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Partners and presidents of companies simultaneously running their own business
thursday, 5 September 2013

A common situation among partners and members of the management boards of commercial companies, especially those that are small private or family enterprises, is the combination of their own business (sole proprietorship) and the function performed in the said company. Its special case is running its own business and company in two different countries of the European Union.

Partners and presidents of companies simultaneously running their own business

The situation of coinciding running your own business with the performance of a function in a company should be considered primarily in three important problem categories or issues - i.e. the right to such a situation and a possible conflict of interest (1), the possibility of entering into contractual relations between the company and the enterprise of a natural person (2) and the issue of remuneration of management board members, partners and proxies of the company (3).

Non-competition and conflict of interest

At the beginning, it should be emphasized that a commercial company, even if it is wholly owned by one sole partner, who also serves as the managing director (president), is an entity separate from its owner, which results in specific consequences .

The first and most important consequence is the separate accounting of the legal entity, which prevents the free flow of funds between the company's assets and the private property of the sole partner. The situation is different for a natural person running a business where the flow of funds between the"enterprise" and the private portfolio is free (even if there should be a trace of such a transfer in the books).

The second important consequence is the prohibition of conducting activities competitive to the company. Although the provisions of the Commercial Code clearly state that the conflict is resolved only at the request of the aggrieved party, i.e. the company possibly injured by its president, who would run his own company-like sole proprietorship, and it is hard to imagine a situation in which a company managed by a sole shareholder would occur against him, however, such a situation is possible in two not at all unrealistic situations.

The first situation is related to the company's bankruptcy proceedings. The court-appointed liquidator or trustee of the company will have to check and most likely check whether the own activities of the management board members have contributed to the deterioration of the company's finances. The same would be true in composition proceedings and in other situations in which the court could divide the external management of the company.

The second situation is related to the sale of the company. The buyer of the company, after its purchase, will be able to view the company's books backwards and possibly claim losses.

While both appear to be extreme, it would be unwise to ignore them entirely. However, both these situations do not apply to partners who are not on the management boards of the companies. The Commercial Code - unless the articles of association provide otherwise - do not prohibit conducting your own business with the same profile as the company.

Contracts and transactions between a company managed by a person running a sole proprietorship.

A much more complex problem is entering into contractual relations between the enterprise of a natural person who is also a management board member, partner or proxy. The main reason is the very broad definition of remuneration from contract work (contract work is employment and related forms, e.g. a managerial contract), which in §6 sec. 1 b) lists, apart from the income from a classic employment contract, also the remuneration of members of the management board of companies, partners of companies and cooperatives. Such an interpretation entails not only broad tax consequences, but also the compulsory insurance of employees.

A very broad definition, as well as even wider, multiple interpretations of the Supreme Court were limited only by the Constitutional Court in the judgment US 385/2004, in which it stated that when deciding on the interpretation of a partner's income according to § 6 of the Income Tax Act the degree of independence should be taken into account, as well as how the costs incurred by the partner in providing the service are measured

Translating into human language, based on the verdict of the Constitutional Court, you can defend the income and invoices of a natural person's enterprise against the company in a situation where the subject of the service is different than the company's own activity, and the entrepreneur himself settles all costs benefits. The simplest example would be the entrepreneur's transport services for a store operated by the company.

It is even more difficult to imagine a situation where a commercial transaction concluded on the basis of all free market principles - between a partner and the company would be opposed by the tax office, especially in a situation where buying from a partner would be more advantageous than ignoring it - from direct supplier.

Conversely, it is absolutely unacceptable for a management board member (even being the sole shareholder) to provide the company with services directly related to the company's business - e.g. logistics services to a shipping company or broadly understood consulting services that even fall within the scope of responsibilities of the person entrusted with the management of the company

On the other hand, it is worth paying attention to two specific types of contracts, which the Commercial Code not only allows, but also resolves in its provisions any possible conflict of interest issues, i.e. loan agreements and rental agreements.

Both types of contracts must be concluded on the terms typical for ordinary business transactions and only with the consent of the (prior) meeting of shareholders, and in the case of sole proprietorships always with a signature certified by the body authorized to legalize the signature or in in the form of a notarial deed.

Remuneration of management board members and proxies for performing their functions

The Code of Companies states in § 576 that the relationship between a management board member and the company is governed by the provisions of the mandate contract according to the commercial code (otherwise the mandate contract), which in § 566 sec. 1. is defined as follows:

Through a mandate contract, the mandate undertakes to arrange a specific business relationship for the client and on his account for remuneration, by performing specific legal actions on behalf of the client or through other than legal activities , the mandate undertakes to pay the mandate the remuneration.

At the same time, the provisions of the code allow for the contractual determination of the amount of this remuneration and in practice of small, private or family businesses, remuneration below the threshold for social and health insurance contributions (in 2013 below CZK 2,500) is quite common per month).

When deciding on the amount of earnings of the management board members, one should take into account the possible coincidence of social insurance titles due to employment in the bodies of the Czech company and own business activity in Poland. In this regard, we encourage you to read the previously published articles.

The regulations specific to companies admittedly allow for the possibility that there is an agreement between the company and its managing director or members of the management board on non-payment of remuneration, but in practice such solutions entail a number of complications related to covering the costs of travel by the company , accommodation or allowances for members of the management board, and this is because travel expenses are the company's expenses only when it comes to the trip of the person receiving remuneration from paid employment, i.e. from §6 of the Income Tax Act already mentioned in this text.

It is also worth noting that the conclusion of a mandate agreement, especially in companies with a strong foreign element (often trips abroad, etc.), gives the possibility of several extremely beneficial activities related to tax optimization.



To sum up the considerations in this scope, the legal, economic and financial situation of partners in commercial companies who are also sole proprietorships, should be in particular:

1) Draw attention to the possibility of a conflict of interest between the company and its own enterprise
2) Beware of agreements with the company where the object of business and invoices issued to the company would be consistent with its business profile
3) Conclude contracts with the company only with the consent of the general meeting of shareholders or on the basis of the written consent of all shareholders, but above all on the terms typical in business transactions.
4) Remember about the need to conclude contracts with the participation of a notary in the case of sole proprietorships. < br /> 5) Consider entering into a mandate agreement to avoid problems in settlements between the company and board members for performing functions in company bodies.

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