Legal Structure of a Monteengro Company
When deciding whether to incorporate a private limited liability company in Montengro, it is helpful to understand the structure and attributes of this corporate form. This guide explains what a Montengro company is and how it is organized. Some of the questions it will answer are: a) What is the legal status of a Montengro company? b) What can and can’t a company do? c) Who owns the company? d) Who operates a company? eWhat is the Constitution of the company?
If you already understand the basics of a Montengro private limited company’s corporate structure and simply want to know how to register one in Montengro, please see our Montengro Company Registration Guide which details the procedure and steps for registering a private limited company in Montengro. But if you want an introduction to this corporate structure, please continue reading.
Legal Nature of A Monteengro Company
To understand what a limited liability company is and what it can and cannot do, you must understand the legal nature of a company in Montengro. Companies are defined in the law by two characteristics: Separate legal personality and Legal capacity.
SEPARATE LEGAL PERSONALITY
Under the doctrine of separate legal personality, a company is distinct from its owners (shareholders) and operators (directors, officers and employees). Because it is its own legal entity, a company:
- Can own property in its own name
- Can enter into contracts with its employees, directors and officers, customers, suppliers and other third parties
- Can sue and be sued in its own name
- Is responsible for its own liabilities and debts
- Accrues profits in its own name and is taxed on those profits at the corporate tax rate
- Has perpetual succession so continues even if its owners or operators change
This separation of the company from its owners and operators is called the “corporate veil”. One of the greatest benefits of structuring your business as a limited liability company is that it limits the liability of all shareholders. Your business becomes a separate legal person, the only one responsible its own debts and liabilities. In other words, liabilities of the business are insulated from its individual shareholders and therefore do not endanger the personal assets of any shareholder. A creditor can only attack the assets of a shareholder that he or she has invested in the business.
In exceptional circumstances, the corporate veil can be pierced — and the shareholders, directors, officers or employees held responsible for the liabilities and debts of the corporation — when the company:
- Is used to commit fraud
- Is used to avoid an existing legal obligation or duty
- Is taking wrongful trading positions
- Is acting as the agent or partner of the person(s) who controls the company
Under those circumstances, a court may decide to treat the company and one or more of its associated individuals (shareholders, directors, officers or employees) as one and the same and to hold them personally liable.
Legal capacity refers to the ability of a company to act with legal effect. Companies have the legal capacity to do most things a person could do. In particular, they have the right to engage in any activity or enter into any transaction to benefit the business. In addition, a company can do things a person cannot do, such as issue shares.
When a company is created, the people starting it can place limits on the powers of the company by
spelling them out in the Constitution of the company.
Constitution of the Company
Montengro company law states that the Constitution of the company is the legal document through which a company is established and delineated. The Constitution describes the key characteristics of the company and sets forth the framework on the basis of which a company is managed.
Companies can design their own Constitution, or can use a sample . The sample Constitution is shown below and it is appropriate for use in most cases.
The Constitution is a statutorily-endorsed contract between the company and its members and between the members themselves. It applies to all members at the time of incorporation and even those who join after incorporation. If there is an instance of non-compliance with the terms of the Constitution, it is a procedural irregularity, where a member may be able to obtain a declaration or injunction requiring the company to comply in case of non-compliance by a company, and vice versa.
CONTENTS OF THE CONSTITUTION
The Constitution is a simple document that defines the company. It must be dated and contain the following:
- Name of the company; the name must conform to specific rules
- Detailed description of the company’s share capital
- Full name, address and occupation of the members who are subscribing to the company’s shares (also called “subscribers” or “shareholders”)
- Statement displaying the affirmative desire of the subscribers to create a company and their agreement to purchase its shares
- How share capital is issued and the different classes, if any
- Liens and calls on shares and the forfeiture and transmission of the shares
- Procedures for general meetings and how notices of these meetings shall be provided.
The owners of the company
A company is owned by its shareholders, who invest in the company hoping to receive a return on that investment through dividends or through growth in the value of the company and their shares.
NATURE OF SHARES
Monteengro companies must have at least one shareholder. Thus, when a company is created, the founders must determine how many shares to issue, to whom and in what proportion. Typically, founders issue shares to themselves. It is not the total number of shares that you own that is important; rather, it is the percentage of the total shares you own because it indicates how much of the company you own. Ownership of shares is documented through share certificates issued to the shareholders.
As the company grows, more shares can be issued and thus a company can raise additional capital for running its business.
