Startup Formation: Which Law and Which Form
The formation and structuring of a startup is governed by the Georgian law on entrepreneurs. Its very first article describes the scope and the dispositive principle: it regulates the legal forms of the entrepreneur and the procedures of formation and registration. A general partnership, limited partnership, limited liability company or cooperative may define rules differing from the law in its charter or a partners’ agreement, save where a norm is imperative; in a joint-stock company deviation is possible only within the limits allowed by law.
This last difference matters for a startup: the room for flexible structuring begins with the choice of form, and the joint-stock form leaves the least freedom.
The Concept of the Entrepreneur and the Forms
An entrepreneur is a physical or legal person who has an enterprise — an organized system for carrying on entrepreneurial activity. Entrepreneurial activity is lawful, non-single, independent and organized activity carried out for profit. It proceeds in two ways: as an individual entrepreneur or as an enterprise company.
The difference is fundamental: an enterprise company is a legal person, an individual entrepreneur is not. The individual entrepreneur exercises rights in business relations as a physical person and answers to creditors for entrepreneurial obligations personally, with all its property. For a startup expecting investors, this personal risk almost always rules out the individual form in favour of a company.
Company Forms: Three Different Architectures
In a general partnership the partners act under a single firm name and answer for obligations directly and without limitation, as joint and several debtors; the form needs at least 2 partners. In a limited liability company the capital is divided into shares and the partners’ liability is limited; the company answers to creditors with all its property and is not liable for the partners’ obligations.
In a joint-stock company the capital is divided into shares; a shareholder is not liable for the company’s obligations, the company answers with all its property and is not liable for shareholders’ obligations. Georgian startups mostly begin as limited liability companies and move to the joint-stock form as investment rounds grow.
The one-person company institute covers both forms: an LLC or a JSC may be founded by one person, and where after registration all shares pass to one partner, the company becomes a one-person enterprise — a fact reflected in the register or made public in the manner established by law.