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Navigating Legal Entity Compliance What You Need to Know

When establishing a business, you should not only focus on the nature of the business but also the type of legal entity. The right choice will help you maximize your profits and maintain control of your business, knowing the inherent responsibilities. On the other hand, if you choose the least suitable one, you may have to make a change that involves financial, tax, and legal risks.

In this article, we will show you the legal entity classification established according to Spanish laws. In the same way, you will know the advantages and disadvantages of each of the permitted legal structures.

The Importance of Legal Entities in Business

legal entity

Choosing the right legal entity for your business is one of the most important decisions you must make for the success of your business. Thus, one wrong choice can prevent you from achieving your goals and make you rethink your business. The most notable factors regarding the importance of legal entities are the following:

  • Taxes: Depending on the type of structure you choose, with its different characteristics, this can affect your tax burden.
  • Responsibility: For example, choosing between a Limited Liability Company (LLC) and a Corporation makes the difference between assuming certain responsibilities.
  • Paperwork: The legal framework Spain establishes different characteristics for each legal structure, so choosing between one or the other may require different procedures.
  • Hierarchy: Each of the legal entities has a hierarchical system that makes a difference at the time of certain operations (sale of the company, and sale of shares, among others).
  • Legal registration: Without a legal structure, you will not be able to register your company to apply for permits and visas and cover other legal aspects.

Thus, not only should you create a legal structure but you should also choose the right one for your business. Otherwise, you will face tax and legal consequences if you have to change it at any point.

Ensuring Finance Protection

Choosing an appropriate legal entity helps you protect not only your investment but also the profits you make in the process. This has to do with the tax declaration to which your company is subject according to the type of structure. As you will see below, each has different tax rules as well as layers of financial protection.

In the same way, some entities need to have an appropriate insurance policy for themselves to complement the liability of the partners. Additionally, the type of setup can make the process easier, save costs, and give you a greater layer of financial protection.

Tax Benefits and Legal Entities

Different legal structures have different tax implications, which will affect the profitability of your business. Therefore, you should choose a legal entity Spain knowing what these implications are to plan appropriately. For example, certain business structures require the payment of direct and indirect taxes.

In the case of the first type of tax, they are those that the company must pay in proportion to its profits. On the other hand, indirect taxes include the following:

  • Sales taxes
  • Value Added Tax (VAT)
  • Special taxes
  • The property
  • Payroll
  • Import/export duties

Also, there are some entities with which you can save on income taxes. Furthermore, many of the structures make it possible to avoid the disadvantage of double taxation. Hence, some of the legal entities allow you certain advantages over others, so the choice also depends on this factor.

Comparing Common Legal Structures: Pros and Cons

In Spain, you can choose a legal entity from the wide variety that exists, each with its advantages and disadvantages. Next, we will show you what these legal structures are and what characteristics they have, with their pros and cons:

The sole owner or individual entrepreneur (Autonomous)

The sole proprietorship (Autonomous) is a legal entity classification in Spain ideal for those who wish to operate independently. In addition, it is a very common entity among freelancers, consultants, and small business owners. However, although it is a simple form of organization, the disadvantage is the personal responsibilities in case of debt.

  • Capital: In this case, it does not require a minimum initial capital, making it an accessible option.
  • Responsibility: As a self-employed person, you assume full responsibility for debts and business obligations, so your assets may be seized to cover these obligations.
  • Shareholders: Being a legal entity of a single person, it does not admit shareholders.
  • Taxes: The owners of this type of company must pay the Personal Income Tax (IRPF). In the same way, they must collect Value Added Tax (VAT) and reflect it on their invoices, as well as contribute to social security.
Limited Liability Company or Limited Company (SL)

This type of corporate legal identification is the most common in Spain, especially among small and medium-sized companies. Unlike the previous entity, in this one personal assets are separate from business debts.

  • Initial Capital: The initial capital for this type of entity is EUR 3000, which the members must subscribe to and disburse when establishing the company.
  • Responsibility: Being a corporation, shareholders are only liable to the extent of their contributions to the capital of the company. This is an advantage, as there is some financial protection for the personal assets of shareholders.
  • Shareholders: This structure offers flexibility, as there can be one or several shareholders in a Limited Company.
  • Taxes: The tax to which Limited Companies are subject is 25%, which can be 15% during the first two years under certain conditions.
New Company Limited Company (SLNE)

This legal entity classification is similar to the previous one but allows for a simpler and faster incorporation process. However, this option may not be for all investors, as it is known as a low-cost SL. Nevertheless, it can be a viable option for startups or other small projects in Spain.

  • Initial Capital: This business structure requires an initial capital of between EUR 3,000 and EUR 120,000.
  • Responsibility: In this case, the same thing happens as with the regular Limited Company, the liability depends on the capital contribution of each shareholder.
  • Shareholders: The number of shareholders that constitute a SLNE can be between one and five.
  • Taxes: SLNEs are subject to a corporate income tax, although the government provides certain incentives for new businesses.
Public Limited Company (SA)

Large companies or those that plan to go public prefer this type of legal entity Spain. One of the advantages of this entity is the opportunity to raise capital by issuing shares. With these, you can go public, as long as the company is listed on the stock exchange.

  • Initial capital: Public Limited Companies require an initial capital of EUR 60,000, of which you must disburse at least 25% when establishing the company.
  • Responsibility: As with the SL or the SLNE, in Public Limited Companies the responsibility depends on the investment of each shareholder in the business.
  • Shareholders: You can establish an SA with a single shareholder but it is more common to have several.
  • Taxes: The corporate income tax for this structure is 25%. However, as with the previous entity, tax can be 15% during the first 2 years under certain conditions.
Joint Property Company or Community of Property (CB)

A CB does not have a legal personality and consists of the association of 2 or more people to share assets or capital. Additionally, the parties involved must establish a contract, specifying capital, losses, and profits.

