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Updated: 25-02-2014

Business Legal Structures in Tenerife

Your new Tenerife business will, by law, need an administration and tax reporting structure. Whether you are buying an existing Tenerife business or planning to start a new venture from scratch you will need to decide during the planning phase, the most suitable type of legal structure which will suit both your short-term and long-term business aims. There are many kinds of business entities in Spain, each type is regulated differently and has its own rules. Your liabilities, responsibilities, accounting requirements and taxes will all depend on the selected legal structure of the business. The cost and complexity of the procedures for setting up your Tenerife business will vary for the different legal entities. It is therefore highly advisable to use the services of a qualified professional such as tax and legal advisors (gestors). They will be able to inform you of the pros and cons of each legal structure and propose the most suitable entity for your business in Tenerife, based on which you can make an informative decision. Your selected tax and legal advisor will guide you through the process of setting up your Tenerife business and in most cases will continue managing the administrative and accounting sides of your business.

To give you a very general introduction to the topic, we’ve listed below the most common legal structures for small to middle sized Tenerife businesses:

  • Sole Proprietor (Empresario Individual or Autonomo) is a self-employed individual. There is no minimum financial investment when establishing oneself as self-employed in Spain. The set-up procedures are very simple and set-up time is very short. Mandatory requirements would include registration with the Spanish Social Security system and the Tax office. The important point to remember is the unlimited liability of the self employed person. This means that the sole proprietor is personally liable for all business debts. Self-employment is a common form for many Tenerife businesses, especially smaller sized businesses, such as small pubs, bars and cafes, as well as tradesmen and professionals.

  • Private partnerships, which can be either Comunidad de Bienes (CB) or Sociedad Civil (SC). A partnership is formed by two or more individuals who agree to run a business by sharing resources, finance and liabilities in proportion with their respective share in the partnership. There is no minimum financial investment required to form a partnership. The partners will normally sign a contract regulating the management of the business, its administrative representation and respective shares. Mandatory requirements for partnerships also include application for the company Tax Identification Code (CIF) and registration with the Spanish Social Security system. As in the case above in partnerships, the liability of the partners is unlimited and they are personally liable for all business debts. Partnerships are quite common for those starting as new in the Tenerife business world. As with a sole proprietorship, partnership is a fast and economical way of starting your new Tenerife business and simple to administer. It doesn’t require audited accounts which means that bookkeeping and administrative support are considerably cheaper than limited liability companies that require detailed accounting.
  • Limited Liability company (Sociedad de Responsabilidad Limitada – S.L.) is one of the most common business types and is used to form small or medium sized businesses. It is similar to a limited company in other countries; however in Tenerife it can be also created by a single founder. Compared to the business types described above the setting up time of a limited liability company is longer (about 1 month) and the formalities are more complicated. Some of the mandatory steps include obtaining a certificate of company name and the public deed of incorporation which needs to be signed in front of a Notary, applying for the company tax identification code (CIF), registering the company and submitting the company books to the Central Commercial Registry and much more. The minimum share capital is just over 3,000 EUR. Shareholders of a limited company are not personally liable for the company’s debts; their liability is limited to their investments in the company. Setting up a limited company is a serious step, implying higher costs and obligations on its owners, therefore the decision to found a limited company should be aligned with the business targets one wants to achieve. Professional advice from a qualified expert should always be sought in this situation.

As of September 2013, two more legal structures have been added to ensure added protection to both entrepreneurs and third parties:

  • Limited Liability Entrepreneur (Emprendedor de Responsabilidad Limitada - E.R.L.) is a self employed individual with protection, under certain circumstances, from their business debts affecting their permanent residence. Those with a family home that does not exceed 300,000 Euros or 450.000 Euros in the case of cities of more than 1,000,000 inhabitants, may qualify. When you set up as an E.R.L., you must indicate which property you wish to protect, and then once registered, you will also need to account for your house in the property registry. However, the registered property will still be liable for any past debts incurred by the employer prior to their registration as a Limited Liabilty Entrpreneur, any debts that occur outside professional or business practices, or any appropriations by public law.
  • Limited Liability of Successive Formation (Sociedad Limitada de Formación Sucesiva - S.L.F.S.) S.L.F.S. companies are handled almost exactly like S.L.s, except that they have no minimum start up capital. While S.L.s cost a minimum of 3000 €, S.L.F.S.s must instead meet a number of specific obligations to ensure the protection of third parties in their financial, employment and business relationships. Partners and directors of an S.L.F.S. may be jointly liable for the minimum share capital in the event of dissolution, meaning you may have to pay more than an S.L. if your business fails. In actual fact, an S.L.F.S is just a corporate "subtype" which can become an S.L. once you have provided the share capital legally established minimum for this type of company.

There are also other types of legal entities such as Stock Corporation (Sociedad Anonima), Cooperatives or Labour Corporations (Sociedad Cooperativa or Sociedad Laborales) and others. A competent tax and legal advisor will be the first port of call when deciding on a suitable legal structure for your Tenerife business.

By Irina Saltmarsh

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