Choosing the right type of company is one of the questions that, sooner or later, you ask yourself.
It is probably the question I am most often asked when setting up a company (and also as the business develops, since a lot of things in the future will depend on this choice).
In this post I am going to tell you the good and the bad of the different legal forms of a company so that you can choose the most appropriate one.
Why should you choose the right type of company?
If you have a business mindset, I am convinced that you have already asked yourself this question since choosing the right type of company is not only important at the beginning of the activity, but, even more important, throughout the life of your company.
A legal form is like a suit. You choose one type of suit when you’re twenty, another when you’re forty, and a completely different one when you’re sixty. Because your body and your way of thinking have changed.
Your business, your company, changes over time, and at all times it must have the most appropriate legal form. The suit must adapt as best as possible to the body, especially when there are important changes in that body, such as:
- Billing increases or decreases.
- Entry of new partners in the business.
- Business succession (that the children take over the company).
- Capital needs.
- Image to third parties.
What do you have to take into account to choose the most suitable type of company for your business?
There are several concepts that yes or yes you should know to understand how choosing one or another legal form can affect you. These concepts are:
I) Limitation of liability
If you do not adopt a corporate legal form that limits your liability, you will be personally and unlimitedly liable for the debts you assume.
The form you choose will affect the payments you are going to make to the Treasury. If you choose a corporate legal form you will be subject to corporate tax. If you adopt a self-employed or professional form, you will pay income tax.
A long-term project is not the same as carrying out a project delimited in time. If you are thinking of something that will last a long time, it seems logical to choose a shape that allows that duration.
IV) Type of activity
Due to their very essence (statutes of professional associations, etc.), some activities will have a specific legal form.
How to choose the right type of company for you
The first thing you have to consider is whether you undertake in a shared way (with more people) or individually (on your own only). The situation changes a lot.
If you undertake in a shared way , then your form is corporate and you will have to choose if the company is personal, or capitalist, or a mixture of both (cooperative)
If you undertake individually then you will be self-employed.
There are other forms such as temporary unions of companies, professional companies and even mixtures of the previous ones, but now we are not going to talk about them.
Advantages of choosing a corporate form
If you have chosen the corporate form because that way you have no responsibility for what the company does, be very careful because not all corporate forms limit liability. This is very important for you to know. Partnerships do not limit the liability of the partners. That is to say, the company responds first to company debts, and when this is exhausted, it will go against the equity of the partners.
This means that, first of all, if you want to limit your liability, do not choose a personal company but a capital company: anonymous, limited or limited by shares (very little used)
If you choose one of these options, if the assets are insufficient to meet the company’s debts, your assets would be protected (WARNING, always in general, because there are a number of exceptions in the event that you were an administrator of the company )
If you choose to be a natural person, the current fee exceeds (in some cases) 45%, when companies usually pay 25% on average. This could make you inclined to form a company, but be careful, you have to take into account another thing.
The income tax is progressive, so in the low brackets it is below 25%. However, corporate tax is proportional, so it will always be quoted at 25%. If you are in a tax bracket of less than 25% in the personal income tax, the incorporation of a company does not have to be the best thing for you.
Companies are normally incorporated without an end date and the transfer of the business is as simple as the transfer of the shares or participations of the company.
Much more important than it seems. Corporate formulas have a better reputation than exercising as a natural person. If having a certain reputation is important to your business, then it is vital that you adopt a legal form that matches that reputation.
Disadvantages of choosing a corporate form
Compliance with obligations
Companies are subject to a series of formal, accounting and tax obligations much higher than those of the exercise as self-employed, such as Ordinary (and extraordinary) Meetings, more exhaustive accounting, deposit of accounts, registration of books, audit of accounts by an auditor of the Official Registry of Auditors of Accounts .
The savings you thought you would have from taxation may be canceled out by this additional cost.