How to set up a company in Spain
1. What is a limited company?
A limited company is a company in which the liability of the members is limited to the capital they have invested so that their personal assets are not affected.
The limited company is the most common type of company for small businesses and is regulated by Royal Legislative Decree 1/2010 of 2 July, which approves the revised text of the Capital Company Act.
2. Private limited companies (SL) versus public limited companies (SA): the differences
One of the most common doubts among entrepreneurs considering setting up a company, relates to the differences between a private limited company and a public limited company, which are the following:
- Activity. There are certain activities that can only be carried out by a public limited company, for example, banking and insurance.
- Shareholders. The private limited company is suitable when there are few shareholders. When there are a large number of shareholders, it is advisable to create a public limited company.
- Minimum capital stock. The minimum capital stock in private limited companies is €3,000 and is divided into SL shares, while in public limited companies it is €60,000 and is divided into SA shares.
- Transfer of shares. In the case of the public limited company, the transfer of shares is free, however, in the case of the private limited company, a series of requirements must be met, such as communicating the transfer of shares to the directors.
- Shareholders’ responsibilities. In both cases, it is limited to the capital stock contributed.
- Company name. In the case of the public limited company, the company name must consist of the name of the company followed by the term ‘sociedad anónima’ or the acronym SA. In the case of the limited company, the name of the company followed by the term ‘sociedad de responsabilidad limitada’ or SL.
3. Types of limited companies in Spain
Within the denomination of a limited company, there are several different types:
Limited Liability Company of successive formation. This is a limited company in which there is no minimum capital stock requirement, but to protect third parties, a series of limitations are established:
- An amount of at least 20% of yearly profit must be appropriated to the legal reserve.
- Dividends can only be distributed to shareholders if the net worth is not less than 60% of the minimum capital stock.
- Shareholder and director remuneration may not exceed 20% of the net assets for the corresponding financial year.
New Limited Liability Company. This is a limited company with a series of special characteristics such as a minimum number of shareholders of 1 and a maximum of 5, and minimum capital stock of €30,000 euros and a maximum of €120,000. The advantages of this type of company are as follows:
- If the company is set up digitally and the basic bylaws are drafted, the company can be incorporated within 48 hours.
- EA broader business purpose allows for greater flexibility when developing multiple activities.
- The shareholder book is not compulsory.
- There are tax advantages during the company’s first years.
Worker-owned Limited Liability Company. This is a company in which the majority of the capital stock is owned by the company’s employees, who have an indefinite employment relationship. The minimum number of shareholders for this type of company is 2 and the minimum capital stock is €3,000.
4. What are the minimum requirements for an SL in Spain?
The requirements for an SL are as follows:
- Shareholders. The minimum number of shareholders is one (this is referred to as a single-member private limited company) and there is no limit to the maximum number of shareholders. The shareholders can be natural or legal persons.
- Shareholders’ responsibility. This is limited to the capital contributed.
- Types of shareholders. They can be workers or contributors of capital.
- Name. The name of the SL must be followed by the term ‘Sociedad de responsabilidad limitada’ or SRL.
- Minimum capital stock. The legal minimum is €3,000 and is divided into shares.
- Address. This is the SL headquarters and must be located in Spain.
- Business purpose. This refers to the SL’s activity.
- Formation. This is done through a public deed that is granted before a Notary.
- Management. There are several options: sole director, joint and several directors and board of directors.
- Bodies. The highest governing body is the General Meeting of Shareholders.
- Taxes. The SL is required to pay corporate tax and VAT.
5. What are the steps for setting a limited company in Spain?
Setting up a limited company involves:
- Applying for a non-registered name at the Commercial Registry. This involves choosing a name for the limited company and several alternatives to that name and requesting that the Commercial Registry check whether any company already exists under those names. Once the Registry has verified these names and you have selected the preferred name, the Registry will issue a certificate stating that another company has not used the name.
- Opening a bank account. The next step is to open a bank account in the name of the company being set up and deposit the capital stock of €3,000.
- Drafting corporate bylaws. Simplified bylaws can be put in place to reduce the formalities involved in setting up the limited company. The bylaws must include at a minimum:
- The name of the limited company followed by ‘Sociedad de responsabilidad limitada’.
- Activity that the company will carry out.
- Capital stock, shares in which it is divided, the value of each share and numbering.
- Management system.
- Drafting of the deed of incorporation. This is the most important step and consists of the drafting of the limited company’s deed of incorporation and the signing of the deed before a Notary by all the partners. In order to carry out the deed, it is necessary to provide the following documentation:
- The corporate bylaws
- The original company name availability certificate from the Commercial Registry.
- Bank certification verifying the deposit of the capital stock.
