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5 Mistakes to avoid in the Founding of a Spanish S.L.

in legal

The Spanish Sociedad Limitada (S. L.) is by far the most frequently used form of company in Spain and can be founded from 3,000 euros share capital. This supposed simplicity often leads to the neglect of the corresponding corporate planning and thus in many cases to the failure of the company.

In order to avoid costly problems and irregularities in the life of the company at a later date, it is advisable not to regard company law planning as a problem but as an opportunity even before the foundation of S. L.. In order to avoid the biggest mistakes, the following points, among others, should be observed:

1. The appropriate corporate form

Although S. L. is by far the most widely used form of company in Spain, it is not always the most suitable. In many cases, an S.L. is founded to limit the liability of the company to the company capital. However, it is often disregarded that the partners are at the very beginning of the formation of the company, in most cases, also simultaneously managing directors and or partners working for the company. In both cases, it is quite possible that the shareholder continues to be personally liable and that he continues to be liable not only for his share in the company but also for his private assets.

A second often neglected aspect is the tax treatment of the chosen company form. If, for example, real estate is brought into the company as founding capital, very different taxes may be payable on donations, contributions in kind, sale to the company, etc. and existing tax relief may quickly be lost due to the incorrect choice of the transaction used.

2. Examination and receipt of permits and licenses

Apart from the tax consequences, important administrative aspects are often ignored. For example, for most companies purposes various permits or licenses are required without which the company cannot commence the planned activity or only to a limited extent.

If administrative aspects are not taken into account during the planning stage, it may well happen that the type of company chosen is not compatible with the planned activity of the company, that the activity is limited to a certain maximum per company, that the desired market volume cannot be achieved with a single company, that a license requires a certain minimum capital, etc. A prior analysis of the legal framework can easily prevent subsequent problems.

3. Not without a shareholders agreement

Since the incorporation of a company always requires the drafting of a statute, a shareholders agreement (pacto de socios) is often regarded as less important or even forgotten by the future shareholders. If, for example, it is to be possible to sell the company at a certain point in time, this project can be quickly blocked by even the smallest shareholder without a corresponding agreement between the shareholders. If the company is, for example, a “start-up”, it is advisable to specify in the shareholder’s agreement whether the shareholders will contribute their work to the company, under what conditions, at what costs and how any non-compliance is to be treated. These personal services of the partners are not regulated by law and are not included in the articles of association. A separate express regulation is therefore highly recommended. Since the shareholder’s agreement, within the framework of contractual freedom, can in principle determine virtually all aspects of company law, it is highly recommended that these contracts be drawn up in advance.

4. Protect ideas and names right from the start

Particularly in the area of “start-ups”, suitable advice on corporate law is often dispensed with due to a lack of initial funds. Especially in this type of company, however, the business idea, the company name or new technologies are often in the foreground and should be protected from the outset. Unfortunately, it is often seen in practice that important patents, trademarks, domains, etc. are only registered too late and that high court costs are incurred due to these delays or the planned business activity becomes impracticable. Protecting ideas, names, and trademarks in the context of a previous business plan even before the actual foundation is an increasingly important and indispensable step, especially in the area of “start-ups”.

5. See corporate planning as an opportunity

Even though many new entrepreneurs see suitable legal advice as a problem and like to postpone it to the future, it is precisely at the beginning of the company that appropriate company planning can avoid most of the later problems. Not only in the previous company law planning but also at the beginning of the company’s life, appropriate legal advice can be decisive for the good success of the company. In this respect, it may be necessary, for example, in negotiations with financiers, trading partners, competitors, etc., to include the relevant competition clauses in the respective contracts, sign confidentiality agreements, etc.

Especially with regard to the Spanish S.L., the relatively low minimum capital often leads to the false impression that an initially smaller company also requires less planning in company law aspects. Misconception, because no matter how large the company is at incorporation, the rules regarding the need to obtain licenses and patents, the shareholders’ agreements or the possible personal liability of the shareholders are the same and should be considered accordingly from the outset.

GMTax Consultancy will be pleased to help you analyze your specific situation, plan and constitute your Spanish company and file annual financial statements and tax returns for you. If you are interested or have specific questions on the subject, we are at your disposal by e-mail or telephone in English or Spanish.