It is really easy to start a business – or is it not?
In most cases, the registration of a company is not overly complicated. If the so-called simplified company registration procedure is followed and the model contracts provided by law are used, the deadline for the procedure before the court of registration is one working day. During this time, the court of registration initiates the service of the order of registration or rejection to the legal representative. Everything can be arranged via the Internet, subject to the electronic signature of the lawyer or notary public; no duty is paid at the post office anymore.
However, looks can be somewhat deceiving. Before founding a company, decisions must be made that can have a long-term impact on operation, and are therefore worth careful consideration. In the meantime, one cannot say either that the foundation of the company ends up on its court registration.
So let us see what one should pay attention to, without claiming to be exhaustive.
0. Starting a company requires a valid identity document.
Before signing company documents, it is essential to check the validity of your personal documents (with special regard to your ID card, address card or passport, and driver's license),as such an issue can even prevent the foundation.
1. You need a company name to start your business – is yours free or reserved already?
What name to choose for the company? However simple this may seem, it can often because of headaches. You need to check if there is a business already listed under the given name; be prepared that someone else may have found your attractive company name. In this case, you will need to change it to enable distinguishing your company, otherwise, the court of registration will reject your request.
If you are determined enough, you can also make use of the possibility of a name reservation and reserve your carefully chosen company name. However, this must be done prior to the company foundation process.
2. The new company’s registered office: where will central administration take place?
If you have a self-owned property where the company will operate, then this is not an issue, as you can prove your right to use the registered office with a title deed (by the way, you are advised to clarify in advance with the proceeding lawyer if he or she will obtain this for you). For rented property, you need to be more careful, as you will need the owner's statement too. It is therefore important to lay down in the lease agreement whether the leased property can be designated as the company’s registered office during the registration process. In both cases, however, it is also worth checking whether there is any encumbrance (e.g. mortgage, prohibition on alienation, or encumbrance) registered for the property, as we often see restrictions on the registered office in mortgage and credit agreements.
You can also use the so-called registered office providers. The controversial nature of this activity is a huge topic that could be discussed separately. Please note however that one thing is clear: if the place designated as the registered office serves only for receipt of the company's correspondence and storage of its documents, but the actual central administration takes place somewhere else, you need to report the place of central administration too to the court of registration. The registered office service may only be provided in a property owned exclusively by the provider, or for which the provider’s right of use is entered in the land register, in line with the Decree on registered office services. An exception to this is where the owner of the property has given their prior written consent to the provision of the registered office service and one of the following conditions is met:
- the parties are affiliates, or companies having significant ownership or other shareholding interest under the Accounting Act;
- the provider is entered in the company’s registration data as a delivery agent; or
- in addition to the registered office service, there is a permanent bookkeeping relationship between the parties
- based on the above exceptions, it is a good practice where the accounting specialists or accountants of the newly founded company provide a registered office service along with their accounting service
3. Who owns the new company: is it an individual or organisation?
If instead of an individual, an organisation (usually a company) wants to be the owner of the new company, it is necessary to verify its existence and the right of representation of the person signing on its behalf. For a foreign organisation, this may take place through the verification of original or authenticated (e.g. via official certification by a foreign representation, Apostille, other foreign public documents based on bilateral agreements) company documents and authorisations. In the absence of these, the proceeding legal representative may not submit the application for registration. For a Hungarian company, its existence can be easily verified based on a certificate of incorporation, even via the Internet, however, the authorised signatory is advised to take a specimen signature along, especially if no electronic copy has been submitted to the court of registration.
4. Who will be the company’s senior executive: an employee or agent?
The next question is, who should be the senior executive? And what should be his or her legal relationship with the company? Under the law, with a few exceptions, senior executives may perform their duties either as employees or as legal agents. In case of an employment relationship, they must have an employment contract with the company in place and be notified to the competent employment authority, while in case of an agency arrangement, it is recommended to conclude an agency contract. A senior executive acting as an agent may perform his or her duties for no consideration, however, in the lack of appropriate social insurance arrangement, the company must pay contributions after him or her.
It is also very important that no grounds for exclusion may exist in respect of the company’s prospective senior executive. Such grounds may include, for example, a criminal record or an exclusion from holding a senior office. The senior officer is required to issue a statement on the absence of these, which must be attached to the application for registration. If a conflict of interest may arise (e.g. shareholding interest in or executive position at a competitor),this should also be taken into account.
5. How about the capital needed to start the business?
It depends on the company form whether a statutory minimum subscribed capital is required, and if so, how much. At the time of incorporation, be prepared to transfer the whole or at least part of the initial capital to a bank account or the senior executive within no more than three months of the acceptance of the report on the company's second full, twelve-month business year following its registration. As a novelty for limited liability companies from 1 January 2022, the members may also pay their cash contribution, either in whole or part, from the distributable profits, in line with the rules of dividend payment.
Furthermore, a company can be founded via exclusively non-cash (in-kind) contributions. However, such contribution must be made available in full to the company until the submission of the application for registration. The in-kind contribution may include any asset or right representing the pecuniary value or a recognized claim. Nevertheless, no component of the in-kind contribution may be overvalued, given that the member providing it is held liable to the company for five years that the value of their contribution indicated in the articles of association corresponds to its fair value at the time of provision. Members who may have accepted such contribution at the increased value, knowing about the overvaluation, bear joint, and several liability.
