How to choose the right legal structure for your Startup

Choosing the right legal structure for your startup is a crucial decision that can have a significant impact on the future of your business. Just as an architect designs the foundations of a building, the legal structure defines the framework on which your startup is built, directly impacting its growth, success and protection.

Did you know that 90% of startups fail in their first 5 years? Although the causes are diverse, a fundamental factor is the lack of a solid legal basis. Choosing an inappropriate structure can lead to everything from tax and liability problems to difficulties obtaining financing or expanding.

In this comprehensive guide, we will take you on a journey to demystify the legal maze and choose the legal structure for your startup. We will explore the different options available, analyze the key factors to consider and provide you with practical advice and recommendations so that you can make an informed decision.

1. What is a legal structure and why is it important for a startup?

The legal structure of a startup is the legal framework that defines how the company is organized, operated and owned. This structure determines fundamental aspects such as the distribution of ownership, the responsibilities of the founders, tax obligations and the ability to access financing.

Choosing an appropriate legal structure is a crucial decision for any startup, as it impacts various aspects of the business:

1.1 Protection of personal assets

A well-defined legal structure protects the founders' personal assets from the company's debts and obligations. In the event that the startup runs into financial problems, personal assets, such as homes or savings, will not be at risk.

1.2 Limitation of tax liability

Each legal structure has different tax implications. Choosing the right structure can help the startup minimize its tax burden and optimize its profits.

1.3 Facilitation of access to financing

Investors and financial institutions usually prefer to invest in startups with a clear and defined legal structure. An adequate structure demonstrates seriousness and professionalism, which increases the chances of obtaining financing.

1.4 Definition of the ownership structure

The legal structure establishes how ownership of the startup is distributed among the founders. This is crucial to defining everyone's rights and responsibilities in decision-making and benefit distribution.

1.5 Definition of the governance structure:

The legal structure also defines how the startup is governed. This includes aspects such as the way decisions are made, the involvement of founders and the election of managers.

In short, choosing a suitable legal structure for your startup is like laying the foundation of a solid house. A solid foundation will allow you to build a stable, protected business with greater potential for success.

2. The different legal structures available for startups

Each structure has its own characteristics, advantages and disadvantages, so it is essential to understand them to make an informed decision.

2.1 Limited liability companies (SL)

A Limited Liability Company (SL) is a popular legal structure among startups due to its simplicity, flexibility, and protection of personal assets. It is characterized by:

• Minimum number of partners: 1
• Limited liability: The partners do not respond with their personal assets to the company's debts.
• Management: It can be by direct administration or by a Board of Directors.
• Taxation: Pays Corporate Tax.

Advantages of SLs for startups

• Protection of personal assets: Ideal for entrepreneurs who do not want to risk their personal assets.
• Easy creation and management: Simple procedure and fewer requirements than SA.
• Flexibility: It allows the structure to be adapted to the needs of the startup.
• Fiscal benefits: Corporate Tax Bonuses for newly created startups.

Disadvantages of SLs for startups

• Double taxation: Profits are taxed in the Corporate Tax and then in the personal income tax of the partners.
• Less prestige: It may be perceived as a less formal structure than a SA.
• Limitations in raising capital: Difficulty in attracting large venture capital investments.

2.3 Public limited companies (SA)

A Public Limited Company (SA) is a legal structure that offers greater formality, the ability to raise capital and the possibility of listing on the stock market. It is characterized by:

• Minimum number of partners: 1
• Limited liability: The partners do not respond with their personal assets to the company's debts.
• Management: Mandatory by a Board of Directors.
• Taxation: Pays Corporate Tax.

Advantages of SA for startups

• Greater prestige: Projects a more formal and professional image.
• Ease of raising capital: It attracts venture capital investors and allows for an IPO.
• Scalable structure: Suitable for startups with ambitious growth plans.
• Management professionalization: The Board of Directors provides experience and knowledge.

Disadvantages of SA for startups

• Greater complexity: Creation and management process more complex than SLs.
• Higher costs: It implies higher establishment and maintenance expenses.
• Double taxation: The profits are taxed in the Corporate Tax and then in the personal income tax of the partners.

