner may not, however, exercise his voting right for any part of his share of the company’s capital.
Inaugural shareholders’ meeting
Suppose no election of the capital company’s management and any auditor has been made connected with the establishment of the capital company. In that case, the founders must hold an inaugural shareholders’ meeting no later than two weeks after signing the memorandum of association to elect the capital company’s management and, if necessary, an auditor.
Registration of company
The company must be registered in the Danish Business Authority’s IT system or notified for registration no later than two weeks after signing the memorandum of association.
If the registration or notification has not taken place before the expiration of this deadline, registration cannot occur.
The company cannot be registered unless 25 per cent of the share capital has been paid in.
The company’s incorporation has legal effect from the date of signature of the memorandum of association or the later date stated in the memorandum.
The notification and registration of the company occur via www.virk.dk or by sending the necessary documents to the Danish Business Authority. Irrespective of the procedure, proper documentation must be presented that the share capital has been paid in.