- The original ID card of all shareholders.
- If one of the partners is a foreigner, the declaration of foreign investments will be necessary.
- Applying for the tax ID (NIF). This is requested at the Spanish Tax Agency and will be a provisional NIF.
- Registering for Business Activities Tax. his is a local tax that taxes the activity of companies.
- Filling in the census declaration form. This form informs the tax authorities of the commencement of the limited company’s activity.
- Registering the company in the Commercial Registry. The registration must be made within two months of the deed of incorporation and must include:
- A copy of the deed of incorporation of the company.
- Company name availability certificate.
- A copy of the provisional NIF.
- Exchanging the provisional NIF for the definitive one. his step is also carried out at the Spanish Tax Agency once the company has been registered in the Commercial Registry.
- Registering directors with social security. Directors must register with the special self-employed social security regime and if workers are to be hired, the employer’s number must be requested.
6. Corporate bylaws
In most cases, entrepreneurs opt for the standard model of corporate bylaws because it is the cheapest form, but, over time, problems can arise that can be avoided with well-regulated bylaws adapted to the circumstances.
Some of the clauses that can be included are:
- Start date of activities. By default, the Notary will include the date of the start of the company’s activities, which coincides with the date of the signing of the deed. In the event that the company’s start date is to be delayed, it is important to include the specific date of the commencement of the activity.
- Activities. It is advisable to include wide activity to avoid having to change the bylaws if other activities than the original ones are carried out.
- Capital stock. Although the legal minimum for the capital stock is €3,000, it is advisable to increase the amount of capital stock and deposit something else to offer a guarantee to third parties.
- Contribution in kind. Not all company capital stock has to be contributed in money. Instead, it can be contributed in kind: vehicles, computers, real estate, etc. The requirement is that the contributed assets be must be valued.
- Transfer of shares. The transfer of shares is one of the most controversial aspects because it can involve entry into the capital stock of third parties outside the company. The bylaws can lay down rules for the transfer, such as the obligation for the shares to be assessed by external experts or for flexibility or not in the time limits of the governing body to decide on the transfer.
- Limited company directors. It is advisable to have several types of directors (sole director, joint and several directors or boards of directors), in case, with the passage of time, the directors need to be changed. In addition, the form in which the directors are going to be compensated must be defined, unless the position is non-paid.
- Shareholder’s meeting agreements. It is important for the bylaws to regulate the majority voting for decision-making. If nothing is established, the law applies, but, for example, more rigid bylaws could be established with regard to agreements on capital increases, transfer of shares and sale of assets owned by the company.
- Submission to arbitration. Occasionally, problems may arise between shareholders that require resolution by a third party. One option is to go to court, but this can be time-consuming and block company activity, so there is the alternative of submitting to arbitration and letting an arbitrator decide. This is generally considered to be a faster procedure.
7. Shareholders’ agreement
When two or more people come together to carry out a business project, there may be blockages in decision-making or other problems. To avoid these situations, a shareholders’ agreement can be drawn up.
The shareholders’ agreement is a private document signed by the company shareholders or participants and regulates certain aspects that are not included in the Bylaws. It is usually signed at two fundamental moments of the company:
- At the time of formation.
- The arrival of a new shareholder.
The following are examples of what the shareholders’ agreement might include:
- Functions and compensation. One of the most common conflicts in start-ups is that which arises from the different involvement of each shareholder. If the functions of each shareholder and the way they are going to be compensated are established from the beginning, problems will be avoided in the future.
- Minimum contract period. The founding partners usually sign a permanence agreement for a certain number of years, agreeing to a minimum contract period in order to guarantee the continuity of the project.
- Confidentiality and non-competition. The purpose of this clause is to prevent a company shareholder from leaving the company once the minimum contract period has elapsed and joining a competing company.
- Right of first refusal. In the event of a capital increase, the shareholders will have a preferential right to acquire the new shares.
- Anti-dilution. This clause prevents founding partners’ equity ownership positions becoming diluted upon the addition of new shareholders because of a capital increase.
- Drag-along right. In the event that an offer is received for the company (100% of the shares or holdings), a minority shareholder may refuse to sell and block the operation. The drag-along right clause states that all shareholders are obliged to sell if a number of conditions are met.
- Blocking the sale of shares. This clause is regulated to avoid that if an investment round takes place, a period of time must elapse before a shareholder can sell their shares.
- Right to information. The shareholders can regulate their right to be informed about the company, but it can be limited to a series of data in order to prevent confidential information from being disclosed and circulated.