  • Initial capital: For this corporate legal identification, you do not need minimum initial capital.
  • Responsibility: In the case of CBs, the partners share the responsibility of debts and obligations in the same proportion.
  • Shareholders: As we mentioned, the Community of property must have at least two partners.
  • Taxes: Partners must individually file personal income tax on profits earned in the company.
Civil society

This is a type of company resulting from the union of 2 or more people or entities to establish a business.

  • Initial capital. As with the previous type of legal entity, it does not require minimum initial capital.
  • Responsibility. Each of the partners is responsible for the debts and obligations of the business.
  • Shareholders. This legal structure requires two or more partners.
  • Taxes. Civil Partnership partners are subject to personal income tax on their profits.
Company Owned by Workers or Labor Limited Company (SLL)

The SLL is a legal entity in which the workers own the majority of the capital of the company.

  • Initial Capital. The minimum capital amount varies according to various circumstances.
  • Responsibility. The liability of each partner is limited by the amount contributed to the capital.
  • Shareholders. SLLs need to have at least three working partners.
  • Taxes. The Labor Limited Company is subject to corporate income tax.
Cooperative Society, Cooperative, or S. Coop

The Cooperative or S. Coop is a commercial structure in which the owners themselves operate it, obtaining a mutual benefit.

  • Initial Capital. Depending on the type of cooperative, the minimum capital is different.
  • Responsibility. Generally, the liability of each partner depends on the capital contributed.
  • Shareholders. Cooperatives must have at least 3 members.
  • Taxes. In this case, this type of legal entity has specific tax rules.
General Company or Collective Company

The structure of the Collective Partnership establishes that all partners share the responsibilities and obligations of the business.

  • Initial capital. This legal structure does not require minimum initial capital.
  • Responsibility. All partners in this structure share the responsibilities of the business.
  • Shareholders. Collective Partnerships require two or more partners.
  • Taxes: This type of structure is subject to corporate income tax.
Limited Partnership

This type of company has 2 types of partners, the groups that manage the company and the limited partners that provide the capital.

  • Initial capital. No minimum initial capital required
  • Responsibility. General partners are personally liable, while limited partners have limited liabilities.
  • Shareholders. This legal entity requires at least one general partner and one limited partner.
  • Tax. The community corporation must pay corporate income taxes.
Branch

This type of business entity is an extension of the parent company, operating under the same name and in the same business scope.

  • Initial Capital. Although there is no requirement in this case, the parent company must allocate sufficient funds for its operations.
  • Responsibility. The original company has full responsibility for the actions, debts, and obligations of the branch.
  • Shareholders. In this case, it does not apply, since the branch depends on the parent company.
  • Taxes. The entity must pay Corporate Tax on profits obtained from its activities in Spain. However, the parent company must be responsible for debts incurred in the country.
Subsidiary

Unlike the previous one, the subsidiary can be wholly or partially owned by the parent company. Another difference is that the subsidiary has its legal personality and operates independently of the organization that owns it.

  • Initial capital. This requirement depends on the type of corporate legal identification chosen, such as an SL or SA.
  • Responsibility. This is limited to investment in the subsidiary of the parent company, which provides a layer of financial protection.
  • Shareholders. The subsidiary may have one or more shareholders, including the parent company.
  • Taxes. Subsidiaries must pay a corporate tax of 25%, although there may be reductions under certain conditions.

Key Considerations for Choosing the Right Legal Structure

You should focus on choosing the right legal entity for your business so you can achieve your business goals more confidently. Additionally, you will be able to satisfactorily complete the following aspects:

  • Protect personal assets
  • Maximize tax efficiency
  • Attract investors
  • Ensures business continuity

This is because each business structure offers its advantages and disadvantages, and what works for some may not work for you. Hence, you should evaluate your specific needs and if possible, hire expert business consultants in Spain.

Balancing Liability and Control

A well-defined legal entity Spain allows you to know the terms of responsibility for each partner. In this way, shareholders know the roles, contributions, and authority within the business. This will minimize conflicts that may exist between participants, something that is more common in small companies.

Industry-Specific Considerations

The nature of the business you wish to establish is also an important factor when choosing a suitable structure. That is its general purpose, as well as the existence of a company within the chosen industry. Thus, you should consider the following aspects when opting for one of the existing legal structures:

  • Products and/or services that your company will offer
  • The market niche in which you want to operate
  • The objectives you want to achieve through your company
  • Other aspects that distinguish your company

Tax Implications: How Legal Structure Affects Your Bottom Line

legal entity

The type of legal structure established in the legal framework Spain each has its characteristics as you have seen. Therefore, when choosing the appropriate structure for your business, you must know what taxes are levied according to each one. One of the characteristics you should know is whether the chosen entity applies for double taxation.

However, although your business may pay excise taxes, this does not mean it cannot be profitable. The tax aspect will only help you know how profitable your business is, so it is not just about choosing a structure with fewer taxes.

In summary, there are many aspects to consider when choosing the best legal entity,especially when it comes to a startup. Thus, you must think carefully about what you want to achieve in the future so as not to make a mistake in the type of structure and have to change it. Therefore, you must consider important aspects such as liability, taxes, legal requirements, and more.

However, having experts in establishing businesses in Spain is one more step towards excellence. At Iberia EOR we can offer you quality services in this regard, you just have to contact us to obtain all the information.

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