6. Company registration licenses: now, later or never?
In respect of the company registration, two types of licenses can be distinguished:
- the foundation license, the prior existence whereof is a requirement for registration of the company (e.g. for financial enterprises)
- the activity license, the existence whereof is not a requirement for registration
That is if the company is to carry out an activity subject to a license other than a foundation license, the court of registration will register the company, nevertheless, the activity cannot be started until such license is obtained, which must be published, at the company’s choice, either in the Company Gazette or on their website by the start of the activity, at the latest.
7. VAT and others: where should I put the "x"?
On a limited liability company's registration form, there are a number of optional and required fields related to taxation, and a failure to answer one can cause a serious headache. Perhaps the most important of these is the company’s choice in connection with the assessment of the value-added tax on real estate sale or lease: it can opt for tax liability instead of tax exemption. For a company having one or more real estate, the entire business may stand or fail depending on this choice. With a slight exaggeration, we may say that this is a huge question in itself. In some cases, where it is about the structuring of a company group or high-volume foreseen transactions, it is a forward-looking approach to involve a tax advisor in this phase already.
Once you have all the data, it is time to have the lawyer or notary prepare the documents, the owner signs them, and send them electronically to the court of registration. With the simplified company registration procedure, you will have a company registered within one business day. Still, there is more to be done.
The good news is that the procedure for registering a limited liability company, one-man company, unlimited partnership, or limited partnership is free of charge and no publication or disclosure fee is payable for the publication of the same in the Company Gazette.
8. New bank account for the new company: before or after?
The next step may be to open a bank account, although this step can also take place before initiating the court registry. Still, we can tell that a subsequent bank account opening is usually easier, however, it is worthwhile to consult an administrator at the chosen bank in advance, in order to avoid any obstacles to opening the bank account, especially for foreign ownership or management. In this case, the bank clerks acknowledge in the form of an electronic document and prepare the requested accounts, so that all the senior executive must do is walk to the nearest branch of the chosen bank to sign. The bank also reports the bank account details to the court of registration.
9. Notification of the tax authority: we need a little bureaucracy
The above company registration procedure is a so-called “one-stop-shop” system, in which the court of registration forwards the company data to the tax authority based on the submitted application, the Hungarian Tax Authority notifies the court of registration of the company's tax number, and the bank also sends the bank account number directly to the court of registration. This one-stop-shop would be nice if it were true, but in practice, additional data reporting to the Hungarian Tax Authority is needed in most cases. Failure to do so may result in a default penalty.
10. Accounting – where the last will be first
Based on the foregoing, a number of special topics may arise in the process of starting a business, and although actual accounting may not take place before the registration of the company, it is still recommended to contact your accountant beforehand. A preliminary consultation with the accountant, especially regarding the taxation of the new company, the things to do after foundation, and the company’s future activities, may provide answers to many questions, as well as protect your company from unnecessary costs. Submitting the application for company registration will also earmark the taxation deadlines. Therefore, you must consult an accounting specialist even if the company will not yet start any operations for some time, since reports and returns must be submitted by the deadlines set out by law, irrespective of the company’s activity.
Once the company has been successfully registered, you will still have some important things to do, including the following, in particular:
- registration with the competent chamber of commerce and industry;
- notifications to the Central Statistical Office (KSH) and the Hungarian Tax Authority (the registration concerning the local business tax at the local government is started automatically based on a notification of the tax authority);
- Company Portal (“cégkapu”) subscription;
- selection of an appropriate invoicing and/or accounting program (for advanced players, the start of use of other digital solutions for electronic invoicing) or obtaining a stamp.
An experienced accountant can do a lot for you in connection with these tasks too.
+1 Tax registration procedure
Upon receipt of the application for registration, the court of registration obtains the company’s tax number (including its community VAT number) and the statistical number from the competent organisations. If the tax authority notifies the court of registration that it has definitively rejected the creation of the company's tax number in its own decision with reference to reasons specified by law, the court of registration will reject the application for registration. Therefore, it is always recommended that, before the foundation of a company, you review whether you have any tax debt or a ban on holding the senior executive position.
+2 So what to do now?
The practical speed of the company procedure is nice, still in many cases, a number of obstacles occur and many questions have to be answered in this relatively simple system. Certainly, these issues should not be overrated, nor should they be neglected either, as your business may incur heavy costs for each omission committed. Let us take, for example, the default penalty that may amount to HUF 900,000 in itself.
+3 Countersignature by an attorney digitally?
If you stay abroad or are otherwise normally busy, the new regulation of attorneys’ activity in the field of countersigning has provided a convenient and especially useful opportunity for you. It enables lawyers to act electronically, via video calls when countersigning the signature of a formerly identified party.
This is further facilitated by the provision whereby the full probative force of a document countersigned by an attorney, but signed by the parties abroad does not require any diplomatic certification or re-certification, or an Apostille certificate anymore. In certain cases, the regulation provides even more flexibility. As detailed here, even the video call can be omitted for documents suitable for the settlement of a given case in electronic forms, such as a company registration proceeding, and the attorney can countersign them or use them as electronic documents.
