Company Structures: Advantages & Disadvantages
The Individual Company
Advantages and Disadvantages
The owner is an individual, and the company’s legal personality is identified with the employer. The employer assumes the inherent responsibility of leadership. The employer has unlimited liability to third parties. Company profits are wholly owned by the employer. There is no minimum capital requirement.
Tax Benefits: Income Tax
Advantages:
- Flexibility in decision making
- Full capacity to run your business
Drawbacks:
- Excessive concentration of risk (unlimited liability)
- Management problems
- Multifunctional business operations
- Significance of capital versus labor
Financial Problems:
Most financial resources are provided by the employer and/or financial markets. The employer’s possibilities are often limited, and these companies face limitations due to the restricted credit available to small businesses. This creates problems in dealing with investment projects.
Social Problems:
Limited ability to generate income/wealth. These businesses often have precarious and informal work conditions.
The General Partnership (C.Co.)
All partners operate under a given social name and agree to participate, in an established proportion, with the same rights and obligations. All partners are entitled to participate in the management of the company. The most important aspects are the people (personal qualities) who make up the partnership, not so much the capital they contribute. This structure plays with larger individual businesses (similar features).
- Unlimited liability of partners (personal, joint, and several, but in second order) for the partnership’s debts. The partnership responds first with its own assets, but if these are insufficient, members are personally and unlimitedly liable with their own personal assets.
- The company name must include the names of all partners, some of them, or one, with “and company” added in the last two cases.
- Minimum number of partners: 2
- Capital consists of the members’ contributions (money, goods, or labor). If labor is contributed, the partnership is called an irregular civil partnership (industrial partner, who does not participate in the losses). There is no minimum capital. If there are no industrial partners, it’s called a general partnership (SRC).
- The company has legal personality and capacity to act through its organs with third parties. Only partners who have been exclusively given the corporate signature have the right to represent the company.
- In a closed society, the entry/transfer of membership requires the unanimous consent of all partners (limited expansion possibilities).
- Tax benefits in corporate income tax.
Advantages and Disadvantages:
Similar advantages and disadvantages to the individual enterprise, with slightly higher capital but the same management problems.
The Limited Partnership (C.Co.)
An evolution of the general partnership, where one or more partners contribute capital to the pool, and the business transactions are conducted exclusively by other partners in a collective name.
Two Types of Partners:
- General partners have the right and responsibility for the direction and management of the company and are thus unlimitedly liable for the partnership’s debts.
- Limited partners have their role limited to providing capital and participating proportionally in the profits without intervening in the leadership/management or representing the entity to third parties. Their liability for corporate debts is limited to their contributions.
- Minimum number of partners: 2 (at least one general and one limited partner)
- Contributions of general partners can be work, money, property, or rights; contributions of limited partners can be property, money, or rights.
- The name is formed only by the name of the general partners, with the same requirements as the general partnership, adding “sociedad en commandite”.
- Membership is not transferable (neither collective nor limited).
Limited Partnership by Shares:
A variety of limited partnership, a mix between the simple limited partnership and the corporation.
- Capital is represented by shares, with unlimited liability for managing shareholders (“collective”).
- Company name includes “sociedad en comandita por acciones” or “S. com. por A.”
- Minimum capital: €60,101.21 divided into shares.
- Capital subscribed and paid up 100%, at least 25%.
- Minimum number of members: 3 (one must be collective).
- Limited partner status is transferable.
- Administration can be entrusted to both general and limited partners, who will be unlimitedly liable for debts incurred during their administration.
Advantages/Disadvantages:
- Maintains a personal nature (mixed).
- Suitable for mid-sized companies.
- Today, largely replaced by limited liability companies or corporations.
The Limited Liability Company (SRL/SL)
Act 2/1995 of March 23. Limits the liability of partners for debts to the amounts contributed. Restrictions on the transferability of shares: closed capital company.
- Capital is determined and divided into equal, cumulative, and indivisible shares. Each share gives its holder the same rights and obligations.
- Minimum capital: €3,005.06, fully subscribed and paid.
- Minimum number of partners: 1 (one-person limited company)
- Has its own legal personality distinct from its partners.
- Requirements: constitutive deed and registration in the Mercantile Registry.
- Capital contributions can be in cash or in kind (goods or patrimonial rights), the latter must be previously evaluated and accepted by the other members.
Governing Bodies:
- General Partner Board addresses the fundamental aspects of the company and expresses the will of the partners internally. Each share gives the shareholder one vote; one partner may have multiple shares.
- Administrators carry out the implementation of the social will. May be one or several partners or non-partners and represent the company in all business matters.
- Name: Freedom of choice, provided it does not match another company’s and specifies “sociedad de responsabilidad limitada” or “sociedad limitada” or its abbreviation “S.R.L.” or “S.L.”
Rights and Obligations of Members:
- Voting rights
- Right to participate in profit distribution and assets resulting from liquidation
- Pre-emptive right in proportion to shares held in case of capital increase
- Right to information and review of accounts
- Obligation to pay contributions
This structure offers advantages over collective structures by limiting the liability of its members. Compared to limited partnerships, it restricts access to governing bodies to partners with limited liability. Compared to corporations, it waives several formalities. It is ideal for small and medium-sized businesses that have grown beyond the individual enterprise stage.
The Corporation (SA)
Law 19/1989 of July 25, Royal Decree 1564/1989 of 22 December, and amendments introduced by Act 2/1995. Constituted by public deed and recorded in the Mercantile Registry.
