Company law for SMEs: the most important rules you need to know

You have formed your ApS and got a CVR number. But do you know what is actually expected of you legally? Many owners of small and medium-sized businesses are busy running the business and forget the company-law duties that come with it. That can be expensive.

Company law is the set of rules that governs how a company is run, who is responsible for what, and which decisions require which formalities. This guide gives you the most important overview, without it having to become a legal textbook.

What is company law?

Company law is the part of the law that governs a company's internal matters: formation, management, capital, decision-making and dissolution. In Denmark, the primary source is the Companies Act, which applies to public limited companies (A/S) and private limited companies (ApS).

For SMEs, it is in practice the rules for the ApS that are relevant. The Companies Act imposes requirements on:

• The management structure and the director's powers
• The general meeting and decision-making
• Capital matters and dividends
• The register of members and company registration
• The annual report and accounts

Company law is not optional. If you breach the rules of the Companies Act, you as a director can incur personal liability, even in a company form with limited liability.

The management structure in an ApS

An ApS can have two management models:

Model 1: executive management alone

The simplest model for most SMEs. One or more directors run the company. The director or directors have the day-to-day management and bind the company.

Model 2: board and executive management

The board has the overall supervision and the strategic decisions. The executive management has the day-to-day management and reports to the board.

For most SMEs, executive management alone is sufficient. A board is primarily relevant when:

• There are external investors
• The company grows to a size that requires professional oversight
• The articles require it

Who cannot be a director?

The Companies Act imposes eligibility requirements on directors. You cannot be registered as a director if you:

• Are under 18
• Are subject to a bankruptcy disqualification
• Are under guardianship with removal of legal capacity
• Have certain criminal convictions relevant to the business

These matters are checked at the registration with the Business Authority.

The director's liability and powers

As a director in an ApS, you have two primary legal bases: the Companies Act and your director's contract.

The day-to-day management

The director has the day-to-day management of the company. That means:

• You can enter into agreements and contracts on the company's behalf within your signatory power
• You can hire and dismiss employees
• You can dispose of the company's funds within the framework set by the board or the articles

"Day-to-day management" is the Companies Act's concept. In practice it covers everything that is not of an unusual nature or of great significance to the company. Unusual dispositions require the board's (or the general meeting's) approval.

When are dispositions unusual?

There is no fixed definition. It depends on the company's size, the articles and practice. A useful rule of thumb: would a sensible owner expect to be asked before this happens? If yes, the disposition is probably unusual.

Examples of dispositions that typically require the board's approval:

• Taking out loans above a certain limit
• Buying or selling real property
• Entering into long-term agreements of significant importance
• Hiring senior management

The director's personal liability

Limited liability applies to the company and not to you personally as a director if you act in a way that incurs liability.

You can incur personal liability as a director through:

• Irresponsible conduct: You have acted negligently or irresponsibly, for example by continuing operations despite knowledge of insolvency
• Liability for damages: You have caused harm to the company, the shareholders or a third party
• Criminal liability: Certain breaches of the Companies Act and tax law are criminal

The most common risk for the director in an SME is continued operation when the company is insolvent. If you cannot pay your creditors and you nonetheless continue operating after the so-called point of hopelessness, you can become personally liable for the debt incurred thereafter.

The general meeting: the shareholders' highest authority

The general meeting is the forum where the shareholders (the owners) make the overall decisions for the company. Even if you are the sole owner and sole director, the rules still apply, and you must formally hold and minute your general meetings.

The ordinary general meeting

The ordinary general meeting must be held in good enough time that the approved annual report can be filed with the Business Authority within the deadline in the Financial Statements Act, which for most companies is 5 months after the end of the financial year. So if the company has a calendar year (1 January to 31 December), the general meeting must be held so that the annual report can be filed at the latest by the end of May.

The ordinary general meeting must as a minimum deal with:

1. Approval of the annual report
2. Disposition of the year's result (dividend or transfer to the next year)
3. Election of management and any auditor
4. Any proposals from the shareholders

The extraordinary general meeting

Can be convened at any time when there is a need to make decisions that cannot wait until the ordinary general meeting.

Formalities at the general meeting

Notice must be given with at least 2 weeks' notice, unless the articles set a shorter notice. The general meeting must be minuted, even if you are the sole owner. The minutes are evidence of what was decided.

Capital rules and dividends

Share capital and capital preparedness

An ApS must have at least DKK 20,000 in share capital. But the capital requirement is not just a formation requirement; it is also an ongoing obligation.

