When establishing a business, it is crucial to choose the appropriate legal structure, as this will determine fiscal responsibilities, legal obligations, and future business development options. If you are uncertain about whether to form a public limited company or a limited company, keep reading this post to understand the differences.
Basic explanation of both types of companies
Public limited companies (PLCs) and limited companies (Ltds) are two of the main types of commercial enterprises in Spain. A public limited company is characterised by its high minimum capital requirement and is ideal for large enterprises, while a limited company is more flexible and accessible, with a minimum capital requirement tailored to the needs of the business. In both cases, the liability of the shareholders is limited to their capital contribution.
What is a Public Limited Company (PLC)?
In a public limited company, the share capital is divided into shares, which can be freely transferred. It is the ideal legal structure for large companies or those seeking funding from investors. To create a PLC, a minimum capital of €60,000 is required, with at least 25% to be contributed at the time of incorporation. Its legal framework is regulated by the Capital Companies Act.
Shareholders in a PLC have limited liability, meaning they are only liable up to the amount of their investment.
What is a Limited Company (Ltd)?
The limited company is the most common type of commercial company in Spain among entrepreneurs and small businesses, thanks to its flexibility and low initial capital requirements. Unlike a PLC, the minimum capital for a limited company is more accessible, and since the 2022 reform, it can be incorporated with a nominal initial contribution of €1, provided that part of the profits is later allocated to reach the originally required €3,000.
The liability of shareholders in a limited company is limited to their investment, protecting their personal assets. However, the transfer of shares is more regulated, as shareholders have a pre-emptive right of acquisition.
Advantages and disadvantages of public limited companies
Advantages of a public limited company:
- Facilitates the issuance of shares and their trading in the market.
- Shareholders are only responsible up to the amount of their investment.
- Shares can be transferred freely, simplifying the entry and exit of investors.
- PLCs often generate more trust among financial institutions and suppliers.
- Can have an unlimited number of shareholders, allowing for scalable growth.
Disadvantages of a public limited company:
- Requires a minimum capital of €60,000, with 25% paid up at incorporation.
- Accounting is more stringent, and audits are required in many cases.
- Notary fees, registration in the Companies Register, and potential mandatory audits.
- The free transfer of shares can result in a loss of control over the company.
Advantages and disadvantages of limited companies
Advantages of a limited company:
- Can be incorporated with a nominal amount.
- Shareholders are only responsible up to the capital they have contributed, safeguarding their personal assets.
- The transfer of shares requires the consent of other shareholders.
- Its accounting and tax management is simpler compared to a PLC.
- Auditing of accounts is not mandatory.
Disadvantages of a limited company:
- The transfer of shares is restricted, limiting access to external capital.
- Cannot issue shares or be listed on the stock exchange, making external investment more difficult.
- Although management is simpler, it still incurs a 25% corporation tax.
Detailed comparison
Number of shareholders:
- A public limited company can be established with a single shareholder or an unlimited number of shareholders.
- A limited company can also be single-member but is generally designed for small groups of shareholders, with a limit of 50.
Transfer:
- Shares are freely transferable in PLCs.
- In Ltds, the transfer of shares is restricted.
Taxation:
- Both types of companies are subject to corporation tax, which has a standard rate of 25%.
- There are tax advantages for new companies, which benefit from a reduced rate of 15% for the first two years with profits.
Stock market listing:
- PLCs can be listed on the stock exchange, while Ltds cannot go public or issue shares.
Requirements to form a PLC:
- Contribution of minimum capital and deposit of 25% in a bank account.
- Drafting of statutes and signing before a notary.
- Obtaining a provisional Tax Identification Number (NIF) from the Tax Agency.
- Registration in the Companies Register.
- Obtaining a definitive NIF and registering with tax and social security authorities.
Requirements to form a Ltd:
- Drafting of articles of association and signing before a notary.
- Contribution of minimum capital.
- Application for a provisional NIF from the Tax Agency.
- Registration in the Companies Register.
- Obtaining a definitive NIF and registering with the relevant tax and labour authorities.
Decision-making guide
If you are still undecided about whether to form a PLC or an Ltd, consider the following:
When to choose a PLC over an Ltd:
- When large investments are needed.
- If the business has a large number of shareholders.
- When greater trust and reputation are required.
- If significant growth is anticipated.
- When free transfer of shares will be necessary.
When to choose an Ltd over a PLC:
- If the initial capital is low.
- When a simpler and more adaptable structure is sought for family or small shareholder businesses.
- When greater control over shareholders is desired.
- If a simpler management with lower administrative costs is preferred.
- When access to financial markets is not necessary.
The importance of professional advice
Choosing between a public limited company and a limited company is a decision that should be made after thorough analysis, as it directly influences the structure, taxation, and operation of the business. Therefore, it is advisable to seek guidance from professionals in fiscal and legal matters. Professional advisors not only help define the most suitable structure but also explain how to optimise the tax burden, minimise errors in the incorporation process, and ensure compliance with all legal obligations.
Conclusion
In conclusion, the choice between a public limited company and a limited company will depend not only on the capital you have at the start of the business but also on your future plans. It is always advisable to seek professional advice. A well-founded decision will not only facilitate business growth but also prevent future problems.
