Types of Business Entities And Their Tax Implications

It would be difficult to find the tax implications for a business without knowing its business type. In general terms, a businessman is considered to be the sole owner of his firm. But it is not true. A business does not merely mean someone owning it and making a profit. Rather a business entity has wider meaning when it comes to doing business in Spain.

Understanding tax implications for each business type requires expert advice; it is always a good idea to hire a local tax attorney. Keep reading below to find the types of business entities and their tax implications.

Types of Business Entities

Choosing a business type is an important decision. It can affect the factory costs, indirect expenses, and overall margin of a business. Every country has its own set of standards for forming a business entity under some legal restrictions. Depending on the ownership of a business, there are five major types of business entities in Spain.

Sole Proprietorship

Under a sole proprietorship, the business entity and owner are considered to be the same. An owner is liable for all the actions/debts of the business. A sole proprietor is solely responsible for all the profits and losses of the business. Examples of a sole proprietorship are freelance tutors, shop owners, and freelance consultants.

Corporate Form of Business

A corporate form of business organization is an association of people who have been authorized to conduct a business. By law, a company form of business has its own separate legal entity. The owners and the company are two different things. In case of any dispute or liability, a company is sued but not its owners. Each member of the company has limited liability. There are three types of company form of organization in Spain: Sociedad Anónima (SA), Sociedad de Responsabilidad Limitada (SRL), and Sociedad Limitadad de Nueva Empresa (SLNE).

Partnership Form of Business

A partnership firm of business is an agreement between two or more persons who have agreed to undertake a business activity under the Partnership laws of a particular country. In Spain, the partners of a partnership firm are the co-owners of a business. They have unlimited liability towards all the operations of a business. However, there are partnerships with limited liability given the fact that at least one partner has no limited liability.

Branches

A branch is formed when a foreign company extends its operations in Spain. A branch carries its activities within the prescribed region and must maintain proper records. However, it cannot be held liable for other operations of the business. The ultimate liability rests on the head office of the company.

Joint Ventures

Forming a joint venture in Spain is possible through there are three legal forms:

• Unión Temporal De Empresas or UTE: It is a temporary business association created to undertake a specific project.
• Agrupación De Interés Económico or EIG or European EIG (EEIG): They are non-profit legal associations that provide centralized services to a group of companies.
• Contrato De Cuentas En Participación: A type of partnership in which managing entrepreneur and non-managing entrepreneur participate to carry a business activity.

Tax Implications for Business Entities in Spain

Each business has a different process of paying taxes and can affect the profits of a business. All the corporate form of business is obliged to pay a corporation tax in Spain. Corporate tax is also known as Impuesto sobre Sociedades and it is mandatory to pay it under Spanish Law. Not only companies but the sole proprietors and professionals also pay taxes on the economic activities.

Companies must keep a record of the financial transactions and file the returns on time. Performing certain tax formalities can entitle a company for the tax liability. If you have any form of business entity in Spain, you will be taxed as per Spain Government rules. You can enjoy perks and other benefits of taxation if you comply with the required conditions.

Sarah K, a professional writer who share interests in different creative niches. Her ideas and tips towards such niches have contributed to the online community.