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The Choice of the Legal Form

The choice of the legal form to be adopted for the start-up of a new company should be preceded by an in-depth study of the options, in order to elect the form that best suits the characteristics of the project to be developed.

It is difficult to establish a set of general criteria that would make it possible to determine the most appropriate legal form in each specific case, given that each business project will present its own particular characteristics requiring an individual examination. Nevertheless, the changes that have taken place in business legislation should be taken into account, as these could influence the choice of the kind of company to be incorporated.

Thus, the establishment of minimum amounts of capital for the public limited and the limited liability companies of 60,000 euros and 3,000 euros, respectively, could be a determining factor when it comes time to define the legal form to be adopted, particularly for those projects that do not have significant financing needs. Similarly, the disappearance of the ceiling of 50 members and 300,506.05 euros as the capital of limited liability companies, together with the possibility of incorporating them with a single owner, are other factors to consider.

A number of aspects to be taken into account on making a choice are indicated below:

  • Type of activity to be carried out. The activity in which the company is to be engaged can condition the choice of the legal form in those cases where a specific business form is required by the applicable legislation. For this reason, it is advisable to make a detailed analysis of the rules and regulations applicable to the activity planned, in order to determine whether a specific legal form must necessarily be adopted in order to operate.
  • Number of promoters. The number of people involved in the launch of a new company can also condition the choice. Therefore, when there are several promoters of the business, the best course of action will be to incorporate a company. Nevertheless, we should keep in mind that, as a result of the entry into force of the Limited Liability Companies Act, it is now possible to establish a limited liability company or a public limited company with only one person as owner.
  • Liability of the promoters. This is an important aspect to take into account, given that, depending on the liabilities which the promoter or promoters are willing to accept in the development of the business project, one form or the other will be the preferred option. Liability can be limited to the capital contributed (public limited companies, limited liability companies, etc.) or it can be unlimited, affecting both the business assets as well as the promoter's personal assets (sole trader, civil society, etc.).
  • Financial needs of the project. The economic dimension of the project to be developed and the need for the participation of several people in it also influence the choice, generally leading to the decision to incorporate a company. When choosing the kind of company, the changes that have come about in business legislation and the establishment of minimum amounts of capital for certain kinds of companies need to be taken into account. Thus, in order to incorporate a limited liability company, a minimum of 3,000 euros is required as the company┬┐s capital, subscribed and paid up. The minimum for a public limited company is 60,000 euros, fully subscribed, with 25 percent of the par value of each of the shares paid up.
  • Tax considerations. The results expected for the business year and the tax contribution to be paid on them are an important consideration when deciding on the form the company is to take. Therefore, it will be necessary to make a detailed study of the tax costs to be borne by the company, bearing in mind that companies pay their taxes under the Company Tax system, which has a flat rate, while sole traders pay under the Personal Income Tax system, in which the tax rate becomes higher as the earnings increase.
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