Types of Companies and Legal Forms PDF

# Criteria for Classification of Companies ## A. By Size Companies can be classified according to their size into: large, medium, small, and micro-companies. There is no single criterion for this classification. We can use the amount of profit that companies earn, their sales, their assets. A wid...

# Criteria for Classification of Companies ## A. By Size Companies can be classified according to their size into: large, medium, small, and micro-companies. There is no single criterion for this classification. We can use the amount of profit that companies earn, their sales, their assets. A widely used criterion can be the number of employees. Therefore, the European Union recommends the following classification: | Number of employees | Sales Volume | Total Assets | |---|---|---| | Up to 10 | <2,000,000 € | <2,000,000 € | | Up to 50 | <10,000,000 € | <10,000,000 € | | Up to 250 | <50,000,000 € | <43,000,000 € | | Over 250 | >50,000,000 € | >43,000,000 € | For a company to be classified within a category, it must meet the employee criterion and at least one of the other two. For example, if a company has 5 employees, half a million euros in sales, and assets of 4 million, it is considered a micro-company because it meets the first two criteria. However, if its sales reached 5 million euros, it would be classified as a small company. In addition, all companies with less than 250 employees are called SMEs (small and medium-sized enterprises). Being considered a particular size can be crucial because many grants can vary depending on whether you are considered an SME or a large company. In Spain, more than 50% of companies do not employ any workers and, in total, 96% are micro-companies. SMEs make up 99% of the total (including self-employed). ## B. By Economic Sector We can differentiate between companies in the primary, secondary, and tertiary sectors. * **Primary sector** companies are those that extract raw materials from nature. These include agriculture, livestock, fishing, forestry, and mining. * **Secondary sector** companies are those that process raw materials into products. This includes all industries in general: textile, shipbuilding, steel, chemical, etc. Construction is also included. * **Tertiary Sector** companies cover two groups of companies: * **Commercial companies** are those that buy products to sell them later without transforming them. For example, a stationery store or a comic book store. * **Service companies** offer intangible products, such as an academy that provides private economics classes. In Spain, the majority of companies are in the tertiary sector, with more than 75% dedicated to it. ## C. By Capital Ownership The capital ownership of a company allows us to distinguish three different types: * **Private Companies** are owned by individuals or private entities. Their objective is to make a profit. For example, Zara, the Zara hairdresser you go to, or the bar on the corner. * **Public Companies** are property of the State or any entity of a public nature. For example, RENFE. Their objective is not only to make a profit but also to provide social services. * **Mixed Companies** have ownership that is shared between the State and individuals. For example, AENA (Spanish Airports and Air Navigation). ## D. By Area of Operation Based on the geographical area where companies operate, we can distinguish between local, national, or multinational companies. * **Local** companies are those that operate (production and sales) in one location, or a very close environment. This is the case of most small businesses in our country. * **National** companies operate in all parts of the country. For example, Mercadona. * **Multinational** companies have expanded their operations to two or more countries. It is not enough to just sell in another country (then they would be international companies), they have to carry out production or distribution there as well. The best-known Spanish example of this is Zara, which is present in 88 countries. Coca-Cola operates in almost every country in the world (with the exception of North Korea and Cuba). The development of technology and the internet has made it easier for recently created companies, known as **START-UPS**, to start as a local business and become multinational companies in a short period of time. ## E. By Legal Form This classification is important because it tells us what obligations partners must meet. We can distinguish between two groups: * **Sole Entrepreneur (Self-employed)** is an individual who starts a business in their own name. * **Mercantile Companies** are formed when several people come together with a contract to start a new company which is characterized by a separate legal personality. The contract must be drawn up by a public notary and registered in the commercial register. We can further divide these into three groups. * **Partnership** companies. In these, partners run the day-to-day operations of the company. * **Capitalist** companies. In these, partners primarily contribute capital. They do not have to run the company. They can employ professionals to manage the company's finances and operations. * **Companies of social interest.