4Main Characteristics of Corporations and Limited Liability Companies
4.2 Formation and capital stock
| S.A. | S.L. | |
|---|---|---|
| Minimum capital stock | €60,000, fully subscribed and at least 25% of the par value of the shares paid in4. | €1, fully subscribed and paid in. In the case of companies whose capital stock is less than €3,000, the following is required to safeguard the creditors’ interests: (i) a legal reserve must be recorded of at least 20% of income until the sum of the legal reserve and the capital stock amounts to €3,000; and (ii) the shareholders must be jointly and severally liable with the company, up to the amount of the difference between the subscribed capital stock figure and €3,000 if, in the event of liquidation, the net worth of the company is insufficient to cover the company’s payment obligations. |
| Debt ratios | There are currently no mandatory minimum debt-equity ratios under Spanish law for any type of business enterprise. However, there is a limitation on the deductibility of finance costs for tax purposes (see Chapter 3, section 2). Moreover, certain legal requirements may be applicable to companies operating in regulated sectors. | |
| Special rules on mandatory winding up or capital reduction | There must be a certain balance between the capital stock and the net worth of a company, meaning that if losses incurred reduce the net worth to less than one-half of the capital stock figure, the company will be subject to mandatory grounds for dissolution (article 363.1 of the Capital Companies Law), unless the capital stock is sufficiently increased (or reduced) and, as from September 1, 2004, provided that it is not necessary to petition for insolvency pursuant to Insolvency Law 22/2003, of July 9, 2003. However, by virtue of Royal Decree-Law 20/2022, of December 27, 2022, losses from 2020 and 2021 will not be taken into account until the 2024 year-end when determining whether the company is subject to a ground of mandatory winding-up. In addition, by virtue of article 13 of Law 28/2022, promoting the start-up ecosystem (known as the “Start-ups Law”), the ground of winding-up due to losses will not apply to start-ups (meaning companies that meet the requirements set out in article 3 of the same law) whose net worth has been reduced to less than one-half of the capital stock, provided that it does not arise from petitioning for an insolvency order, until three years have elapsed since the start-up was formed. |
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| Capital must be reduced at a corporation where losses have reduced the net worth of the corporation to less than two-thirds of its capital stock figure and one fiscal year has elapsed without its net worth having been restored (article 327 of the Capital Companies Law). | ||
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4.2.1 Formalities for formation
The shareholders (or their representatives) must appear before a notary in order to execute the public deed of formation of a corporation or limited liability company. Subsequently, the deed of formation must be registered at the Commercial Registry. Upon registration, the company acquires legal personality and legal capacity5.
4.2.2 Contracts made in the corporation’s name prior to registration
The formation of an S.A. or an S.L. two-step process involving, as noted, execution of a public deed before a notary and registration at the Commercial Registry. It is only after registration of the public deed of formation that the corporation acquires legal personality and legal capacity. Persons who enter into contracts for and on behalf of the corporation prior to its registration are jointly and severally liable for their performance, unless such performance was made conditional on the corporation’s registration and, if applicable, on later assumption by the corporation of compliance with their terms. Contracts made in the corporation’s name and on its behalf may generally be ratified by the corporation prior to its registration at the Commercial Registry or within three months of registration.
However, a corporation in the process of formation and its shareholders (but not its directors or representatives) are liable, up to the limit of the amount they have undertaken to contribute, for the following types of contract prior to registration:
- Contracts that are essential for registration of the company.
- Contracts entered into by the directors within the scope of the powers granted to them in the pre-registration stage.
- Contracts entered into by virtue of a specific mandate granted by all the shareholders.
Upon registration, the corporation becomes bound by the foregoing acts and contracts.
In these cases, and if the corporation ratifies acts performed prior to its registration within three months of the date of registration, the joint and several liability of the shareholders, directors or representatives lapses.
Moreover, it should be noted that directors will be deemed to have authority to fully pursue the corporate purpose and to perform and make all kinds of acts and contracts if the date of commencement of the company’s operations coincides with the date of execution of the deed of formation.
4.2.3 Acquisitions following the registration of a corporation at the Commercial Registry
In the case of corporations, in the two years following its formation, the shareholders’ meeting must grant its prior approval for acquisitions of assets for consideration involving amounts in excess of 10% of the capital stock, unless such acquisitions are within the ordinary scope of business of the corporation or the purchase is made on a stock exchange or by public auction. Where prior approval of the shareholders’ meeting is required, the following are basically necessary:
- Issuance of a report prepared by the directors that justifies the acquisition.
- An independent valuation by the expert appointed by the Commercial Registry.
4Nonetheless, bear in mind that:
- When the capital stock is not fully paid in, the bylaws must state the manner and time period for the payment of the remaining portion of subscribed capital. No maximum time period for payment of outstanding capital by contributions in cash is stated in the Law but five years is the maximum term for full payment of contributions in kind.
- The specific regulations governing certain activities (banking, insurance, etc.) may require that the minimum amount under the Capital Companies Law be exceeded.
5 Moreover, there is an alternative little-used procedure for formation called "successive formation", consisting of a public offering to subscribe shares prior to execution of the deed of formation. To this end, means such as advertising or financial intermediaries may be used.
