Choosing the appropriate legal form to operate the business

The very first decision that promoters must make relates to the legal form for the operation of their business. The legal form is important since this will have a bearing on the level of taxes imposed and liabilities towards third parties.

The main types of business forms that are available in terms of Maltese lawfor start-ups are the following:

Sole Trader: Starting a business as a sole trader is the ‘easiest’ and most cost-effective route, since no legal documents need to be filed with a regulatory authority and no registration fees are imposed. At most, one would need to apply for a VAT number and obtain a trade licence. However, this type of business form does not come without challenges and potential pitfalls and is, in fact, the one which is least recommended.  If the sole trader needs additional capital from another investor, this form would not work and a partnership or company would need to be set up. The main disadvantage is that this type of business form provides absolutely no protection for the sole trader against creditors of the business, meaning that they can sue the sole trader directly and his personal assets are capable of being seized, as opposed to a limited liability company in terms of which the company and its shareholders are considered to be separate and distinct and consequently (save for a few exceptions) the creditors of the company may not successfully sue its shareholders in their personal capacity.

Partnerships: Maltese law provides for various types of commercial partnerships including general and limited partnerships. The most popular form of business organisation is, however, the private limited liability company which is formed by the filing of certain documentation with the Registry of Companies and the payment of the appropriate registration fees. The costs for setting up a limited liability company are often greater than for partnerships and sole traders due to legal, tax, accounting and audit considerations. However, this type of business organisation generally offers significant advantages for promoters (and subsequent investors) including, the facility to raise capital, liability protection from business creditors and tax savings through deductions.

Aside from the mechanics of registering a company, it would be advisable for promoters to also consider a number of issues before embarking on their business which include (i) the feasibility of the company’s proposed activities; (ii) its proposed financing; (iii) its budget of expenditure and income; (iv) tax and regulatory issues; and (v) recruitment of personnel.

Signing a “pre-nuptial” agreement

signing a shareholders’ agreement may go a long way in ensuring that there are no problems five, ten or twenty years down the line

As any entrepreneur will confirm a business partnership may to a certain extent be compared to a marriage. They both involve the pooling of financial and other resources, mutual trust and respect is the foundation for success and they both require hard work to achieve a common goal. In order for business partners to sustain a successful relationship and avoid ending up in a complicated “divorce”, signing a shareholders’ agreement may go a long way in ensuring that there are no problems five, ten or twenty years down the line, especially when there are more than just two founders or investors. Failing to set the business parameters between the shareholders at the outset, often results in problematic legal and commercial issues in the future, which could effectively doom a company. A few key issues which may be addressed in a shareholders’ agreement are the following: (i) percentage of voting rights required in respect of certain key and day-to-day decisions; (ii) whether the shareholding is based on continued participation in the business; (iii) the roles and responsibilities of the shareholders and/or directors; (iv) mechanism for future share allotments, share transfers, share options and share buy-backs; (v) shareholders’ dispute resolution; (vi) company financing; (vii) dividend policy; (viii) sale and/or merger of business.

Maintaining employment documentation

It is essential for business start-ups to maintain adequate employment records and should therefore procure the preparation of certain employment documents to be signed by its employees. Such documentation would include service agreements or letters of engagement containing certain information pertaining to the period of probation, rates of wages payable, periodicity of wage payments, vacation and sick leave entitlement, duration of contract and the conditions under which disciplinary action may be taken by the employer.  Other documentation which should ideally be prepared at the outset is an Employment Handbook (setting out the company’s internal policies on vacation, behaviour in the workplace, conflicts of interest, internet usage and access to employee emails) and if appropriate, share option documents, including a share incentive plan, notice of share option grants and share option agreements.

Protecting Intellectual Property

If you have developed a unique and distinctive product, the appropriate steps to protect your intellectual property would need to be considered. In Malta, formal protection of intellectual property is provided through registration at the Commerce Department. The following are some protective measures which may be undertaken by start-ups:

Trademarks: ‘Trademark’ means any sign capable of being represented graphically, and of distinguishing goods and services of one undertaking from those of another.  A trademark may consist of words (including personal names), figurative elements, letters, numerals or the shape of goods or their packaging. A trademark right therefore essentially protects the symbolic value of a word, name, symbol, or device that the trademark owner uses to identify or distinguish its goods from those of others. Some of the most well-known and valuable trademarks include Google, Apple, Microsoft, Vodafone and Coca-Cola.

Patents: A patent gives its inventor the right to prevent others from making, using, or selling the patented subject matter described in words in the patent’s claims and patents are therefore the best protection you can get for a new product or idea. An invention shall be patentable if it is novel, involves an inventive step and is susceptible of industrial application.

Designs: A design is protected by a design right if the design in question is new and has individual character. ‘Design’ refers to the appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colours, shape, texture and/or materials of the product itself, and/or its ornamentation. A design is considered to be new if no identical design has been made available to the public before the date of filing of the application for registration.

Copyright: ‘Copyright’, also known as ‘Author’s Rights’, includes artistic creations such as poems, novels, music, cinematographic works and software. A copyright gives the owner the exclusive right to make copies of the work and to prepare derivative works (such as sequels or revisions) based on the work.While formal protection is provided for Industrial Property in Malta through registration at the Commerce Department, copyright works, although not formally registered, still receive statutory protection automatically once they are placed in the public domain.

“Lawyer Up”

To implement the above actions effectively, professional advice should always be sought, particularly in the case of businesses operating in highly specialised sectors, such as in the electronic communications, banking, insurance and investment services industry. Accordingly, proper preparation and careful selection of professional advisors will be paramount for operators looking to successfully launch their Malta business.

This Article was first published on Money Magazine, 2016.