** These are formed to meet the needs of their members. ## 7. Companies By Legal Form You want to create a company and you are asked for a legal form. You start looking up what it means and you find many different types. You ask your entrepreneur friend and he states that the first thing you have to decide is whether you want your company to have its own legal personality or not. This is perhaps the most decisive factor! What is legal personality? The first thing to differentiate between is companies whose entrepreneurs are individuals and companies that have their own legal personality. * **Companies with individual entrepreneurs:** In this case, the individual carries out their business in their own name. Therefore, they provide the capital, manage the company, and take on the risk. In this case, the person and the company ARE THE SAME. Therefore, the company's rights and obligations coincide with those of the individual. If John Garcia opens a bar in his own name (as a self-employed person), the liabilities (such as the bar's debts) are also John's. In that case, if the bar closes, the bank could seek repayment of the debt from John. * **Companies with legal personality:** In these, several individuals pool capital or work together to set up a business. This contract creates a new legal personality that is distinct from the individuals who signed it. Therefore, this new "person" (the company) will have its own rights and obligations, different from the individuals who make up the company. For example, if John and Ann set up a bar through a contract and form a company, this company has its own legal personality. Should the bar close and have debts with a bank, the bank cannot seek repayment from John and Ann. Thus, categorizing companies according to their legal form resulted in two main groups: 1. **Self-employed individual**: is an individual who starts a business in their own name. 2. **Mercantile companies**: are formed when several individuals come together with a contract to form a new company. The contract has to be drawn up by a public notary and registered in the commercial register. ## 8. How to Choose the Right Legal Form for Your Company? Choosing the right legal form for your company is a significant decision. Here are the aspects to consider before making a choice: 1. **Minimum number of partners:** If a business has a single partner, the company can be a sole proprietorship. Some mercantile companies, such as limited liability companies, allow for a single partner. However, other companies, such as labor companies or cooperatives, require a minimum number of partners. 2. **Partnership liability:** This aspect is one of the key decision-making considerations. In a company, partners are responsible, and therefore they have certain rights and obligations. Here, we can differentiate between two types of liabilities: * **Unlimited liability:** This means that partners would be responsible for the debts of the company with their current and future assets. In other words, if the company has debts and cannot pay them, partners could lose their assets (their house, car, bank accounts). * **Liability limited to contributed capital:** When the company has debts, payment will be made from the company's assets, not those of the partners. In this case, you could lose the money you invested in the company, but nothing more. 3. **Minimum capital contribution:** You need to consider the minimum capital contribution that partners need to contribute to the company. This requirement does not usually apply to sole proprietorships. It also doesn't apply to some partnership companies. However, some companies require a specific minimum contribution (for example, €60,000 for a Public Limited Company, or €18 million for establishing a bank). 4. **Transfer of ownership:** This aspect refers to whether you can sell your share as a partner in the company or not. There are two options: * **Restricted transfer of ownership:** This means that if you want to sell your share as a partner to another company, your current partners have to agree to the sale. * **Free transfer of ownership:** This means that you can sell your share to whomever you choose. Therefore, it is crucial to consider the relationship with your business partners. If you want to work very closely with them, a restricted transfer of ownership is the logical decision, as you won't have to compromise your partnership with someone you do not get along with. If partners just contribute money and it doesn't matter who is involved, you can opt for a free transfer of ownership. 5. **Taxation:** Taxes change depending on the legal form of your company. Generally speaking, companies pay a fixed percentage of their profits (corporate tax), while self-employed individuals pay a percentage that increases as they earn more (income tax). If you think you are going to have a low income, it would be better to be self-employed. For a small profit, you will pay less tax as a self-employed individual than as a partner in a limited company. 6. **Profit motive:** A company has a profit motive when it wants to earn a profit. Generally speaking, all companies want to be profitable. However, sometimes a company may be created to meet the needs of its partners. For example, foundations or non-profit organizations (like Parent-Teacher Associations) are examples of this. ## 9. Sole Entrepreneur Your friend Lucía has always been good at academics. Now, she is planning to teach private classes to students your age. She has to create a company but is unsure which legal form to choose. Lucía believes that she won’t start earning a lot initially, but she will go to her students’ homes, so she does not need to invest much money. She asked you for advice, but you have no idea what to suggest. Don’t worry, after this section you will have a clear understanding. The sole entrepreneur is the first legal form we will discuss. This form poses fewer problems when setting up a company. However, what is it exactly? **What is it?** A sole entrepreneur is an individual who performs a self-employed activity on a regular basis. In this case, the individual takes responsibility for all the rights and obligations of the company. **Who is it ideal for?