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Imagine you have a brilliant idea for a new business. You’ve already created a solid plan and you are ready to put it into practice. But there’s one question you still need to answer: what kind of business entity is best suited for my project? This decision is crucial because it can affect various aspects such as taxes to pay or your personal financial stability.
At Lexington, we want to make sure you’re clear about this, and that’s why in this article we will explore the different types of business entities.
What is a business entity?
A business entity is a legal entity formed by at least to individuals who come together to engage in economic activities with the aim of obtaining profits. Each member contributes to the business, and all partners share in the profits and losses.
Business entities can be divided into commercial and non-commercial entities, based on their organization.
Types of non-commercial business entities
Non-commercial entities don’t aim to generate profits for the partners. They are created for cultural, educational, scientific, sports, or religious purposes. However, they can engage in economic activities to achieve their objectives. Some examples are:
- Associations: Entities formed by a group of individuals who voluntarily come together for a common purpose.
- Foundations: Non-lucrative organizations that aim to promote social welfare, education, culture, etc. For example, a humanitarian foundation.
- Joint ownership communities: Entities where at least two people jointly own a property or right. They don’t have legal personality and are governed by the will of the co-proprietors.
Types of commercial business entities
When you decide to deepen into the business world, in addition to learning how to be your own boss, you need to carefully choose the correct commercial business entity.
Limited Liability Company (LLC)
Limited Liability Company, or LLC, is one of the most common types, especially for small and medium-sized enterprises (SMEs). This type of entity limits the liability of the partners to the contributed capital, protecting their personal assets from potential company debts. The minimum capital required for its formation used to be 3,000 €, but the latest Spanish amendment to “Ley de Sociedades de Capital” reduced it to 1€.
LLC is a straightforward and quick entity to establish, allowing partners to make decisions in an agile and flexible way. However, it can have disadvantages, such as the difficulty of obtaining external financing.
Public Limited Company (PLC)
Public Limited Companies, or PLCs, are very popular, especially among large companies. Its establishment requires a minimum capital of 60,000€ and a more complex management.
PLCs’ main characteristic is that capital is divided into shares, which can be freely bought and sold by shareholders. Choosing between LLC or PLC will depend largely on the needs, size and growth aspirations of your business.
Other types of commercial entities
In addition to LLCs and PLCs, there are more types of commercial entities that can be a viable option for your business. Let’s review some of them:
General Partnership
In a General Partnership, all partners, under a collective name, commit to participating in the same proportion of the business’ rights and obligations.
Unlike LLC and PLC, General Partnerships’ partners have an unlimited liability for the company’s debt. This means that if the company incurs debts, the partners are personally responsible with their personal assets.
Limited Partnership
Limited Partnership consists of two types of partners: general partners and limited partners. General partners have unlimited liability and actively manage the company. Parallelly, limited partners have limited liability and contribute capital but don’t participate in the management of the company. This entity allows to combine the active management of some partners with the passive inversion of others.
Worked-Owned Company
In a Worked-Owned Company, workers are also owners of the majority of the company’s share capital. It is governed by principles of democratic participation, cooperation, and solidarity among its members, with the main objective being stable and high-quality employment.
Cooperative
A Cooperative is a social-oriented commercial entity characterized by democratic engagement, cooperation, and mutual benefit among its members. The members actively participate in decision-making processes and share the benefits generated by the company.
What is the best type of commercial entity for your business?
Choosing the right type of commercial entity for your business is crucial to start your entrepreneurship on the right foot. Consider the following:
Firstly, assess your acceptable level of risk. LLCs and PLCs protect your personal assets, whereas in some other modalities, your personal assets may be used to settle company debts.
Secondly, your financing needs. If you are going to need a lot of capital, a PLC could be an attractive option. LLCs would be more suitable for more modest capital needs.
Lastly, the level of control you want to have. PLCs have shareholders with a say and vote, which could limit your control.
All in all, the best type of commercial entity to choose will depend on your circumstances and objectives.
Aspects to consider when choosing a commercial entity
Before choosing the right type of commercial entity, here are some essential aspects to take into account:
- Limited liability protects your personal assets from any debts or liabilities of the company, while unlimited liability puts your personal assets at risk.
- Capital needs. How much money do you need to start your business? Will you rely on external investor or only on partners?
- Company control. Company control can be in the hand of the founding partners or distributed among shareholders.
- Tax implications. Each type of commercial entity has different considerations in terms of taxes. It’s important to understand how your company’s profits will be taxed and what tax benefits you can obtain. In this regard, it is best to contact a tax professional.
- Market credibility. Some business entities provide more credibility to clients, suppliers, or investors.
- Flexibility and bureaucracy. Certain types of commercial entities require more administrative and legal procedures for their creation and management.
Now that you know what type of commercial and non-commercial business entities exist, you will be able to make an informed decision. Remember that choosing the right entity impacts directly on your business’ success and growth.