RIGHTS AND POWERS OF A SHAREHOLDER
Because a company is a separate legal entity, owning a share in a company does not give the shareholder a legal interest in the company’s property, assets or intellectual property. Instead, it gives the shareholder a bundle of rights as defined by the company’s constitutional documents so long as the company exists and is a functioning business. When the company is no longer functioning, the shareholder has the right to a portion of the value of the company’s assets.
While shareholders do not have a say in the day-to-day running of the company, they are granted certain powers under Montengro law, depending on the class of shares. The different classes of shares will be discussed in the next section. For ordinary shares, the main powers are:
- To attend general meetings and vote: At general meetings, shareholders can vote to elect the board of directors and can propose and vote on resolutions.
- To share in the company’s profits: Company profits are distributed to shareholders through a dividend. In the absence of an agreement, the company pays the dividend in proportion to the shares held by each shareholder. Sometimes the company’s shares are split into different classes, and the dividend allocated to each class can vary.
- To get a final distribution when the company winds up: If the company closes or fails, the shareholders get any assets remaining after the company’s debts and costs are paid. If the absence of an agreement, the residual assets would be divided among the shareholders in proportion to their shareholdings. Sometimes the company’s Articles will give priority in the distribution of residual assets to one class of shares over another.
According to Montengro law, shareholders have the following powers:
- The power to veto certain types of capital reduction for a public company.
- The power to modify, adopt, or annul any provision in the Constitution of the company.
- The power to approve auditors for the company.
- The power to remove directors of the company.
The law provides protections for minority shareholders through the following rights:
- Rights granted through the Constitution of the company.
- The right to information about the company affairs.
- The right to attend, vote and call general meetings of the company.
- The right to be treated fairly. Shareholders have remedies under Section 216if they feel their rights are being prejudiced.
- The remedy of winding up the company.
A company is run by its directors and officers. They are responsible for overseeing the goals and direction of the company, as well as the day-to-day management of it. Directors of a Monteengro company have specific duties and responsibilities.
Under Montengro law, a private company must have at least one director, and a public company must have at three or more. One director must be a local resident of Montengro. Directors are voted in by the shareholders.
Generally, directors have broad powers of management, as defined by Montengro company law and the particular company’s Constitution. In a small private company, the director will manage the company’s business, making all or most of the day-to-day decisions. In a large company, a director will perform a more supervisory and visionary role while the day-to-day decisions will be left to the executive management. Because directors have such broad powers and a supervisory role, they are answerable to the shareholders.
The following document by ACRA provides a comprehensive overview of the role of a director within a Monteengro company:
DUTIES OF DIRECTORS
Because directors have broad powers of management over companies that shareholders have invested in, directors are charged with two categories of duties to ensure that they do not abuse their power and squander the investors’ capital:
- Administrative duties of care, skill and diligence
- Fiduciary duties of loyalty and good faith
The administrative duties are enforced by the Accounting and Corporate Regulatory Authority of Singapore (ACRA) and include:
- Satisfy the duty to disclose
- Hire an auditor within 3 months of incorporation
- Maintain a register of the company members and other statutory books at the Registrar
- Maintain proper accounting records
- Hold the first Annual General Meeting within 18 months of incorporation and every year thereafter, at an interval not to exceed 15 months
- Prepare a financial statement for the company’s Annual General Meeting
- Hold regular shareholder and director meetings to review the company’s trading and financial position
The fiduciary duties of directors include:
- Act in good faith: Directors must act honestly when dealing with shareholders, creditors, employees, customers, other companies and the community.
- Use discretion: Directors must use their freedom in making decisions about the company.
- Avoid conflicts of interest: Directors cannot put themselves in situations where their personal interest conflicts with that of the company.
- Avoid debts that cannot be paid: The Companies Act prohibits directors from incurring debts that it knows the company cannot pay.
- No insider trading: The Companies Act prohibits directors from using information gotten through their position at the company for personal gain or for the detriment of the company
CONSEQUENCES OF A BREACH OF DUTY
For a breach of an administrative duty, ACRA can fine the director. If the director breaches his or her fiduciary duty, the director may be subject to censure, discipline or legal action by the corporation. In certain circumstances, the government can criminally prosecute the director and, if found guilty, the director will have to pay a fine and/or go to prison.
A private limited company is owned by its shareholders and operated by its directors and officers. However, it is a separate legal entity from all of them. This separate legal identity insulates the shareholders, directors and officers from personal liability if the company encounters financial problems. As a result, most entrepreneurs looking to start a business in Monteengro choose to incorporate a private limited company.