** Small businesses with low risks, in which the individual barely needs to contribute capital. **Characteristics:** * You must be at least 18 years old (at 16 years old if you are emancipated). * **Unlimited liability:** This means that the sole entrepreneur assumes all the risks of their personal and future assets. * **Minimum capital required:** There is no minimum capital required to start a business. * **Applicable taxes:** The tax to be paid is the IRPF (Income Tax). This implies that with low profits, the percentage to be paid would be low, but will increase as profits grow. The main example of a sole entrepreneur is the self-employed. We can differentiate between three types: * **Self-employed individual:** This is the most common type, where an individual performs an independent activity (a plumber, a lawyer, etc.). * **Self-employed with employees:** Aside from performing their activity, this type also manages a team of workers. * **Self-employed economically dependent (TRADE): **This applies to those who mainly carry out their activity for one client. In this case, if 75% of your income comes from the same client, you are a TRADE. For example, imagine that an IT company hires you as a self-employed individual to complete projects that take 8 hours a day of your work. If this revenue is more than 75% of your total income, you are a TRADE, since you are economically dependent only on one company. The key aspect of the TRADE is that you’re entitled to unemployment benefits, vacation time, maternity leave, and compensation if the party paying your services decides to end the contract. This modality was created to combat false self-employment, a practice that has become increasingly widespread in the phenomenon known as the UBERIZATION of the economy. This refers to when a company hires you to work for them, but forces you to become self-employed to avoid paying you social security, vacation time, or compensation if they fire you. ## Advantages and Disadvantages of Being Self-Employed **Advantages** * The entrepreneur is in control of their company. * **Few procedures:** It is ideal for small businesses and with little initial investment (plumbers, electricians, etc.) * **Taxation:** It is usually more profitable for small businesses with low profits (higher profits are better for incorporated businesses). **Disadvantages:** * The entrepreneur has to bear all costs. * **Unlimited Liability:** If you cannot repay, you’re liable with all your current and future assets. * **High Taxes:** In the case of higher profits, taxes are high. Since 2013, the legal figure of a self-employed individual with limited liability exists. This means that you are liable for debts with your personal assets, but your home (which you normally live in) is exempt. However, there are conditions to be met. ## 10. Partnership Companies In **partnership companies**, the partners’ personal characteristics are of key importance because they are the ones in charge of running the business. The success or failure of this type of company depends heavily on the skills of its partners. Here are three common characteristics of partnership companies: 1. **Partners are responsible for the company’s management**: * **Transfer of ownership:** The condition of partner cannot be transferred to another individual without the consent of the rest of the partners. 2. **Partners have unlimited and joint liability:** This means that if the company has debts, it will first be paid off with the company’s assets. If there is not enough money, partners are liable with their current and future assets (unlimited liability). Moreover, if one partner cannot pay, the others have to pay for them (joint liability.) 3. **Partnership companies are not suitable for large companies or those with a high investment.** This type of company is not suitable for companies with many partners or for companies with a high investment. It is crucial for the company to be adequately capitalized. We can distinguish between two main types of partnership companies: general partnerships and limited partnerships. * **General partnership:** * **What is it?** A general partnership is the simplest type of partnership company. Partners agree to work in the company and to contribute capital. They are in charge of management. Additionally, some partners could only provide their labor and no capital. * **Who is it ideal for?** General partnerships are suitable for a limited number of partners who want to carry out the same activity (for example, a law firm). * **Characteristics:** * The minimum number of partners is two. * Partners have unlimited and joint liability, which means they are liable for the company’s debts with their current and future assets, and they also have to pay debts if another partner cannot do so. * There is no minimum capital requirement for the company’s formation. * Transferring ownership is restricted. Therefore, it requires the consent of the other partners. * The tax to be paid is corporate tax. * **Limited partnership:** **What is it?** It is a type of company similar to the general partnership, but with the key difference that there are two types of partners: **general partners and limited partners.** * **General partners:** contribute capital and work in the company. Therefore, they are responsible for management. * **Limited partners:** only contribute capital. They are not involved in the management or operations but are entitled to share in the company’s profits. * **Who is it ideal for?** This company type is ideal when general partners would like to carry out the same activity, but also need capital contributions from people who are not involved in the company (limited partners.). * **Characteristics:** * The minimum number of partners is two. One has to be a general partner and the other a limited partner. * **Liability:** General partners have unlimited and joint liability. This means that they are liable for company debts with their current and future assets, and they also have to pay debts if another partner cannot do so. Limited partners are only liable for the amount they invested. * **Capital:** There is no minimum capital requirement. * **Transfer of ownership:** The transfer of ownership is restricted. Therefore, it requires the consent of the other partners. * **Taxation:** The tax to be paid is corporate tax. * **Limited partnership by shares:** This company type is categorized as a capitalist company, which will be discussed in the next section. However, we will discuss it here because it is almost identical to the limited partnership with a few variations. The main difference between a limited partnership by shares and a limited partnership is that the capital contributed by the limited partners is divided into shares. Therefore, limited partners are subject to the regulatory framework of Public Corporations and the requirement for a minimum share capital of €60,000 applies. Other aspects are the same as the