What Exactly Is a Company?

Picture the following scene. Your best friends sit down together over a good lunch, and the Idea is born. A Big Idea. One that is bound to work. You are going to manufacture and sell pink, headless plush piggies. Someone enthusiastically grabs a napkin, scribbles down the outline of a business plan, and then the question is already flying across the table: So in what company form should we do this? This is usually the point where everyone falls silent.

If this is a moment you have found yourself in, this article is for you. We will look at the basic rules that apply to every company, explained clearly and without legal jargon.

Under the Hungarian Civil Code, a company is essentially a joint venture that the members create with the goal of making money together. Everyone puts in something, money, an asset, or knowledge, and then they share in the profit together. But they also bear the losses together. That last part is the one people usually forget when writing the business plan on a napkin.

The most important feature of a company is that it is a separate legal entity. This means the company is not the same as you. The company has its own assets, concludes contracts in its own name, and has its own bank account. If someone sues your company, they are not threatening your home, but the company’s assets. There are exceptions, but that is a topic for another article. A Hungarian court of appeal made it clear in one of its decisions that the assets of the company and of the member are separate from each other. If your business share is frozen in a lawsuit, the company can still keep operating, and payments can still be made from the company’s account. The two cannot be mixed up.

Setting Up a Company: The Four Possible Forms

In Hungary, a company can be set up in only four forms. This is the so-called principle of mandatory form, meaning you cannot invent some entirely unique hybrid company form, but must choose from the four options offered by law.

General Partnership

The members are liable without limit for the company’s debts. This means that if the company has no money to pay its bills, the creditor can reach into the members’ own assets as well. It is a form typical of small partnerships where everyone fully trusts one another. And they had better, because here everyone truly has skin in the game.

Limited Partnership

A mixed solution. There is at least one general partner who is liable without limit, and at least one limited partner who only risks the capital they have paid in. Many small businesses start out as a limited partnership, because it is simpler and cheaper to set up.

Limited Liability Company

The most popular company form in Hungary, and for good reason. The members are liable only up to the amount of their capital contribution, so if things go wrong, they may lose the money they put in, but not their own car or home. It requires a minimum share capital of three million forints, roughly 7,500 euros.

Company Limited by Shares

It can operate as a private or a public company limited by shares. It is chosen by larger, more capital-intensive companies, where ownership can also change hands in the form of securities, that is, shares.

The law also requires that the company’s name make clear which form you have chosen. If you set up a limited liability company, the name must indicate this, so that everyone knows who they are dealing with.

Who Can Be a Member of a Company?

Almost anyone can be a member of a company. A natural person, another company, even a foreigner. Within the European Union this is especially clear, since under the EU freedoms any citizen or company of a member state can set up a business here.

There are limits, however. It is worth knowing the most important ones.

A minor cannot be a member with unlimited liability. This is logical. Someone who does not yet have full legal capacity is not exposed by the law to unlimited financial risk either.

A natural person can be a member with unlimited liability in only one company at a time. If you are already a general partner in one limited partnership, you cannot be a general partner in another at the same time. In a limited liability company, on the other hand, you can be a member in as many as you like.

Someone who is disqualified cannot join. If a person has previously committed a legal violation and is under a disqualification because of it, they cannot acquire a majority influence in a company, nor can they be a member with unlimited liability. Public companies limited by shares are an exception to this, since there the shares trade freely on the stock exchange, and it is not possible to control who buys shares.

Profit and Loss in a Company

Everyone likes to talk about profit. About loss, less so.

Under the rules of the Civil Code, members share in the profit in proportion to their capital contribution. So if you put in 30 percent of the capital, 30 percent of the profit is yours. The same applies to loss.

There is a very important limit. The founding document cannot completely exclude any member from the profit, nor can it completely exempt anyone from bearing the loss. If someone tried to write this into the articles of association, that provision would be null and void, meaning it is treated as legally nonexistent.

This is the so-called prohibition of the lion’s share, a classic legal principle known already to Roman law. Business partners cannot be mere slot machines for one another.

There is also a rule on payouts. The company can pay money to its members only out of its free profit reserve, supplemented by the previous business year’s after-tax result. To put it more simply, you cannot pull money out of the company in a way that harms its creditors. If the company has no distributable profit, it cannot pay a dividend, no matter how much the members might want it to.

The Duty of Cooperation in a Company

The Civil Code states that members are obliged to cooperate with one another and with the bodies of the company. What is more, they cannot engage in any activity that endangers the achievement of the company’s goals.

At first reading this seems self-evident. Who would sabotage their own company?

The answer is surprising. Quite a few people. Especially when relationships sour in a joint venture. A business partner might, for example, suddenly stop taking part in decisions, refuse to vote, and block the passing of resolutions, all so that the company cannot function. This is a breach of the duty of cooperation, and it can have serious legal consequences.

The Role of Written Form in a Company

Legal statements relating to the company must be made in writing. This applies to resolutions, notices, decisions, to almost everything.

Why does this matter? Because if a dispute arises, someone has to prove what was said and when. A verbal agreement on its own is rarely enough. This is also why lawyers exist, to help put everything down on paper properly, before a friendship turns into a business partnership, and a business partner into an opposing party in a lawsuit.

If you send letters by post, the law helps you. A registered item must be regarded as having arrived on the fifth working day after posting, even if the other party did not collect it. This is not some special lawyer’s trick, but a rule of the Civil Code.

What to Watch Out for Before Setting Up a Company

If you are about to set up a company, or you have some problem in an existing one, the most important takeaways are the following.

Choosing the company form is a serious decision. It matters how much risk you are willing to take, how many of you there are, and what activity the company will carry out. You do not need to set up a company limited by shares right away, but a general partnership is not for everyone either.

The founding document, that is, the articles of association or the partnership agreement, is the foundation on which the whole business is built. Whatever is not properly regulated there can later turn into a dispute. Setting up a company from a template is about as good an idea as cooking from a napkin. The result is unpredictable.

Cooperation is not optional, it is a legal obligation. It is worth clarifying at the very start who expects what from the joint venture.

If you already feel that you have questions, that is a good sign. The questions asked before setting up a company are much cheaper than the problems to be solved afterward.

If you need help setting up a company, drafting a partnership agreement, or with the operational questions of an existing company, feel free to get in touch. Book a consultation, and together we will find the best solution.