Memorandum of association

Parties wishing to set up a company must enter into a contract: company agreement (Memorandum of Association) under which two or more persons transfer assets or services for doing business jointly with the aim of sharing the ensuing profits.

The legal system also envisages the establishment of a business entity by a single person through a unilateral deed: for instance a stock company with a single shareholder, a one-man limited responsibility company, or a spin-off decided by the shareholders’ meeting of the parent company.

If the partnership is not set forth in a document, but is the result of the behaviour of the partners, then the company is a ‘de facto’ or unregistered company.  However the lack of  a formal document creates difficulties because there is no proof that the company exists.  De facto joint-stock companies are forbidden.

Qualifications that make a person eligible for signing a partnership deed

Individuals interested in becoming partners, whether they be natural persons, companies, associations or in general, entities, must have the legal capacity to act, i.e. carry out transactions that are valid from a legal standpoint.

Can joint-stock companies  be members of a partnership? The issue was a matter for debate up to recently, but an affirmative solution was provided by the law that entered into force as of January 1 2004.

Participation by other entities in companies can give rise to different solutions depending on the participating entity and on the type of company that is formed.

In general, any natural person above the age of eighteen who is an Italian citizen or who is a citizen of any European Union country can set up a company.

The participation of minors who are independent, of disqualified persons and of persons under judicial interdict is possible but is subject to special authorization.  Special caution is necessary when a supporting director is appointed to assist a partner. In such case it will be necessary to comply with the decree that appoints the director.  The variety and multiplicity of situations that may occur, depending on the type of company to be set up, on the circumstances that determine the birth of a company (for instance co-owners of a company as a result of inheritance) and on the nature and quality of the individuals and entities that wish to set up the company, suggest that it be done with the assistance of a notary who can provide advice on the best solution for each concrete case.

The participation of foreigners, who are not citizens of a European Union Country, is possible, within the limits envisaged by law (refer to  Foreigners in Italy).  Also in this case, seek the professional advice of a notary.

Essential requirements for partnership deeds

The essential requirements for entering a partnership deed are three:
- contributions;
- jointly carrying out a business activity;
- sharing in the earnings.

Contributions – Company’s assets and share capital

Contributions are the assets that the partners are obliged to provide under the partnership deed.

In other terms, the contributions are the resources that the partners contribute to create the initial assets of the company.

It is their function to provide the company with the initial capital required to carry out the company’s activity.

Through the contribution each partner allocates a part of his personal assets to the common activity throughout the lifetime of the company and takes on the entrepreneurial risk:  the partner runs the risk of not receiving anything in return for his contribution if the company does not make a profit, and he runs the additional risk of losing, all or part, of the value of the initial resources if the company produces losses.

Contributions may consists of:  money; allotments in kind (capital and real estate, tangible or intangible assets) transferred to the company for good or granted in use; manual or intellectual work; loans; companies.  In short, a contribution may be any resource that can be attributed an economic value that the parties deem useful or necessary for carrying out their joint business.  

In any case, limits are set for  joint-stock companies and cooperatives:  contributions in the form of work or services can be offered directly only in the case of limited liability companies.

It is worthwhile describing the concept of company assets and share capital because it is linked to the notion of contribution by the partners.

The corporate assets

The corporate assets are the company’s assets and liabilities.  Initially they are made up of the contributions offered or promised by the partners.  During its life-time the corporate assets undergo changes depending on the business activities carried out. The assets and liabilities are audited regularly through the drawing up of the annual balance sheet.

The net worth is the positive difference between assets and liabilities.

The corporate assets also have the function of providing the company’s creditors with a general guarantee.

Share capital

The share capital is a numerical entity that expresses the value of the contributions in monetary terms, as indicated by the valuation expressed in the Memorandum of Association.

A share capital of 100 means that the partners have committed to contributing (underwritten capital) and/or have contributed (fully paid-up capital) money or other entities which at the time of the signing of the partnership deed, were attributed that given monetary value.

The share capital remains unchanged throughout the life of the company up until, by modifying the Memorandum of Association, the decision is taken to increase it or reduce it.

Carrying out an economic activity in common – Corporate purpose

Individuals who set up a company do so because they want to carry out a given economic activity together with other individuals.  This activity is the corporate purpose and must be indicated in the Memorandum of Association.  It may be changed during the life-time of the company only in accordance with the amendment rules envisaged in the Memorandum of Association.

The activity must be a productive activity, i.e. a business aimed at producing or trading goods or providing services, while it cannot restrict itself to merely enjoying and managing assets, because this would be a community of interests and not a company (with the exception of management companies).

In addition, in order for there to be a company, the business must be carried out in common.

Sharing in the profits

Carrying out an economic activity jointly in the form of a company is aimed at making a profit (objective profit) subsequently to be shared among the shareholders (subjective profit).  The companies that pursue this aim are called profit-making companies (partnerships and companies with share capital).

There are however other types of companies (cooperatives) which by law pursue a mutual aim that is different from profit-making.

Their typical aim is to provide the members with direct advantages that depending on the field of activity of the cooperative, may either be savings on purchases or a higher fee for services offered by the members of the cooperative.