limited partnership. ## 11. Capitalist Companies The key element in **capitalist companies** is the amount of money that each partner contributes, not their abilities and personal characteristics. It doesn’t matter who is the most capable in this type of company, as it is usually the partner who contributes the most money who takes on the role of management. Here are some characteristics of this type of company: * **Partners may or may not be responsible for managing the company:** In many cases, partners hire professional managers. * **Partners can freely transfer ownership:** The most important thing is the money contributed, so partners can freely transfer ownership to another individual. However, there are some exceptions for limited liability companies. We can highlight two main types of capitalist companies: limited liability companies and Public Limited Companies. * **Limited liability companies:** * **What is it?** A limited liability company (LLC) is a type of capitalist company that is divided into equal, cumulative, and non-divisible shares. These shares **do not trade on the stock market.** * **Who is it ideal for?** LLC was often used for businesses with a limited number of partners who did not need a high level of capital. It is the favorite legal form used by Spanish entrepreneurs. **Characteristics:** * **Number of partners:** It can be formed by one or more partners. If there is only one partner, the company is called a “single-member limited liability company.” * **Liability:** Partners are liable to the amount invested. If the company’s initial capital is less than €3,000, partners will be jointly liable up to that amount. However, they are not liable for the company’s debts with their personal assets. * **Capital:** The minimum share capital is now €1 (previously €3,000). This capital is divided into equal, cumulative, and non-divisible shares. In addition, 20% of the annual profits must be allocated to a reserve fund until it reaches €3,000. * **Transfer of ownership:** Shares are transferred to family members or other partners freely. If you want to transfer shares to someone else, you need the consent of the rest of the partners. * **Taxation:** The tax to be paid is corporate tax. * **Governance bodies:** * **General assembly**: This is the body that brings together the partners to make decisions. It is responsible for approving or rejecting administrators’ management, approving financial statements, deciding what to do with the profits, appointing administrators, etc. * **Administrators:** This body is responsible for managing and representing the company. The general assembly appoints administrators. They can be one or more individuals (board of directors) and they do not have to be company partners. * **Partners:** * **Right to share in the profits:** * **Right to buy other partners’ shares:** * **Right to participate in the general assembly:** * **Right to access information about the company’s decisions:** * **Public Limited Companies (PLC)** **What is it?** A PLC is a type of capitalist company whose capital is divided into equal shares that **trade on the stock market.** **Who is it ideal for?** This type of company is suitable for large businesses with high capital needs. It allows investors (shareholders) to buy or sell their shares on the stock market, effectively raising capital and allowing expansion. **Characteristics:** * **Number of partners:** It can be formed by one or more partners. If there is only one partner, the company is called a “single-member public limited company.” * **Liability:** Partners are liable to the amount they invested. * **Capital:** The minimum share capital is €60,000, fully subscribed and at least 25% paid up at the time of incorporation. * **Transfer of ownership:** Shares can be freely traded on the stock market. * **Taxation:** The tax to be paid is corporate tax. **Advantages:** * **Easy access to capital:** It is easy to sell shares, so companies can raise capital quickly. * **Limited liability:** Partners are only liable for the amount they invested. ** Disadvantages:** * **High capital requirements:** A considerable amount of capital is required to start a company. * **Complex formalities:** It involves more complex incorporation procedures than other companies. * **Shareholders have less control over the company:** The company’s ownership is spread across many shareholders. * **Higher risk for investors:** As shares are traded on the stock market, there is a higher risk for investors. * **Greater scrutiny:** Companies are subject to more stringent regulatory controls. * **Public disclosure requirements:** PLCs are subject to greater public disclosure requirements. ## 12. Companies with Social Interest The most common companies of social interest are cooperatives and labor companies. They are highly important for a country. They ensure that workers have some ownership of the company. This means that income will be spread among many people. These companies are called "of social interest." * **Labor Company** Luisa and Paloma work in a Ltd Co. that is about to close down. They are very upset, as they will become unemployed soon and they were great at their jobs! They want to become directors of their company. They ask for your advice and you suggest that a labor company could be interesting for them. **What is it?** A labor company is a PLC or an LLC where workers are the owners of the company and hold its shares or participations. If a company is divided into shares, it will be a public limited company (PLC). If it is divided into participations, it will be a limited company (LLC). * **Types of Shares or Partitions:** 1. **Labor shares or participations:** These are for worker partners. 2. **General shares:** These are for non-worker partners, if applicable. **Who is it ideal for?** This company type is ideal for businesses where workers are the owners. Labor companies are often created when a company struggles financially and workers “rescue” it by becoming owners. **Requirements:** * The government is particularly supportive of this type of company. Here are the requirements: * **At least 51% of the capital should be held by workers who have permanent contracts.