- Capitalist society: the personal qualities of the partners are less important than their capital contribution.
- Social capital is divided into securities called shares. Each share grants its owner partner status with limited liability for company debts up to their contribution.
Types of Foundation:
- Simultaneous (shares acquired by founders in one act through agreement in the charter)
- Successive (shares purchased through public offering by promoters before charter issuance, by public subscription)
- Capital: 100% subscribed, 25% paid at constitution. Guarantees against third parties. Minimum: €60,101.21
- Minimum number of partners: 1
- Freedom of choice of name, as long as it doesn’t match another company’s, with the addition of “sociedad anónima” or “S.A.”
Governing Bodies:
- General Shareholders’ Meeting: Shareholders meet to decide on matters within their competence. Embodies the social will. Types: Ordinary (annual, within the first six months, to review management, approve accounts, and decide on profit application) and Extraordinary (all other meetings).
- Administrators and Board of Directors: Manage and lead the company and represent it. Appointment by the General Meeting; shareholder status not required. When there are several administrators (at least three), they form the Board of Directors, holding office for a period specified in the statutes (maximum five years, renewable). Governed by majority rule.
- Auditors: Oversee the corporation and report audit results to the General Meeting.
- Shares: Represent aliquots of social capital. Types: Nominative (owner’s name included) and Bearer (owner’s name not included).
Rights and Obligations of Shares:
- Right to participate in profit distribution and assets from liquidation
- Pre-emptive right in new share or convertible bond issuance
- Right to information
- Right to transfer shares
- Obligation to pay for outstanding shares
Advantages:
- Allows for high capital volume
- Shareholders are compensated based on company gains
- Professional management guided by the principle of capital democracy (one share, one vote)
- Enhanced recruitment of qualified personnel for management
Problems:
- Dissociation between ownership and management
The Labor Corporation (SAL)
Law 15/1986 of April 26. Liability limited to capital contributions. Minimum capital: €60,101.21, divided into shares. 100% subscription, 25% payout at constitution, the rest within one year. 51% of share capital must be owned by workers. No member may hold over 25% of capital unless they are public bodies (up to 49%).
- Minimum number of partners: 3
- Types of partners: Workers (provide capital and services under indefinite, full-time employment contracts; shares have restricted transferability) and Non-workers (contribute only capital)
- The number of indefinite employees who don’t own shares (non-members) cannot exceed 15% of worker-members, except in companies with fewer than 25 worker-members, where the maximum is 25%.
- Name must include “Sociedad Anónima Laboral” or “SAL”.
- This structure originated from worker takeovers of companies facing closure. It allows workers to participate in the firm’s performance.
The Cooperative Society
Cooperation involves working jointly for a common purpose. It stems from the need for solidarity among workers and consumers to achieve benefits and improvements unattainable individually.
A cooperative is a community of freely associated individuals performing an economic activity to benefit all partners. Its purpose is to advocate for and satisfy members’ interests, not profit (meaning no member profits at the expense of others, not that profit is not intended).
Classification:
- Primary cooperatives comprise natural or legal persons.
- Second-grade cooperatives consist of other cooperatives.
Purpose:
- Co-production cooperatives aim to provide steady income to associated producers.
- Sales cooperatives facilitate the sale of cooperative products.
- Consumer cooperatives aim to provide quality goods at lower prices.
Cooperatives are classified by activity: agricultural, consumer and user, housing, credit and insurance, services, education, transport, etc.
Principles (International Cooperative Alliance, 1968):
- Free membership (entry and exit)
- Equality (equal rights regardless of share capital)
- Surplus sharing in proportion to work performed or use made
- Limited interest on capital (price of capital rental)
- Promoting education and mutual support
- Encouraging collaboration with other cooperatives
- Minimum partners: 5 (first-degree), 2 (second-degree)
- Free name choice, provided it’s not identical or confusingly similar to existing ones, ending with “cooperative society” or “S.Coop.”
- Capital consists of member contributions, accredited by certificates or share books (nominative and non-marketable equity securities), fully subscribed, with at least 25% paid up. Statutes set variable capital limits.
Governing Bodies:
- General Assembly: Sovereign body composed of all members. Approves accounts, amends bylaws, and appoints the Governing Board.
- Governing Board: Minimum 3 partners. Represents and governs the society, reports to the Assembly. May appoint a director (partner or not) to manage and represent the cooperative.
- Auditors: Review annual accounts. Minimum 1, maximum 3.
Liability is limited to cooperative assets; partners are liable only for their contributions’ nominal amount (though statutes can extend liability). Contributions don’t represent an aliquot of the entire estate but only the distributable equity capital. Non-distributable heritage includes collective purpose assets linked to business, cooperative promotion, and education, through mandatory reserves (promotion and education), voluntary reserves, non-member profits, and windfall profits.
The Public Company
Capital is wholly or partly owned by the State or public authorities, whose influence on the steering system is crucial.
Characteristics:
- Government ownership or control
- Created to achieve defined public purposes, engaging in business activities, providing goods and services, aiming (at least) to cover costs
Creation is justified by arguments like ensuring national economic independence, mitigating market failures, acting against private monopolies, mitigating social adjustment costs, maintaining employment, providing essential services regardless of profitability, supporting activities with public benefits (e.g., telecommunications), and making significant long-term investments.