Setting up a Limited Liability Company with minimal capital

Setting up a Limited Liability Company with minimal capital is entirely possible, thanks to the option of a limited liability company under successive formation. This model is designed to facilitate entrepreneurship. However, it comes with certain obligations, such as profit reservation and restrictions on dividend distribution. We explain everything in this post.

Concept and requirements of the limited Liability Company under Successive Formation

A Limited Liability Company under Successive Formation (SLFS) is a type of limited liability company designed to simplify business creation without requiring the minimum capital of €3,000 that is mandatory for a “conventional” limited liability company. Thanks to Law 18/2022, it is now possible to create a limited liability company with a symbolic minimum capital of just €1. However, the following requirements must be met:

• Reservation of 20% of annual profits: Until the minimum capital of €3,000 is reached, 20% of earnings must be allocated to a legal reserve.
• Restriction on dividend distribution: Dividends cannot be distributed until the company’s share capital reaches €3,000.Liability of partners and administrators: In the event of dissolution, partners and administrators are jointly liable for the difference between the contributed capital and €3,000.
• Obligation to reflect it in the statutes: It must be stated in the deed of incorporation that the company operates under the successive formation regime.

Benefits of incorporating a Limited Liability Company without monetary contribution

Choosing to set up this type of company without providing the minimum capital usually required has a clear advantage. But what other benefits does it offer? We explain them below:

• Accessibility: Allows more people to start a business without the initial capital barrier.
• Greater initial liquidity: Since a large sum is not allocated to the minimum share capital, resources can be used for other aspects of the business.
• Ease of attracting investors and alternative financing: External financing sources can be sought without committing large amounts of money at the start.
• Flexibility in growth:The company can operate with a basic structure and expand its capital over time.
• Legal compliance with progressive reserves: The obligation to create progressive reserves ensures long-term financial stability.
• Job creation: By allowing companies to be established with just €1 in share capital, new jobs can be created more easily.
• Diversification of the entrepreneurial ecosystem: Sectors with lower margins can formalize their activities.
• Electronic invoicing: The ability to operate with liquidity from the outset enables the implementation of digital tools such as electronic invoicing, facilitating payments and proper financial management from the beginning.

Description of the process: how to create an SL for one euro?

Another advantage, which we did not mention in the previous section, is that the process of creating an SL for €1 is simple and can be carried out electronically. The step-by-step process is as follows:

• Reserve the company name in the Central Commercial Registry: A negative certification of the company name must be requested.
• Draft the company’s bylaws: As mentioned earlier, specific clauses on successive formation and dividend distribution restrictions must be included.
• Apply for the provisional NIF: This is done at the Tax Agency.
• Sign the deed of incorporation before a notary: This is an essential requirement to formalize the company.
• Register in the Commercial Registry: This officially formalizes the company’s incorporation.
• Register with the Tax Office and Social Security: To legally begin business activities.

Tax implications and annual accounts

Establishing a limited liability company with a minimum capital of €1 does not exempt it from its tax and accounting responsibilities. Although the initial outlay is minimal, it must follow the same tax regime as any other limited liability company in Spain. With that clarified, the main tax obligations are:

• Corporate tax (IS): All SLs must pay 25% on their net profits. However, emerging companies can apply a reduced rate of 15% for the first two years.
• VAT: If the company’s activity is subject to VAT, quarterly and annual tax returns must be filed.
• Withholdings and payments on account: If the company has employees or collaborators with IRPF withholdings, these must be declared and paid to the Tax Agency.
• Annual declaration of transactions with third parties: If the company exceeds €3,005.06 in transactions with a supplier or client, it must file form 347.

Management and presentation of annual accounts

Every limited liability company, including those under successive formation, must maintain clear and orderly accounting records. At the end of each fiscal year, the company must submit its annual accounts to the Commercial Registry, including:

• Balance sheet: Reflects the company’s financial position, detailing assets, liabilities, and equity.
• Income statement: Shows revenue, expenses, and the net result for the period.
• Statement of changes in equity: Displays how the company’s own resources have changed.
• Explanatory report: Complements the financial statements and details key aspects of the business activity.

Potential issues and challenges

While creating an SL for €1 has many clear advantages, it also comes with risks and challenges that must be considered before starting one. Although the lack of an initial fund may seem entirely beneficial, it is crucial to understand that a weak starting capital may affect the financial stability and operational capacity of the company in its early years.</p>

What happens if the company does not generate profits?

One of the main challenges of a limited liability company with minimal capital is the requirement to set aside 20% of annual profits until reaching €3,000. Why is this a challenge? Because if the company does not generate profits or incurs losses, several problems may arise:

• Difficulty meeting the legal reserve requirement: If the company does not earn profits, it cannot allocate funds to the mandatory reserve, delaying compliance.
• Higher risk of insolvency: Operating with a reduced capital may lead to difficulties in covering fixed expenses and tax obligations.
• Difficulty accessing financing: Without demonstrable profits, obtaining bank loans or attracting investors may be challenging.
• Risk of closure or liquidation: If the company cannot generate sustainable income, it may be forced to cease operations or be dissolved.