The Companies Act requires the management to ensure on an ongoing basis that the company has adequate capital preparedness. This means the company must at all times have sufficient liquidity to meet its obligations as they fall due.

If the company has lost more than half of the share capital, the management must ensure that a general meeting is held at the latest 6 months after the loss of capital is established. The general meeting must decide whether the company should continue, and if so what measures should be taken to restore the capital base (section 119 of the Companies Act).

Dividends: when and how much?

The shareholders can decide to distribute a dividend from the company's free reserves. A dividend requires:

• A decision at the general meeting
• That the company has sufficient free reserves to cover the dividend and continued operation
• That the distribution is prudent and does not make the company insolvent

If a dividend is paid out beyond what is lawful, the shareholders and the management can be held liable for the repayment.

Shareholder loans: the big pitfall

A shareholder loan (a loan from the company to a shareholder) is only lawful under strict conditions in section 210 of the Companies Act, among other things that it is within the free reserves, made on market terms and decided prudently. Regardless of whether the loan is lawful under company law, it is generally taxed at the recipient as salary or dividend in the year it is made, under section 16 E of the Assessment Act. If the loan is unlawful, it must be repaid with interest, and the management can incur liability.

Exception: Ordinary business transactions on market terms are not covered by the prohibition.

The register of members and the Owner Register

The company has two parallel registrations of ownership:

The register of members (internal)

The company's internal register of shareholders. It must be updated on any change, for example a sale of shares, inheritance or a gift. It is the management's responsibility to keep the register correctly.

The Owner Register (public)

If anyone owns 5% or more of the shares or votes (directly or indirectly), the ownership must be registered in the Owner Register at the Business Authority. Registration must take place at the latest 2 weeks after an ownership share crosses the threshold. Note that there is also a separate duty to register the company's beneficial owners (typically natural persons with more than 25% of the ownership shares or votes).

Articles of association: the company's constitution

The articles are the legal foundation for the company's operation and organisation. They govern:

• The share capital and the shares' rights
• The management structure
• The convening of the general meeting and the voting rules
• Rules on the transfer of shares (right of pre-emption, consent requirements etc.)

The articles can be changed, but it typically requires adoption at the general meeting with a 2/3 majority of both the votes cast and the capital represented.

The articles are public documents that are registered with and available via the Business Authority.

The annual report and the duty to report accounts

All ApS companies have a duty to file an annual report with the Business Authority. The deadline is at the latest 5 months after the end of the financial year for most companies.

The annual report must as a minimum contain:

• Management's review (can be omitted for the smallest class B companies)
• Balance sheet (assets and liabilities)
• Income statement
• Any notes

For the smallest companies (accounting class B), the requirements are lighter. For larger companies, the requirements for audit and additional information increase.

If the annual report is filed late, the Business Authority can send the company for compulsory dissolution, and the management can, depending on the circumstances, incur liability.

Frequently asked questions

Can I have two companies with each other as shareholders?

Yes. It is possible to have a holding company that owns shares in an operating company. Holding structures are widely used in Denmark, among other things to be able to defer tax on dividends and protect assets. The structure is governed by the Companies Act and tax law.

What happens if we lose more than half of the capital?

The management must ensure that a general meeting is held at the latest 6 months after the loss of capital is established. The general meeting must decide whether the company should continue, be reconstructed or be liquidated. The duty to act is real, and if it is not observed, the management can incur liability.

Can I change the management model from executive management to a board?

Yes. It requires an amendment to the articles adopted at the general meeting and a registration with the Business Authority. There is no obligation to have a board in an ApS.

Can shareholders intervene in the director's day-to-day management?

In principle no, because the director has the day-to-day management, and the shareholders cannot instruct the director on individual decisions in the day-to-day operations. The shareholders can, however, set overall guidelines via the articles and general-meeting decisions, and they can of course remove the director.

What is the difference between the Companies Act and an owners' agreement?

The Companies Act is legislation and applies regardless of what you agree. An owners' agreement (a shareholders' agreement) is a private agreement between the shareholders about their mutual relationship (right of pre-emption, non-compete clauses, dividend policy etc.). The owners' agreement can govern more than the articles do, but it cannot override mandatory statutory rules and is not binding on the company.

Conclusion

Company law is not just for large companies. As an owner and director in an ApS, you are subject to the rules of the Companies Act, and non-compliance can cost you personally. Hold the general meeting on time, minute your decisions, keep the register of members updated, and pay attention to the capital requirements. It takes far less time to follow the rules than to clean up when they have not been followed.

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The content of this article is for guidance only and does not constitute legal advice. Consult a lawyer for advice on your specific situation.