Business Structures: Types and Key Features
Monopolistic Competition
Monopolistic competition describes a market where many firms offer similar, but not identical, products or services. Barriers to entry and exit are low, and individual firms’ decisions don’t directly impact competitors. All companies in this structure have similar market power and are price makers.
Classification by Legal Structure
When deciding on a legal structure, consider these factors:
- Capital required to start the business
- Number of owners
- How the company will be organized and managed
Main Legal Structures
Natural Person
Sole Proprietorship
A sole proprietorship is a business owned and run by a single person (a physical person) who pays personal income tax on profits. It’s the simplest business to set up, making it popular among self-contractors and small business owners. The entrepreneur is responsible for fulfilling all business obligations and paying debts. Critically, the entrepreneur’s liability is unlimited, meaning they are personally liable for all business debts and may have to use personal assets to cover them. Any individual over 18 (or younger with parental authorization) can create a sole proprietorship using their personal identification card number.
Jointly Owned Company
A jointly owned company is similar to a sole proprietorship, but involves two or more individuals who share ownership of a common property or right. Members are personally liable for debts (unlimited liability). There’s no minimum financial investment, and taxes are reported on each individual’s IRPF (Impuesto sobre la Renta de las Personas Físicas) tax form.
To establish a jointly owned company, you need:
- A partnership agreement.
- A CIF (Código de Identificación Fiscal – tax identification number).
- Registration for IAE tax (Impuesto sobre Actividades Económicas).
- Registration with social security.
Legal Entity
Stock Corporation
Stock corporations (Sociedad Anónima or S.A. in Spain) can be formed by a single person and are often used for larger investments. The deed of incorporation must be signed before a notary and registered in the Spanish Corporate Registry. The minimum share capital is €60,101.21. Capital is divided into shares, which shareholders can freely transfer (sell). Shareholder liability is limited to their investment.
Limited Liability Company
A Limited Liability Company (Sociedad de Responsabilidad Limitada or S.L. in Spain) can be formed by one or more persons and is commonly used for small and medium-sized enterprises (SMEs). The deed of incorporation must be signed before a notary and registered at the Corporate Registry. The minimum capital is €3,000.06, which must be fully subscribed and paid upon company formation. Liability is limited to the amount contributed. Instead of shares, ownership is represented by “participations,” which are not freely transferable; information must be shared with other partners.
Cooperative
A cooperative is a worker’s association formed to meet common economic needs and carry out a specific activity. There’s no legally required minimum capital; it’s established by the articles of association. The deed of incorporation must be registered at the Cooperatives’ Registry of the Spanish Labour Ministry. Workers are generally not liable for company debts unless otherwise stated in the articles. Cooperatives operate democratically, and various types exist depending on the members.