2.4 Single-member limited liability companies (SLU)

A Unipersonal Limited Liability Company (SLU) is a legal structure designed for startups with a single founder. It is characterized by:

• A single partner: The founder is the sole owner and person responsible for the company.
• Limited liability: The partner is not responsible with his personal assets for the company's debts.
• Management: It can be by direct administration or by a Board of Directors.
• Taxation: Pays Corporate Tax.

Advantages of SLUs for startups

• Maximum simplicity: Extremely simple creation and management process.
• Less costs: It involves the lowest establishment and maintenance costs.
• Ideal for solopreneurs: It allows you to control the company autonomously.
• Fiscal benefits: Corporate Tax Bonuses for newly created startups.

Disadvantages of SLUs for startups

• Unlimited liability of the partner: If the company goes bankrupt, the partner loses the investment made.
• Less attractive for investors: It can make it difficult to raise external capital.
• Perception of less solidity: Being a one-person company can project a less professional image.

3. Factors to consider when choosing a legal structure:

Choosing the right legal structure for your startup is not a decision that should be taken lightly. It is crucial to carefully analyze various factors that will impact the present and future of your business. Here are some of the most important aspects to consider:

3.1 The number of founders and ownership:

• Number of founders: If you are the sole founder, an SLU may be the simplest option. If there are several founders, an SL or SA may be more suitable, depending on the distribution of ownership and decision-making.
• Property distribution: If the founders have different participation in the company, an SL or a SA allows the ownership and rights of each one to be clearly defined.

3.2 Fiscal responsibility:

• Taxes: Each legal structure has a different tax regime. SLs and SLUs pay Corporate Tax, while SAs can opt for Corporate Tax or Personal Income Tax.
• Double taxation: In SLs and SAs, profits are taxed in the Corporate Tax and then in the personal income tax of the partners (double taxation). SLUs do not have double taxation.

3.3 Financing needs:

• Attraction of investors: SAs are typically more attractive to large investors, while SLs and SLUs may be suitable for angel investors or seed funding.
• Going public: If the startup plans to go public in the future, a SA is the most suitable structure.

3.4 The complexity and cost of training:

• Formalities: The constitution of an SLU is the simplest, followed by the SL and then the SA.
• Costs: Training and maintenance costs are lower in SLUs and SLs, while SAs are more expensive.

3.5 Future plans for the startup:

• Growth: If the startup plans rapid growth and international expansion, a SA may be more suitable.
• Acquisition: If the startup has plans to be acquired in the future, an SA can facilitate the process.

4. Recommendations for choosing the appropriate legal structure:

Navigating the startup legal maze can be challenging. To help you make the right decision, we present some recommendations and tips:

4.1 Seek professional legal advice:

Deciding on the legal structure is crucial for the future of your startup. Don't take it lightly. Consult with an advisor specialized in startups who can provide you with personalized legal advice adapted to the specific needs of your business. An experienced consultant will help you understand the advantages and disadvantages of each structure, analyze the relevant factors and choose the most suitable option for your case.

4.2 Investigate and compare:

Before making a final decision, spend time researching and comparing the different legal structures available. Read articles, consult informative guides, and compare the features, advantages, and disadvantages of each structure. Familiarize yourself with tax implications, training requirements, financing options, and liability considerations.

4.3 Consider the specific needs of the startup:

There is no single legal structure that works for all startups. The best option for you will depend on the specific characteristics of your business, such as the number of founders, ownership distribution, financing needs, growth plans and long-term aspirations.

Remember:

• Choose a legal structure that protects you, facilitates access to financing and allows you to achieve your objectives.
• Don't be guided solely by simplicity or cost. Choose the structure that best suits the needs and future of your startup.
• A specialized startup consulting can be your best ally in this crucial process.

Choosing the appropriate legal structure for your startup is a strategic decision that will directly impact the present and future of your business. It is not a task that should be taken lightly, but requires careful analysis and a deep understanding of the different options available.

Remember that the best legal structure for your startup will depend on its specific needs and circumstances. There is no universal magic formula. This is why we strongly recommend that you seek professional legal advice from a startup lawyer. An experienced attorney will help you successfully navigate the legal maze and make the best decision for your business.