Business Entities: Types and Legal Structures

Posted on Dec 15, 2024 in Law & Jurisprudence

Types of Companies and Their Legal Forms

Individual Business

Sole Proprietorship: A sole proprietorship is a business owned and run by one person, where there is no legal distinction between the owner and the business entity. A sole trader is an individual who engages in a trade, business, or profession. The owner must be of legal age and have full availability of their assets. There is no required minimum capital. The business name must be the holder’s name. Profits are taxed as personal income.

Private Civil Society: Based on a contract where two or more persons are obliged to pool money, property, or industry, to share profits among themselves. Although they consist of several persons, they are considered individual companies without legal personality. These societies have secret agreements among their members, and their actions are individual. They must have a lawful purpose, be established in the common interest of the shareholders, and the company operates according to the contract. It is a private document, there is no capital limit, the name can be any name chosen by the partners, and it is taxed as income tax.

Company Business

A company business is a type of company with legal personality, meaning it acquires a distinct personality from its owners. All company businesses must be entered in the commercial register.

Public Civil Society: The same as a private civil society, except that the agreements between the partners are public and notarized.

Commercial Society: These societies are formed by several people who have a common capital fund to operate a business, make a profit, and participate in revenue sharing.

“Personal” Trading Companies

• General Partnership: The minimum number of members is two, with no maximum. All members are involved in the management of the company, except for partners who only provide industry work. Members are liable for debts personally, jointly, and unlimitedly. There is no minimum capital. The name must be the name of all partners, some, or one of them, followed by the words “and company” or “& Cia,” in addition to the term “General Partnership” or the abbreviation “SC.” Taxed under corporate income tax.
• Limited Partnership: There are two types of partners:
  • General partners are directly involved in the management of the company and respond personally, jointly, and unlimitedly to debts.
  • Limited partners make an economic contribution to the society and participate only in economic performance without interfering in management. Their responsibility is limited to their contribution.
  The minimum number of partners is two, one of whom must be a general partner and another a limited partner. Membership cannot be transmitted freely without the consent of the other partners. There is no minimum capital. The name is the name of all partners, some, or one of them, followed by “company” and “partnership” or its initials “S. in C.” or “S.Com.” Taxed under corporate income tax.

Capital (Trading Company)

• Company Limited by Shares: Very similar to the limited partnership. It differs in that the participation of limited partners (who only provide capital) is represented by shares, which are equal parts of the capital. It has a minimum capital of €60,101.21, and at the time of incorporation, at least 25% must be paid. The number of limited partners must be at least three, and at least one general partner manages the company. The name can be any chosen name, followed by “Company limited by shares” or the abbreviation “S. in Com. For A.”
• Limited Liability Company (LLC): One or more partners. If there is only one partner, it is a sole proprietorship. This can be a natural person or a legal entity. It can also happen that the company was formed by two or more partners, and its shares have become the property of one. The partners’ liability is limited to the invested capital. The social capital is divided into shares (equal parts, cumulative and indivisible, of the capital of a limited liability company, not stock), which are abstract in nature and cannot be documented, negotiated, or transferred freely. The minimum capital is €3,005.06. The name must consist of the name followed by “limited liability company” or “limited company” or the abbreviation “LLC” or “SL.” Taxed under corporate income tax.

Formation of an LLC

This type of company must register in the commercial register with a charter that includes:

• The name of the company and the corporate purpose.
• The head office.
• The social capital (shares into which it is divided, their value, and numbering).
• The way of organizing the administration.
• Other lawful agreements and conditions established by partners.

Organs of an LLC

• General Meeting: A deliberation and decision-making body that handles the censorship of social management, approval of annual accounts, application of results for the year, appointment and dismissal of directors, and amendment of the statutes.
• Managers: May not engage in paid employment of the same kind of trade that is the subject of the company. They hold office for the term provided by the charter and may be dismissed by the general meeting. They must follow the rules of corporations to keep accounts and do not need to have the status of partners.

Partners’ Rights in an LLC

• Right to participate in the distribution of profits and assets of the company in liquidation.
• Right of first refusal on the acquisition of an outgoing partner’s shares.
• Right to participate in social decisions and to be elected as directors.
• Right to information in the periods set out in the charter.

Joint Stock Company

• The number of partners may be one or more.
• The partners’ liability is limited to the capital.
• The minimum start-up capital is €60,101.21, divided into registered shares or bearer shares.
• Such partnerships can be created by simultaneous foundation (all shares are paid for at the time of creation) or sequentially (disbursed successively). At the time of creation, 25% of the capital must be paid.
• The name is the company name plus “limited company” or the initials “SA.”
• The transfer of shares is free once the company is registered in the commercial register.
• Taxed under corporate income tax.

Formation of a Joint Stock Company

This is registered in the commercial register and must also indicate:

• The name of the company.
• The social object.
• The head office.
• The social capital.
• The number of shares into which the capital is divided, nominal value, class, and series.
• The method or methods of organizing the administration.
• Other lawful agreements and special conditions to be established.