8. Management of a limited company
There are several ways to organise the management of a limited company, including:
- Sole director. This is the person who acts on behalf of the company and who is responsible for all acts performed by the company. The person acting as the sole director can either be external to the company or one of the shareholders. If nothing is specified in the bylaws, the position is unpaid and is indefinite.
- Joint and several directors. In this case, there are two or more directors who can act individually, binding the company with their acts.
- Joint directors. Here too, there are two or more directors, but they must act jointly.
- Board of Directors. This is the collegial form of organising the management of a limited company and is most often used in public limited companies. The board of directors may delegate its powers to a director, who will be called the managing director.
9. Directors’ responsibilities
The directors’ responsibilities, or liabilities, are some of the most important issues in commercial companies. Directors are liable to:
- The shareholders.
- The company.
- The creditors.
Responsibility is incurred for failure to comply with the director’s duties when there is willful misconduct or fault.
In general, we can differentiate between various types of liability:
- Fiscal responsibility. Tax regulations establish joint liability between the principal debtor and other persons, jointly and severally. The Spanish Tax Agency may claim the debts that the company could not pay from the director.
- Criminal responsibility. In 2015, the Criminal Code was amended and the criminal responsibility of legal persons was regulated, i.e. it is understood that a legal person (a commercial company, for example) can commit an offence. Some of the most frequent crimes in these cases are environmental crimes, punishable insolvency, fraud or crimes against the Spanish Tax Agency or Social Security, among others. The criminal responsibility of company directors can therefore arise in two cases:
- When the director commits a crime directly.
- When an employee or other person under the control of the director commits the crime. In this case, the director becomes a co-perpetrator, as they have the obligation to ensure control over their employees. Actually, in order for the director to be held liable in this case, two requirements must be met.
- That they knew the crime was committed by that third party.
- That they could have prevented it with control measures.
- Commercial liability. In accordance with the commercial regulations, the directors are liable to the company, to the partners or to the creditors of the company for the damages that they cause due to acts or omissions that are contrary to the bylaws or to the law and for those that they carry out in breach of the duties related to their position.
In the event that the director fails to comply with their duties, they must compensate for the damage caused by their own property. The action to claim the directors’ responsibility can be applied by the General Meeting, a certain number of shareholders or the creditors of the company.
- Workplace liability. The directors are also liable for the damages they cause to the labour or social security field, as they are attributed to company management privileges.
10. Limited company responsibilities
A limited company must comply with a series of obligations in the financial, commercial, labour and tax fields, among others. The most important of these obligations are as follows:
- Registration and accounting obligations. The legalisation of corporate books must be carried out. The following must be presented: the minute book, the Shareholders’ book and the contract record book. On the other hand, the accounting ledgers that must also be legalised are the following: the inventory and the annual accounts, the journal, the VAT record book which, in turn, is made up of three books: the book of invoices issued, the book of invoices received and the investment goods book.
- Tax obligations. In order for the limited company to commence activity, it must present Form 036 to register with the Spanish Tax Agency; in addition, it will have to register for the Business Activities Tax. In addition, the taxes to be presented periodically are the following:
- VAT. The limited company will have to declare the input and output VAT. VAT is declared using Form 303 and at the end of the fiscal year, a summary is presented using Form 390.
- Corporate tax. Corporate tax is levied on profits obtained by business entities as a result of their activity. The general rate of this tax is 25%.
- Corporate income tax withholdings. Companies must pay the withholdings they make from their employees or from the professionals who provide them with services (Notaries, advisors, lawyers). Payment is made through model 111 and at the end of the fiscal year, the annual summary is presented with model 190.
- Form 347. This form must be submitted in the event that a company carries out operations with the same third party for an amount greater than €3,005.06.
- Employment Law and Social Security obligations. These are as follows:
- Communicate additions, deletions and variations in worker data.
- Pay social security contributions on a monthly basis.
The procedures for creating a limited company or Limited Liability Company are time-consuming and complex and there are numerous obligations for the company to fulfil. This is why many businesses opt for the help of a business advisor who can provide advantages such as:
- Saving time in the execution of all the procedures
- Experience in the formation of all types of companies.
- Transparency in the procedures, as the client always knows the procedures that are being carried out.
- Development of tax planning to save money on taxes payable.
- Knowledge of tax, commercial regulations and new developments.
- To avoid errors or delays in the payment of taxes or in the commercial management of the company that could result in penalties or damage to the business.
- To have a multidisciplinary team that allows for advice in all the important areas for the company: labour, fiscal, Social Security, commercial, civil etc.
- Confidentiality, because all the information provided to the adviser to carry out their work will be treated in an absolutely confidential way.
In short, a business advisor must become a part of the company strategy, so that their work does not consist only of filing taxes, but also helps the company make important decision-making.