In addition to having a good idea and solid business plan the starting entrepreneur also needs to address the creation of several documents. Some documents are inevitably needed, others are recommended and hereby we provide a summary overview of these.
Notary or Company Registration Portal
At first the entrepreneur must choose the type of the company to be established. If the purpose of the business activity is to make profit then the most common and simplest form of company is private limited liability company. Private limited liability company is easy to establish with no significant costs. If a person has Estonian ID card, E-residency or residence permit, the company can be established via company registration portal in expedited procedure. If a person does not have the aforementioned document or he/she does not feel confident enough in using digital solutions, he/she can establish the company at the presence of a notary, who will draft the establishment documentation and forward these to commercial register.
When establishing a private limited liability company through company registration portal in expedited procedure a state fee of 190 euros must be paid. When establishing the company at the notary’s office the state fee is 145 euros, to which a notary fee is added, the amount of which depends on the planned share capital of the company. If the share capital is the usual minimum, i.e. 2500 euros, then the notary fee amounts to 21 euros plus VAT.
Articles of Association
Articles of Association (AoA) is the basic document of the company which the principles of the operation and management of the company are provided. AoA may be a formal minimalist document which is provided by company registration portal, but the management of the company, decision-making process, division of profit etc. can be regulated much more thoroughly. Well thought management structure and the future plans of the company should be reflected also in the AoA, it would help to avoid a number of disputes and misunderstandings.
The AoA provided in the company registration portal at the establishment of the company contains a minimal regulation required by the law and is in compliance with the law, but does not reflect all necessary conditions and principles, especially if there are several shareholders in the company. The standard AoA provided by the company management portal can be substituted with a more thorough and elaborate AoA either at the establishment of the company or after it with the respective shareholders’ decision.
While the Articles of Association is a public document which must include the mandatory information required by the law, the Shareholders’ Agreement (SHA) is a confidential document binding only for the parties to the agreement which allows to regulate the relations of such parties more specifically and in more detail. SHA does not have to be entered into by all the shareholders, but it is advisable to include such shareholders who together have majority shareholding, otherwise the provisions agreed upon in the agreement might not be enforceable.
In SHA the shareholders can agree on everything that concerns the management of the company, the principles of the business activities, competition, principles of profit distribution, the transfer of shareholding etc.
SHA and AoA should be in compliance with each other. In case of conflicts between these the provisions of SHA are applied to the shareholders parties to the SHA and AoA is applied to third parties.
In case of several shareholders it is advisable immediately at the beginning to think through the mutual relations and regulate these in the SHA in order to avoid confusion or disputes later on. Situations often occur where the parties do not think of these issues at first and therefore later when the business is up and running the shareholders end up in lengthy and costly disputes.
Management Board Member Agreement
Management Board Member Agreement is an agreement between the company and the management board member which regulates the relations between the company and the board member, including the board member’s tasks, obligations, liability, remuneration, benefits and vacation.
Management Board Member Agreement is not a mandatory document and written format is not required. Concluding a written Management Board Member Agreement is, however, advisable if the company has several shareholders and/or the board member is not one of the shareholders.
In essence, the Management Board Member Agreement is a service agreement (also called authorisation agreement), regulated by the Law of Obligations Act, not the Employment Contracts Act. Thus, the provisions of the Employment Contracts Act do not apply to the Management Board Member Agreement and all the agreements between the company and the board member have to be set forth in the agreement.
At the beginning of business activities the person establishing the company is often its only employee. Although there are a lot of companies that have needs and resources enough to hire employees from the start on. Employment contracts must always be concluded in written form.
Employment contracts are often concluded only to comply with formal requirements without analysing the actual needs, obligations and rights of the employer and the employee. Considering, however, that this is the document that sets the basis for the whole employment relationship, these issues should be considered thoroughly at the conclusion of the employment contract. The law provides mandatory minimal content requirement for the employment contract, in addition of which the parties can regulate their mutual relations in more detail, considering the limitations and restrictions provided by Employment Contracts Act.
In case the company has not been registered yet or there are other obstacles due to which the conditions for hiring an employee have not been arrived yet, it is possible to conclude a preliminary employment contract, in which the parties undertake to conclude an employment contract on agreed terms when certain conditions have arrived. In preliminary employment contract the parties can determine the main conditions of the future employment contract (position, wages, vacation, obligations etc.).
Contractor Agreement is usually concluded in order to procure work or service necessary for the starting company from another company or private person that is not an employee of the starting company.
Contractor agreement and employment contract may be similar at first glance but they differ regarding the rights, obligations and liability deriving from the contract.
By a contractor agreement, the contractor undertakes to manufacture or modify a thing or to achieve any other agreed result by providing a service, and the customer undertakes to pay remuneration therefor. In the case of employment contract the employee undertakes to work for the employer under its control and the employer undertakes to pay for such work.
It must be noted also that in case the contractor is a private person then the income tax from private person’s income must be paid – the procuring company must withhold from the fee and pay to the tax board.
Granting of options is usual in the case of a company which does not have sufficient means at the beginning to offer competitive salary, but the shareholders and employees see potential for growth and therefore the employees are given the chance to earn a shareholding in the company with their work.
With Option Agreement the optionor provides the optionee with the right to acquire from the optionor the shares during the time period and on the terms named in the agreement. The parties can agree in the option agreement in all issues regarding the object of the option and its acquisition, e.g. the amount of the shares, vesting period, conditions for exercising the option etc.
In granting and exercising the option the tax issues must be kept in mind. If an employee exercises his/her option before three yeas have passed from the granting if the option, it is considered to be a fringe benefit and the employee must pay income tax from the fringe benefit. Therefore, if the employee acquires the optioned shares before three years have passed, additional costs arise for the employer. However, the parties may agree in the option agreement that the employee must compensate such costs to the emplyer.
In Avokaado you can create all the aforementioned documents.
You can always ask from the helpdesk what kind of document you should conclude and there is information included with each document on when to use it. You can also find answers to frequently asked questions regarding the specific document. In order to create the document the user will answer questions, the tooltips next to the questions explain further the contents, court practice and other circumstances related to the questions. When the questions have been answered the Avokaado system creates the final document momentarily and the document can be downloaded, shared, commented and signed.