Bodies of a Joint Stock Company

• General Meeting of Shareholders: The members’ meeting where decisions are made on important business issues. There are three types of meetings:
  • Ordinary General Meeting: Meets in the first six months of each year to discuss corporate management, approve the previous year’s accounts, and resolve the application of results. Convened by the administration.
  • Special Meeting: Any meeting that does not meet the above requirements. Convened by the administration.
  • Universal Meeting: Called and constituted to deal with any issue, provided that the entire share capital is present and those attending unanimously agree.
• Administrators: Appointed by the board and must meet certain requirements:
  • Need not be shareholders unless the bylaws say otherwise.
  • Must prepare the annual accounts within three months from the end of the year.
  • May not engage in similar kinds of trade that is the subject of the company.
  • Hold office for the term provided by the charter.
  • Can be removed at any time by the general meeting.
  • Respond to the company, shareholders, and creditors for damage caused by actions contrary to law or statute.

Shareholders and Shares in a Joint Stock Company

Shareholders are the owners of shares and therefore own the company. They have certain rights:

• The right to participate in the distribution of social benefits.
• Pre-emptive rights in the issuance of new shares.
• The right to attend and vote at meetings.
• The right to challenge resolutions.
• The right to information on matters to be discussed at the meeting of shareholders to cast a vote.

The capital of a corporation is divided into equal parts, each called a share. Contributions of capital are represented by certificates or book entries.

Classes of Shares

Basic Concepts Relating to Shares

• Nominal Value: Value of each share, obtained by dividing the capital by the number of shares.
• Cash Value: The market value at the time of purchase, depending on supply and demand, usually not matching the nominal value.
• Book Value: Value based on various objective criteria.
• Subscription Rights: The right of a shareholder (preemptive) to buy new shares during a capital increase. This right is economically valuable, and the shareholder can buy new shares or sell the right for compensation. The company must specify the relationship between new and old shares (e.g., for every 5 old shares, 1 new share).
• Revenue and Profitability: The amount provided by each share each period. Net income for the title equals the amount of gross income minus discounts. Profitability is the ability of capital to produce income, expressed as a percentage, calculated as: rate of return = income of the period / investment made.

Worker-Owned Company

A corporation or limited liability company where most of the social capital (at least 51%) is owned by the workers. No member may hold more than 33% of the capital, except for public entities, which can hold up to 49%. The minimum number of members is 4, of whom at least 3 must be worker partners. Liability is limited to the capital. The share capital is divided into shares or units. At least 25% must be paid if it is a SAL, or 100% if it is an SLL. The capital must be greater than or equal to €3,005.06 or €60,101.21, respectively. There are two types of stocks and shares: worker class (aimed at workers) and general class (non-working partners, if any). The company can have non-member workers, but the number of hours they work cannot exceed 15% of the hours worked by worker partners, or 25% if the company does not exceed 25 workers. The name is any name followed by “limited liability worker company”/”SLL” or “corporation worker”/”SAL”. For the transmission of shares, preference is given to permanent workers who are not partners, then worker-members, general class partners, and other workers without a permanent contract, in that order. A mandatory special reserve fund of 10% of the net profit obtained must be established. Formalized in a public deed and entered in the commercial register of companies in the business of the Autonomous Community.

Social Cooperative Society of Interest

An association of people with common interests, where economic performance (called surplus) is charged to members once community funds are served. Members can be first degree (minimum 5 partners, 4 in Extremadura and Galicia, and 3 in Andalusia), second degree (2 members, 3 in Catalonia, composed of cooperatives), or further degree. The addition of partners is voluntary and free. There may also be associates who contribute money, charge interest for their contribution, and are not personally liable for corporate debts. Social responsibility is limited to the nominal amount of their capital contributions. The minimum capital is fixed in the statute and varies according to the number of members who join or leave. No member can hold more than 25% equity in primary cooperatives, or more than 45% in second-degree cooperatives. At least 25% of the capital must be paid at the time of incorporation. The name must include the term “cooperative society” or the abbreviation “S. Coop,” according to the region: S.Coop.V (Valencia), S.Coop.And (Andalusia), etc. When the partners’ liability is unlimited, it should include: S.Coop.V.Iltda. 30% of the surpluses are used for the compulsory reserve fund for education and promotion. A constitution script and statutes must be written before a notary and registered in the register of cooperatives.

Bodies of a Cooperative Society

• The General Assembly: Meeting of partners and associates.
• Board of Regents: The governing body, management, and representation.
• Appeals Committee: Processes and resolves appeals (only first grade).
• Controllers: Censor statements, from 1 to 3 members.

Members of a Cooperative Society

Members have certain rights (to participate in activities, receive information, and distribute the surplus) and obligations (attending meetings, meeting agreed arrangements, and participating in training activities).

Types of Cooperatives

Worker cooperatives, consumer and user cooperatives, housing cooperatives, agrarian cooperatives, communal land holding cooperatives, service cooperatives, sea carrier cooperatives, insurance cooperatives, health cooperatives, education cooperatives, credit cooperatives, etc.