To choose the legal entity of our company is something to decide before starting it up. It is as important as it will affect tax and accounting obligations. To the affiliation to the Social Security and to the responsibility that the partners will face in front of third parties.
For those who are thinking, or have the idea of starting their own business, in this article we give some advice to choose the most appropriate legal entity that best suits your needs and those of your project.
How to choose the legal entity for a company
We will take into account a number of important factors. And, based on them, we will see what is the most advisable.
Number of partners
For this we will also look at the degree of involvement and responsibility of these. On the one hand, in the case of starting a self-employed business there is the option of limiting or not the tax liability. However, on the other hand, in the case of having more than one person involved or partner it would be recommended to create a Partnership.
For example, for sole proprietorships, the sole proprietorship or sole proprietorship formula is the most appropriate. However, when there is more than one partner or entrepreneur, it is advisable to resort to a corporate form, either with or without legal entity.
For this purpose, there are different legal entities for companies in which all the partners will work in the company, and others for those in which some of them will work in the company, while others will only contribute capital.
For this reason, it is important to agree on a Partners’ Agreement, so that the obligations and responsibilities of the partners are clear from the beginning.
Initial capital contributed
The initial capital contributed also determines the legal entity. This is because in some cases it is essential to have a minimum capital. In other words, if we choose a certain legal entity, we are obliged to have a minimum amount of capital.
For example, setting up as a self-employed person does not require any initial capital. But if we decide for a Limited Company or a Corporation, these are constituted with a minimum of 3.000€ and 60.000€, respectively.
Equity liability of the partners
A very important aspect to take into account is the patrimonial responsibility of the partners. This can be limited or unlimited. In the first case, the partner is only liable for the capital contributed. In the case of unlimited liability, the partner is also liable with his personal assets, present and future.
While the Individual Entrepreneur (Self-Employed) is taxed according to the Personal Income Tax (IRPF). A commercial company will be taxed according to the Corporate Income Tax (Impuesto de Sociedades).
Sector of activity
The sector of activity to which the business activity will belong is also important, since the regulations themselves require the adoption of one legal entity or another in some cases. For example, for those entities operating in the financial sector, a corporation is required.
On the other hand, some administrations exclude certain legal entities when applying for certain grants and subsidies.
Implications of choosing the legal form of a company
Depending on the legal entity chosen, there will be more or less administrative difficulties.
Simplicity of incorporation procedures
The individual company requires less start-up formalities. Whereas companies require more formalities. First of all because it is necessary to proceed to its constitution before starting the start-up.
In addition, the accounting and tax management will be somewhat more complicated.
A sole proprietor or the sole partner of a sole proprietorship manages the company with complete freedom of choice. In a partnership, all partners participate in the decision making of the partnership and in the profits or losses in proportion to their contribution. The management is carried out by the administrators or by a Board of Directors composed of several partners.
Initial financing of the project
Generally, financial institutions make it easier to grant loans to companies that have guarantees or the guarantee of a large share capital. But also, the economic dimension of an investment makes that the participation of several people is necessary to undertake it, so that normally it will be chosen to constitute a society.
A question of image
It is necessary to take into account the psychological effect of our potential clients, before the sensation that the legal entity of the company can transmit to them. And this can determine the greater or lesser success and initial confidence.
But equally, a similar effect is produced in the suppliers. They may trust us more or less depending on whether they see their potential client in one way or another.