Sociedad Anónima versus Sociedad Limitada

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The main differences between the Spanish companies  Sociedad Anónima “S.A”. and a Sociedad Limitada “S.L”  derive from their conception: On broad terms, the S.A. is a corporate structure mostly designed for large corporations while the S.L. was conceived to be used for small or family owned companies where the trust and personal relationship constitutes the basis of the foundation of the company. For this reason, the legal structure and mechanisms to operate an S.L. are less sophisticated than those of an S.A.

The main differences between both types of companies are the following:

1.- Minimum capital stock:

S.A.: €60,000 (€120,000 in the new Commercial Code)

S.L.: €3,000. The law however provides for sequential formation where, in broad terms,

The minimum capital is only required in the event of liquidation. If the company’s equity is insufficient to cover its obligations, its partners and directors shall be severally liable for the minimum capital established by law.

2.- Payment upon formation:

S.A.: At least 25% of the capital amount and any share premium must be paid-in upon incorporation. Payment of the outstanding portion of capital must be carried out as indicated in the company’s by-laws. The deadline for payment of non-cash contributions shall not extend beyond five years of the date of company formation or its decision to increase its capital.

S.L.: All the capital must be paid in upon incorporation.

3.- Non-cash contributions:

S.A.: In general, a report from an independent expert is required.

S.L.: No report from an independent expert is required but the partners are liable for the authenticity of any non-monetary contribution made.

4.- Capital representation:

S.A.: The capital is represented by shares that qualify as negotiable securities. Shares of an S.A. may either be issued physically as certificates or recorded by a book-entry system. They can be of two types: registered or bearer shares. Shares however must be registered in the following cases:

– If they are not fully paid in.

– If their transferability is subject to restrictions.

– If they are subjected to ancillary obligations.

S.L.: The capital is divided into stakes (participaciones sociales) that closely resemble the shares of an S.A. but under not circumstances shall be regarded to be securities.

5.- Transfer of shares or stakes:

S.A.: In principle, shares may be freely transferred. Restrictions on or requisites for the free transfer of shares shall only be valid when applied to registered shares and explicitly stipulated in the by-laws.

S.L.: Stakes are generally not freely transferable. In fact, the law establishes a pre-emptive acquisition right in favor of the other partners. Even an unconditional restriction on the transfer of stakes is allowed if the lock-up is limited to five years.

There is however a remarkable exception: voluntary inter vivos transfers of stakes may be freely transacted among partners or in favour of partners’ spouses, ascendants or descendants or companies belonging to the same group as the transferor.

A common restriction to both S.A. and S.L., is that until the company or, as appropriate, the decision to increase the capital is registered in the Mercantile Registry, they may not be transferred.

As a consequence of the transfer of shares or stakes, both of these corporate forms can become a sole-shareholder or partner company.

Spanish law allows most of the mechanisms commonly used in corporate transactions around the world such as ‘tag along’ and ‘drag along’ rights, put and call options and rights of first refusal.

6.- Attendance and majorities at shareholders/partners’ meetings:

S.A.: Different quorums and majorities are established for meetings on first and second call and depending on the content of the resolutions. These can be increased by the by- laws.

S.L.: There is only one call. There are no quorum regulations and different majorities are established depending on the content of the resolutions. These can be increased by the by-laws.

7.- Number of members of the board of directors.

S.A.: Minimum 3; maximum: no limit.

S.L.: Minimum 3; maximum: 12 members.

8.- Term of the office of directors.

S.A.: Maximum 6 years. They may be reelected for periods of the same maximum duration.

S.L.: May be indefinite.

9.- Issue of bonds:

S.A.: Bond issues may be used as a means to raise funds.

S.L.: Bond issues are not permitted.

According to the features highlighted above, most investors in Spain prefer to choose a SL, because the investment needed is lower and its management is much more flexible. Nevertheless, large companies or multinational groups may find an SA suitable for their business. A final remark is that the tax regime of both companies is exactly the same; both types of companies are subject to the Spanish Corporate Income Tax under the very same rules.

This article has been written by Luis Manglano, legal Partner at Juan Costa Abogados y Asesores