There are three primary established business media in Cyprus: companies; partnerships and sole traders. Sole traders tend to represent smaller operational concerns and therefore, as a business takes off, many promoters of the business will primarily be concerned with considering the characteristics and applicable benefits of a company or a partnership.
Forms of Entity Companies:
Companies are governed by The Companies Law, Chapter 113 of the Laws of Cyprus. The most basic distinction between companies can be said to be that of private companies and public companies. Section 29 of the Law states that a private company is a company which, by its Articles of Association, (i) restricts the right to transfer shares; (2) limits the number of members to 50 ; and (3) which prohibits invitation to the public to subscribe for shares or debentures of the company.
By contrast, a public company is not defined by the law but by implication it is any company which does not restrict the right to transfer; or which has more than 50 members; or which invites members of the public to subscribe to its shares or debentures.
Partnerships: Partnerships are governed by the Partnership and Business Names Law, Chapter 116 of the Laws of Cyprus. Section 5 defines a partnership as being the relation which subsists between persons carrying on a business in common with a view of profit but which has not been registered as a company. Partnerships can be classified into two types: standard partnerships and limited partnerships. The distinction is important as it impacts the level of liability of the partners (discussed below).
Constitution and Authority
Companies: The Memorandum of Association is the primary constitutional document of the company. It states (amongst other matters) whether the company is a public limited company or a private company; the objects of the company and that liability is limited. The objects of the company refer to its authorised activity and it is not permitted to act ultra vires (i.e. outside the scope of permitted activity). If a company wishes to amend its objects, this is possible, by a special procedure outlined in section 7(1) of the law. The Articles of Association are the second key constitutional document of the company. They prescribe regulations for the operations of the company, outlining the correct procedure and process for the company to undertake any action. Section 12 (1) states that the Articles of Association may be amended by special procedure outlined in the Companies Law.
Both the Memorandum of a company and the Articles of Association must be delivered to the Registrar of Companies when the company is incorporated.
Partnerships: Section 6 of the Partnership and Business Names Law lists certain factors which will assist in determining whether a partnership is in existence, for example the receipt by a person of a share of the profits of a business. Section 51 states that every partnership carrying on business in Cyprus must be registered by sending certain key information to the Registrar. However, there is no requirement to submit a key constitutional document and it is possible for a partnership to exist without any foundational document per se. In reality most partnerships are formed around a Partnership Agreement which sets out the manner in which the partnership will operate and to which each incoming partner will subscribe.
Companies: A company generally enjoys limited liability status. The liability differs according to whether the company is a company limited by shares or a company limited by guarantee. Section 3 (2) (a) of the governing law states that a company limited by shares is a company which has the liability of its members limited to the amount (if any) unpaid on any shares respectively held by them. A company limited by guarantee by contrast is a company which has the liability of its members limited to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up (Section 3 (2) (b).
Partnerships: By contrast Section 12 of the Partnerships and Business Names Act states that, for a standard partnership, every partner in a partnership will be liable jointly with his other partners for all debts and obligations of the firm incurred whilst he is a partner. Moreover after his death his estate is also severally liable for such debts and obligations.
Limited Liability Partnerships operate slightly differently to standard partnerships in that limited liability can be enjoyed to a certain extent. A limited liability partnership consists of one or more persons (general partners) who will be liable for all of the debts and obligations of the company and other (limited) partners who shall, upon joining the partnership, contribute a sum (capital or property) and shall only be liable for the debts and obligations of the firm to the extent of the amount contributed (Section 47(2) Partnership and Business Names Law).
Companies: Section 170 of the Companies Law states that every public company shall have at least two directors and that every private company shall have at least one director. A director is responsible for the day to day running of the company and certain decisions relating to the company can only be made by a resolution made by the directors. The shareholders are also responsible for certain decision making within the company. Certain decisions may only be made by a vote of the shareholders. Every year the company will hold an annual general meeting (section 125 (1) Companies Law) and will also convene general meetings and extraordinary general meetings at which company business will be determined.
Partnerships: The decisions concerning the firm are made by the partners. Every partner is an agent of the firm and the acts of any partner performed in the usual scope of business of the firm will bind the firm and the other partners of the firm (Section 8 of the Partnership and Business Names law).
Accounts and Taxation
Companies: Section 141 (1) places directors under a duty to ensure that proper books of account are kept, which give a true and fair view of the state of company affairs and transactions and which are maintained along the prescribed basis of International Accounting Standards. Financial accounts must be presented within eighteen months of incorporation and thereafter on an annual basis (Section 142 (2) (a)). Resident companies are taxed in Cyprus at the rates of corporate income tax applicable, currently 10%. Interest income, dividend income and profits from disposal of securities are all exempt from the imposition of corporation tax.
Partnerships: Section 64 of the Partnership and Business Names Law states that every partnership shall keep books of account which exhibit and explain transactions and financial position in their trade, business or profession. Individual partners are individually responsible to account to the tax authorities for their respective profits from the partnership, which will usually be taxed as income.
Companies: A company is a perpetual legal entity whose life is maintained by its members (and these members may change from time to time). A company will cease to exist when it is wound up, which according to Section 203 of the Companies Law can occur (i) by the Court; (ii) voluntarily or (iii) subject to the supervision of the Court. Section 211 goes on to elaborate, stating a number of different circumstances where a company may be wound up by the Court, for example if it is unable to pay its debts (i.e. insolvency) or if it is just and equitable to do so.
Partnerships: A partnership will be dissolved if it is entered into for a fixed term and that fixed term expires, if it is entered into for a fixed undertaking and that undertaking is achieved or (if it is entered into for an undefined time) by any partner who may determine it by giving notice to the other partners of his intention to do so (Section 34 of the Partnership and Business Names Law). Moreover, subject to agreement to the contrary, a partnership will also be dissolved upon the death or bankruptcy of any partner (Section 35), or in the case that an event occurs making the business of the partnership unlawful (Section 36). Finally, the Court may order the dissolution of the partnership under certain circumstances (for instance if the business of the partnership can only be carried on at a loss or if it is just and equitable to do so – Section 37).
Companies and partnerships are regulated by different governing laws in Cyprus and each enjoys their own individual characteristics. The appropriate vehicle for business operation will be a choice made by balancing the various features of these entities and determining the most beneficial under individual circumstances. Michael Chambers and Co LLC are able assist clients in deciding which of these structures will be most beneficial for their business operations and in maintaining such entities in accordance with the governing regulations.