** (permanent employees are those with permanent contracts, not temporary contracts). The government can also be a partner in these companies. * **No partner can hold more than a third of the capital**. * **The number of hours-year worked by permanent employees who are not partners cannot exceed 49% of the hours-year worked by all partners.** **Characteristics:** * **Minimum number of partners:** There must be 2 partners at the time of incorporation and 3 after 36 months. * **Liability:** Partners are only liable for the amount invested. **Transfer of ownership:** First priority goes to workers with permanent contracts who are not partners, and then to partners who are workers. If they do not want to buy shares, then the company will offer them to other workers who have no permanent contracts, and finally, it will be offered to other workers who aren't permanent employees. **Taxes:** The tax to be paid is corporate tax. The labor company is a very good option for a country. It helps create job security (through permanent contracts) and gives workers ownership in their company, reducing income inequality. The requirements are to ensure that the capital is distributed among many partners and workers. * **Cooperative** This is a group of friends who are interested in setting up a consultancy firm to help other businesses with their bureaucratic procedures. They are experts in the field, and they are aware of the different legal forms. They want to create a company that is democratic and where everyone has a say, regardless of how much they invest. They come to you and you suggest a cooperative could be a good idea. **What is it?** A cooperative is a company formed by individuals who come together to carry out a business activity that will help them meet their needs. In this type of company, the most important thing is to maintain and improve the work of its members. For this reason, cooperatives benefit society greatly. **Who is it ideal for?** This type of company is ideal for partners who share common interests, want to work democratically, and benefit together. This is also known as "strength in numbers." **Characteristics:** * **Minimum number of partners:** There must be at least 3 partners if it is first-degree, and at least 2 partners if it is second-degree. A first-degree cooperative is formed by individuals. A second-degree cooperative is formed by at least two cooperatives. * **Liability:** Partners are only liable for the amount they invested. The minimum capital requirement is set out in the company's bylaws. Taxes: Cooperatives pay corporate taxes but have tax benefits. Cooperatives do not aim to make a profit but to reinvest profits in the company and to improve the social environment. **Advantages:** * **Tax benefits:** Cooperatives qualify for tax benefits and pay lower taxes. * **Democratic decision-making:** Members are actively involved in decision-making and have more influence than other companies. * **Social goal:** The cooperative places a great emphasis on the well-being of its members and the community. **Disadvantages:** * **Difficult to manage:** A clear hierarchy of responsibilities is needed. * **Bureaucracy:** The process for setting up a cooperative is more cumbersome than other systems. * **Limited access to financial sources:** Cooperatives face challenges in accessing funding and investment. * **Conflict of interests:** The cooperative management is vulnerable to conflicts of interests. ## 13. Other Company Formations We have looked at all the usual company formations in Spain: sole entrepreneur, limited liability companies, general partnerships, limited partnerships, public limited companies, cooperatives, and labor companies. However, there are other, less common forms of business association, namely: community of property and civil liability companies. * **Community of assets:** **What is it?** A community of assets is formed by two or more people holding an asset in common that cannot be divided (e.g., through an inheritance) and who decide to use it to conduct a business activity. This is a simple format for self-employed people to come together. **Who is it ideal for?** For small businesses requiring little investment. Not very common. **Characteristics:** * The minimum number of participants is two. * **Liability:** There is no separate legal entity. Therefore, **liability is unlimited**. * **Capital:** There is no minimum capital requirement. Participants can contribute assets or money but not only money. * **Taxation:** There is no corporate tax, the participants are individually liable. * **Principal differences** between the community of assets and a civil liability company: The latter is created specifically for the purpose of earning profits, while the community of assets involves a pre-existing asset (such as an inheritance) that leads to the company’s foundation. * **Civil liability companies:** **What is it?** A civil liability company is created by a formal contract between at least two people who want to carry out a business activity for profit. There are two types of partners: * **Industrial partners:** They work for the company * **Capitalist partners:** They contribute money or assets. * **Who is it ideal for?** Like the community of assets, it is suitable for smaller businesses with no large investments. Not this form is not very common. * **Characteristics:** * The minimum number of partners is two. * **Liability:** There is no separate legal entity. Therefore, **liability is unlimited**. * **Capital:** There is no minimum capital requirement. * **Taxes:** As of 2016, civil liability companies are subject to corporate tax. This means they have to go through more procedures and pay more, as compared to individual entrepreneurs. The main difference between a community of assets and a civil liability company is that the latter is created specifically for the purpose of generating profits. On the other hand, a community of assets involves a pre-existing asset, often obtained through inheritance, which is then utilized for creating a company.