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 The main legal forms of a company

What should you consider when choosing between the legal forms of a company

Have you decided to set up your own business? If you are planning to set up a company, one of the main decisions you will have to make is the legal form you will give it. This decision will affect such important aspects as the liability assumed by the company’s partners and the way in which the company will be taxed. In this article we are going to analyse the main legal forms that a company can have in order to see the advantages and disadvantages of each one, as well as the taxation.

What should you consider when choosing between the legal forms of a company?

In order to choose the right legal form for your company you should consider aspects such as the following: 

  • Whether or not you have partners. In the first case, it will be more appropriate to create a commercial company (limited or public limited company, among others) and in the second case, to work as a self-employed or individual entrepreneur. 
  • The capital you have for the business. There are certain types of companies that require a minimum capital to be created. 
  • The liability you wish to assume. It is important to know that as a sole trader you will be liable for the debts of the company with all your assets, unless you are a limited liability entrepreneur. However, with a limited or public limited company, it is the capital of the company that is liable for the debts of the entity. 
  • The type of activity you are going to carry out. There are certain types of activities for which a specific legal form is required. 
  • Taxation. The self-employed are subject to Personal Income Tax (IRPF) and companies are subject to Corporate Income Tax (Impuesto sobre Sociedades), where the general tax rate is 25%.

Most common legal forms of a company 

The most common legal forms of a company are as follows:

Self-employed or individual entrepreneur

This is a natural person who carries out an economic or professional activity for profit. They may or may not have employees and no minimum capital is required to carry out the activity. The start-up of the activity is very quick, as there are not many steps to take to get started, except for registering with the Tax Office and the Special Regime for Self-Employed Workers, among other formalities. The main disadvantage is that the self-employed person is liable for the company’s debts with all his or her assets. 

In this section, we must also highlight the limited liability entrepreneur, whose characteristic feature is the possibility of excluding his habitual residence and the productive equipment used for the activity from the company’s debts (except for public debts). In order for the exclusion to be effective, it must be registered in the Mercantile Register.

Corporate legal form

In this type of company we can distinguish two forms:

General Partnership

This is a company with its own legal personality in which two or more persons pool capital in order to share the profits. It is not necessary, although it is advisable, to set it up with a deed before a notary and no minimum capital is required. It is important to know that the liability of the partners is unlimited, so they are liable with all their assets. It is subject to corporation tax.

Commercial company

In this case, the company must be incorporated in a public deed before a notary and entered in the Commercial Register. In the case of commercial companies, the two most common legal forms are: 

  • The limited liability company (SRL). The limited liability company is the most common legal form for small and medium-sized companies when there are several partners. With the 2022 reform of the Capital Companies Act, the minimum share capital of the SL (which is divided into shares) will be one euro (previously it was 3,000 euros) and several requirements must be met:
    • At least 20% of the profits must be allocated to the reserve fund until the share capital reaches 3,000 euros. 
    • If the company is liquidated and the share capital is insufficient, the partners will be jointly and severally liable for the difference between the €3,000 and the subscribed capital.

The main disadvantage of a limited company is the limitation on the transfer of shares, unless it is a transfer to another shareholder or a family member of the transferring shareholder. Another disadvantage is the more complex corporate taxation.

  • Public limited company (SA). The public limited company is a trading company with its own legal personality in which liability is limited to the share capital, which is divided into shares. In the joint stock company, the share capital may not be less than 60,000 euros, making it the most advisable legal form for large projects that require a high level of investment. The shares of an S.A. can be freely transferred. In this case, the company is also subject to corporation tax. 
  • Cooperative company. This is a company set up by several people who join together to carry out a business activity. If the co-operative operates in several Autonomous Communities, the State Co-operative Law applies, but if it operates in one Autonomous Community, the regulations of that community apply, as competence has been transferred to each community. It is constituted by means of a public deed executed before a notary and registered in the Register of Cooperative Societies. The liability of the members is limited to the share capital, the minimum of which must be established in the Articles of Association. With regard to taxation, it is subject to Corporation Tax, which establishes a special regime for this type of entity.

Main differences between the public limited company (S.A.) and the limited liability company (S.L.).

When setting up a business entity, it is crucial to understand the differences between the available legal forms. Public Limited Companies (S.A.) and Limited Liability Companies (S.L.) are two common options but with different characteristics. Below is a table summarizing the main differences between the two legal forms:

We have seen the types of company according to their legal form and the advantages and disadvantages of each case. In order to make the right choice, it is important that you have the help of a team of lawyers who are experts in setting up a company in Spain, who can understand your needs, analyse the best legal form of company for your case and carry out all the necessary procedures before the notary and public administrations for the incorporation of the company.

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