When it comes to starting a new business or expanding an existing one, one of the most important decisions facing entrepreneurs is the choice of the most appropriate legal structure for their project. In Spain, Sociedades Limitadas (SL) and Sociedades Anónimas (SA) are two of the most common legal forms. Each has its own advantages and disadvantages, and the choice between the two can have a significant impact on the operation and success of the company. Today, from the law firm Ignacio García Taboada, we would like to explain them in detail:
Definition of a Limited Company (S.L.)
A Limited Company (S.L.) is a legal form in which the liability of the partners is limited to the capital contributed to the company. This type of company is the most common among small and medium-sized entrepreneurs due to its administrative simplicity and less bureaucratic burden.
Definition of Sociedad Anónima (S.A.)
In contrast, a Sociedad Anónima (S.A.) is a more complex business structure, designed for large companies with high capital requirements. In an S.A., partners or shareholders can buy or sell shares freely and liability is also limited to the capital contributed, but with stricter legal and tax requirements.
Advantages of the Sociedad Limitada (S.L.)
Reduced minimum share capital
One of the advantages of a Limited Company is that the minimum share capital for its incorporation is only 3,000 euros, which facilitates the entry of small investors and entrepreneurs.
Flexibility in management and organisation
The Limited Company allows for a more flexible organisational structure. The partners have the ability to establish personalised management agreements, which facilitates quick and efficient decision-making.
Liability limited to the capital contributed.
In an S.L., the liability of the partners is limited to the capital contributed, thus protecting personal assets in the event of debts or bankruptcy of the company.
Simplicity in the transfer of shareholdings
The transfer of shares in a limited company is simpler and less costly than in a public limited company, as it does not require the intervention of a notary in most cases.
Advantages of the Public Limited Company (S.A.)
Ability to raise large amounts of capital
A S.A. can issue shares and other securities in the financial markets, enabling it to raise large sums of capital for major projects.
Ability to issue securities on the stock exchange
Corporations have the option of being listed on the stock exchange, which can increase their visibility and attractiveness to potential investors.
Free transfer of shares
Unlike Limited Companies, in a Public Limited Company the shares can be sold or transferred freely, which facilitates liquidity and the entry of new investors.
Greater prestige and credibility in the marketplace
Operating as a limited company can confer a higher level of prestige and credibility, which is especially useful in negotiations with large customers or suppliers.
Disadvantages of the Limited Company (S.L.)
Limitations on raising capital.
A limited company has a lower ceiling in terms of raising capital. It cannot issue shares on the stock exchange and generally has to rely on bank loans or contributions from partners to finance itself.
Potential difficulties in transferring to non-member third parties
The transfer of shares to non-member third parties in a limited company can be complicated, as the consent of the other partners is generally required.
Obligation to register in the commercial register
Although it is common practice for all companies, registration in the Commercial Register is compulsory and entails administrative and time costs.
Disadvantages of the Sociedad Anónima (S.A.)
High minimum share capital
To incorporate a Sociedad Anónima, a minimum share capital of €60,000 is required, which can be a barrier for small entrepreneurs or startups.
More complex incorporation procedures
The incorporation of a Sociedad Anónima involves a more complex set of legal procedures, including the drafting of detailed articles of association and the need for a financial audit.
Greater Control and Oversight
S.A.’s are subject to a higher level of scrutiny and control by the authorities, which implies a heavier administrative burden.
Continuous public reporting obligations
This type of company must comply with strict transparency and public reporting obligations, including the publication of annual accounts and other financial reports.
How to Choose : S.L. or S.A. – The Importance of Expert Legal Advice
Making the decision between incorporating a limited company or a public limited company is a key step in the life of any entrepreneur or businessman. The difference between a limited company and a public limited company is considerable. Therefore, given the complexity and long-term implications of this choice, expert legal advice is essential.
Factors to consider in making the choice
The choice between a limited or public limited company should not be taken lightly. There are a number of factors that should be carefully considered in making this decision:
Nature and size of business.
If you have a small or medium-sized business, a limited company may be the best option due to its more flexible structure and fewer bureaucratic requirements. In contrast, a public limited company is more appropriate for larger companies that require more capital and have plans to go public. This is where the difference between SA and SL becomes more apparent.
Capital and Financing Requirements
Public limited companies offer a greater facility to raise capital through the issue of shares. In a limited company, the raising of capital is more restrictive and is generally done through the contribution of the partners. It is essential to know the minimum capital to create a public limited company and the minimum share capital of a private limited company.
Medium to Long-term Expansion and Growth Plans
If you have large-scale expansion and growth plans, a public limited company may be more suitable due to its ability to raise large sums of capital and issue securities on the stock exchange.
Incorporation and Maintenance Costs
Incorporating a public limited company involves higher costs and more complex procedures compared to a private limited company, which is generally cheaper and quicker to incorporate. It is important to know how much it costs to set up a limited company and compare it with the costs of a limited company.
