The Spanish LLC: advantages, disadvantages, and differences with a regular corporation
In addition to being one of the most common business organizations, the LLC corporate form is highly suggested for starting a small- to medium-sized business because of its more relaxed reporting or publication requirements, its relatively minimal initial capital requirement (about 3,006 Euros), and its limited liability for its members. According to Mr. Lincke, a German and Spanish lawyer and expert in commercial law matters, about 90% of the newer companies in Spain are LLCs, and the rest of the 10% are some loose form of partnerships. A similar statistic from Guillermo J. Jiménez Sánchez’s commercial law handbook reports that 98% of newly created companies in Spain are LLCs, while only 2% are regular corporations.
One of the newer forms of Spanish business organizations, the LLC was born as a result of general distaste for the time-consuming and complex structure and maintenance of the regular corporation. The LLC is more attractive as a business model for small- to medium-sized companies, as Mr. Sánchez explains, because of its modest dimensions, reduced number of members, limited responsibility, and lack of excessive capital requirements. The Spanish LLC is similar to the regular corporation in the way that it requires the same steps for formation and some reporting. The Spanish LLC is a better choice, however, for a foreign national seeking to establish a small or medium business presence in Spain because it is more suitable for companies that have an ordinary amount of capital to start with, and those that want to keep their general costs (especially labor) down.
To demonstrate their differences, the Spanish regular corporation has more stringent publication requirements and requires more of an initial investment (about 62,000 Euros) than the Spanish LLC. In the regular corporation context, constant changes must be reported to the Commercial Registry’s public and private official bulletins (newspaper-type publications). Such a change requiring reporting would be, for example, a change in the Board of Directors. Because more publication and reporting requirements mean more money spent and more labor involved in maintaining the regular corporation, these burdens often lead companies to choose the LLC as their preferred corporate model when starting up as relatively small. LLCs, on the other hand, do not have as many reporting requirements, nor are their reporting requirements as strict because they have no shareholders to keep informed. These realities show how starting and maintaining a regular corporation would ultimately be more cumbersome than establishing and running an LLC.
More specifically, the Spanish LLC must fulfill certain commercial accounting requirements. These requirements are basically the same for both Spanish LLCs and regular corporations, but because the regular corporation is a more complex corporate model, satisfying such obligations is more time-consuming because it involves a more thorough revision of company writings and reports; in some cases this revision must be professional for the regular corporation rather than for the LLC.
The administrative and accounting requirements that both types of companies must meet include the following:
- Registering the company with the Commercial Registry
- Presenting and depositing account balances and management and auditing reports
- Maintaining daily reports on the company’s economic operations
- Maintaining balance and inventory reports
- Maintaining annual accounting reports (including balance, gains, losses, and annual reports)
- Maintaining reports on the agreements made and applied by the Board
- Registering transactions involving shares/participations
- Creating a report identifying the partners of the company
In summary, when choosing its business model, a foreign national should keep in mind that because LLCs tend to be smaller, their administrative and accounting requirements are not as burdensome as they are for the regular corporation.
Other notable differences between a regular corporation and an LLC include the reality that regular corporations tend to have more diverse shareholders and capital flow and often involve highly successful business undertakings and a lot of external capital; LLCs, contrastingly, do not require such diverse investment. In fact, a lot of the capital to begin and maintain an LLC comes from just a few people or entities.
While the concept of creating capital in both LLCs and regular corporations is varied, their respective names for capital –participations for capital in LLCs, and shares in regular corporations- represent merely a semantic difference. Mr. Lincke comments that these two different names — when used in a legal context — demonstrate that a lawyer is referring to an LLC if he or she is talking about participations, while a lawyer is referring to a regular corporation when he or she is talking about shares. The only true difference between an LLC and a regular corporation in terms of investment is from where the capital comes. Their corporate forms are what define their character of capital, not the names of such capital.
While their reporting and capital requirements are different, the basic internal structure of both the LLC and the regular corporation are similar. Each has socios, like members (LLC) or shareholders (regular corporation), and administradores, like directors or officers. Specifically for the LLC, if there exists only one member or shareholder, it is most likely also the administrator.
In particular, the Spanish LLC requires at least one founding partner, but never more than 50 founding partners. The internal structure of the LLC must have a Board of Directors/Administrators to manage the LLC’s affairs. The LLC’s members -who act as shareholders would in a regular corporation- must hold meetings by which they make important decisions for the functioning of the LLC.
The tax issues regarding both the LLC and the regular corporation are also somewhat alike. All corporate models must pay an incorporation tax. The dividend tax is also the same for all types of corporate models that involve dividends. Any person can start a business in Spain; any person can be a director, administrator, or a shareholder. But for those foreign nationals who make direct investments in Spanish companies and maintain a foreign residency for tax purposes, such persons must file a form with the Spanish Ministry of Economic Affairs stating the amount of their investment. Those foreign nationals who have residency in Spain and make investments in Spanish companies are not subject to filling out such a form.
Lastly, a foreign national should consider the specific disadvantages of the LLC, which are few. Such potential drawbacks include the following: (1) the capital of the LLC must be established in its operating agreement; (2) a general meeting of the members must take place every year; and (3) there are certain reporting requirements that must be fulfilled at the Commercial Registry.
To conclude, it is recommended that a foreign national choose the LLC model for its less complicated structure and starting-up process, modest size, low amount of required capital to start up, and the limited liability it offers its members.
1. In-person interview with Karl Lincke, Lawyer, Mariscal Abogados (June 2009)
2. Santiago Herrero Suazo, Como Crear Una Empresa (Boletín Oficial del Estado 2003)
3. Guillermo J. Jiménez Sánchez, Derecho Mercantil (Ariel Derecho 2006)
This article is not considered as legal advice