3 Reasons Why An LLC Beats A Branch Office

Author:SMARTLEGAL Schmidt & Partners
Profession:SMARTLEGAL Schmidt&Partners
 
FREE EXCERPT

As a foreign company who plans to do business in Hungary, it sounds a great idea to open a Hungarian branch office. The main reason for this is that you do not need to provide the minimum capital contribution. Even if at first glance, opening a branch office seems simpler and cheaper than founding a Hungarian LLC as subsidiary, yet there are strong reasons to do the latter. In these article we share with you these considerations.

Liability of the foreign company In Hungary, a foreign company may found a limited liability company (LLC) as a subsidiary, in which it holds 100 % of the shares (so called single member LLC). In this case the mother company is only obliged to provide the subscribed capital of the LLC, which is HUF 3 Million (around EUR 10.000). As its name shows, the shareholder's liability is restricted towards the creditors to the capital contribution.

Only in exceptional cases (eg. when the LLC was liquidated) is the shareholder with its own assets liable for the LLC's debts.

On the other hand, in case of a branch office the mother company must ensure the assets that are needed for the operation of the branch office. Furthermore, the mother company has joint and several liability towards the creditors of the company.

To simplify the above: if a branch office has HUF 4 Million debt towards a creditor, the creditor can directly claim the debt from the mother company. However, if the LLC founded by the foreign company has a debt towards a creditor, the creditor may only sue the LLC itself and the shareholder mother company does not have direct, joint and several liability.

Representatives and signature rights in order to be a CEO at a limited liability company, one has to fulfill several conditions. The CEO must have clean criminal records and he cannot be prohibited from being an executive officer in Hungary.

Besides these conditions the CEO may be also a foreign citizen and he does not have to be a resident in Hungary. The LLC can hire the CEO not only as an employee but also as a civil law agent, thus the parties have more contractual freedom. If the CEO is hired under a labour contract, then the contract has to be concluded between the CEO and the LLC.

In case of the branch office of a foreign company there are...

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