Legal and Bureaucratic Requirements
Corporations have stricter legal and bureaucratic requirements, such as mandatory audits and a more complex governance structure. In contrast, limited companies are more flexible in this respect.
Partners’ responsibilities and obligations
In a limited partnership, the liability of the partners is limited to the capital contributed. In a limited company, the partners are not personally liable for the company’s debts. Their liability is likewise limited to the capital invested in the form of shares.
Fiscal and tax implications
Public limited companies and private limited companies have different tax treatments. It is essential to have a good understanding of these fiscal and tax differences in order to optimise the company’s tax burden.
Avoiding common company formation mistakes
Mistakes when incorporating a company can be very costly and difficult to correct. That is why it is so essential to be well informed and well advised from the outset.
Not clearly defining roles and responsibilities of partners
One of the most common mistakes is not clearly establishing the roles and responsibilities of each partner. This is especially relevant in a limited partnership, where management tends to be more personalised. The lack of definition can lead to conflicts and misunderstandings that affect the functioning of the company.
Ignoring tax and fiscal aspects from the outset.
In both a public limited company and a private limited company, it is crucial to take tax aspects into account from the start. Ignoring them can result in penalties and problems with the tax authorities.
Omitting essential clauses in the articles of association
The articles of association are the backbone of any company. Omitting essential clauses can lead to legal problems later on. It is vital that these bylaws are reviewed by an expert to ensure that they comply with all applicable company laws.
Failure to establish dispute resolution protocols
Conflict resolution protocols not only apply to partners, but can also be crucial for managing disputes with employees, suppliers and customers. These protocols may include formal methods such as mediation or arbitration, and their absence can lead to more complicated and costly dispute resolution. In a public company, where the structure may be more complex and there are more stakeholders, these protocols are particularly important. However, they are also relevant in a limited company, where relationships tend to be closer and more personal.
Lack of clarity in shareholding distribution
The distribution of shares must be clear and transparent to avoid future conflicts. This is especially relevant in limited partnerships, where each partner may have a different percentage of the company.
Failure to adequately consider the liability of partners
As mentioned above, the liability of partners varies according to the type of partnership. Not taking this into account can lead to legal and financial problems.
Failure to plan for the possible exit of a partner
Exiting a partner can be a complicated and potentially contentious process. Having an exit plan or “shotgun clauses” in the articles of association can facilitate this process.
Ignorance of company registration requirements and deadlines
For both a public limited company and a private limited company, it is crucial to know and comply with all the requirements and deadlines of the commercial register to avoid penalties and legal problems. Since a lot of information is involved, expert legal advice is a priority if all steps and requirements are to be strictly followed.
Not taking sector-specific regulations into account
Depending on the sector in which the company operates, there may be specific regulations that must be complied with. Ignoring these regulations can lead to sanctions and, in the worst case, to the closure of the company.
Why it is vital to have a Lawyer when Incorporating a Company
The legal and bureaucratic complexity of incorporating a company makes the advice of an experienced lawyer indispensable. In this case, a lawyer can make a big difference between getting it right or running the risk of penalties.
Navigating the red tape and documentation.
A lawyer can help you navigate through the complex bureaucracy and documentation required, whether you are forming a limited company with multiple shareholders or a limited company with a smaller focus.
Minimising risk and costly mistakes
Mistakes in the formation of a limited or public limited company can be costly and difficult to correct. An experienced lawyer can help you minimise these risks by ensuring that all legal and tax requirements are met from the outset.
Mediation and resolution of partnership disputes
Conflicts between partners can arise in any type of partnership. A lawyer can help establish conflict resolution protocols and act as a mediator in the event of disputes, which is especially useful in limited companies, where the structure can be more complex.
Ensuring Protection of Rights and Obligations
A lawyer can ensure that statutes and contracts adequately protect the rights and obligations of all parties involved, which is crucial to avoid unwanted liabilities or future legal problems.
Constant updates on legislative changes
Laws and regulations are constantly changing. A lawyer can keep your limited company or limited liability company up to date with legislative changes, which is vital for legal and tax compliance.
Ensuring an orderly exit or transition
Whether a limited or public limited company, planning for a partner’s potential exit or business transition is crucial. A lawyer can help establish clauses in the articles of association or shareholders’ agreements that facilitate this process in an orderly manner.
The presence of a lawyer in the formation of a limited or public limited company not only facilitates these processes, but also provides an additional layer of security and confidence in the company being formed.
Conclusions
If you are considering incorporating a limited or public limited company, do not underestimate the importance of having expert legal advice. A specialist lawyer can be the difference between the success and failure of your venture. Don’t leave such crucial issues as legal structure, tax liabilities and dispute resolution to chance. Contact our team of experts today to ensure a solid and compliant future for your business.
