Entrepreneurship: Legal Status, Obligations & Liability
Private Law Incompatibilities and Prohibitions
Private law incompatibilities: Absolute incompatibilities have recently lost their leading legal case (Art. 14.4 Ccom, as a result of the merger between the notary public body and so-called “agents de cambio y bolsa”). However, relative prohibitions based on private interest are frequently provided for. Relative prohibitions are usually intended to prevent certain persons from illicitly competing by reason of their position – namely, partners in a partnership (socios colectivos) according to Art. 136 and 137 CCom, factors (Art. 288 Ccom), business agents, captains of ships (Art. 613 Ccom), and so on.
Inability in Commercial Activities
A third restricting situation must be noted: inability. Although it arises from different causes from those triggering prohibition and incompatibility, its results in the similar effect of temporarily banning the carrying on of commercial activities. It may be declared in insolvency cases (Art. 172 Insolvency).
Consequences and Obligations of the Entrepreneur
Acquisition of the legal status of entrepreneur: The existence of such a particular legal status is grounded on the need to protect third parties dealing with the sole trader or financing the activity from the adverse results of the business.
Professional Obligations of an Entrepreneur:
- Firstly, the obligation to keep accurate financial accounting of the business (mainly Art. 25-49 C Com) benefits their own organization, third parties dealing with the sole trader, and even state supervisory power.
- Secondly, the duty and the right – depending on the kind of entrepreneur – to register relevant data concerning the business in the Mercantile Registry (basically Art. 16-24 C Com with a number of modifications) as a public tool of crucial importance in market transactions.
- A third consequence deriving from the sole trader’s status that used to be noteworthy has recently disappeared, since insolvency Law has unified in a sole and common regime, “concurso,” the previously separate regimes of insolvency under which sole traders were subject to “quiebra” and “suspensión de pagos.”
Unlimited Liability of the Entrepreneur
A sole trader is also liable for the performance of their obligations with all present and future property.
Understanding “Lifting the Corporate Veil”
“Lifting the corporate veil” is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually, a corporation is treated as a separate legal person, who is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. The law usually upholds this principle of separate personhood, but in exceptional situations, may “pierce” or “lift” the corporate veil.
Contractual vs. Tort Liability
- Contractual liability: Persons who, in the performance of their obligations, should incur in willful misconduct, negligence, or default, and those who in any way should contravene the content of the obligation, shall be subject to compensation of any damages caused.
- Tort liability: The person who, as a result of an action or omission, causes damage to another by his fault or negligence shall be obliged to repair the damage caused.