Create companies with one euro: a lot of noise and little substance

Create companies with one euro: a lot of noise and little substance

In recent months, there has been a lot of talk about the creation of companies with only one euro of capital, especially since the approval of Law 18/2022 on October 19, 2022, better known as the “Create and Grow Law.” The main objective of this Law is to encourage the creation and growth of innovative companies in the country, as well as promote entrepreneurship and investment in business projects. This Law has created a more favorable environment for the creation of new companies, as it reduces the costs associated with starting new businesses.

One of the main innovations introduced by the Create and Grow Law was the possibility of setting up limited liability companies with a lower share capital than the 3,000 euros previously required. This measure was a relief for many entrepreneurs and small business owners because it allowed them to create a company with a lower share capital and therefore less demanding from a financial point of view.

However, this measure also has its disadvantages and limitations that are important to know before deciding to set up a limited liability company with a share capital of less than 3,000 euros, which usually makes it preferable or advisable to set up a limited liability company for that amount.

The Create and Grow Law. Is it really as they say?

The main innovation of the Create and Grow Law from a purely corporate point of view is the modification of the minimum share capital of limited liability companies from the traditional 3,000 euros to 1 euro. It is important to clarify that this is not an exception or contingency; the Create and Grow Law introduces a new reduction to Article 4 of the Capital Companies Law (LSC), which expressly states that the minimum share capital will be 1 euro, replacing the previous wording.

However, despite this, the spirit of the rule is aimed at the shareholders ultimately contributing a minimum of 3,000 euros in share capital. In this sense, as long as the capital does not reach 3,000 euros, at least 20% of the company’s profits must be allocated to legal reserves until the sum of the share capital and legal reserves reaches 3,000 euros.

With this Law, the figure of the company in successive formation is eliminated, which was hardly known or used due to its complexity and inoperability, allowing this alternative whose shortcomings we will see later.

Do you want to create a company with just one euro? Consider the drawbacks

There are several problems related to the incorporation of companies with a share capital of less than 3,000 euros; therefore, it is recommended to carefully consider the implications of setting up a company with a lower share capital before making a decision in this regard.

Some of the most common are:

Responsibility

Firstly, and the most important aspect to consider is that the reduction of share capital does not imply less responsibility for the shareholders. Although we mentioned earlier that the Create and Grow Law modified the wording of Article 4 of the LSC, the liability of limited liability companies does not change.

In a limited liability company, the liability of the shareholders is limited to the capital they have contributed, but in the event that the company incurs debts or defaults, the shareholders may be obliged to respond with their personal assets.

In the case of companies with share capital of less than 3,000 euros, if the company is liquidated and the social assets are not sufficient to satisfy the social obligations, the shareholders themselves would be jointly liable for the difference between the amount of 3,000 euros and the amount contributed as share capital. That is, the shareholders assume significant financial risk when setting up the company.

Operational limitations

It is important to note that although the law allows the formation of limited liability companies with a social capital of €1, it may be difficult to carry out economic activity with such a small amount of social capital. In general, it is recommended to contribute an adequate amount of social capital for the development of the planned business activity.

Difficulties in attracting investors

A limited liability company with a reduced social capital may convey the appearance that the company does not have the necessary resources to develop its activity in a sustainable way and, therefore, may have greater difficulties in dealing with financial or economic crises, increasing the risk of bankruptcy. This makes it difficult for these companies to obtain financing and access certain financial resources, such as credit lines or bank loans; or produce reluctance to attract private or institutional investors.

It is important to note that many financial institutions, as well as certain public aid and subsidies, require a minimum social capital to grant loans or credits to companies, so a limited liability company with a social capital of less than €3,000 may have difficulty obtaining external financing.

This is an essential aspect for the future of the company and the project, so those companies that are established with a capital of less than €3,000 for whatever reason should be capitalized as soon as possible if they foresee the need for financing or investors.

Reputation problems

Linked to the previous point, but with a focus on the market, a reduced social capital may convey to customers, suppliers, and other interested parties a perception of little solvency and professionalism. This is because a company with a low social capital may be perceived as a company with fewer resources and less ability to fulfill its commitments, although this is not always true.

It is important to note that the minimum social capital of €3,000 for the formation of limited liability companies in Spain was established to guarantee the solvency of companies and protect the interests of investors and creditors.

A lot of noise and little substance 

Taking into account these disadvantages and limitations, it is important to carefully consider whether forming a limited liability company with a social capital of less than €3,000 is the best option for our business project. In many cases, it may be more convenient to opt for other legal forms, such as self-employment, or the formation of a company with sufficient social capital.

In any case, it is essential to have the advice of legal and business professionals who can help us make the best decision based on our needs and objectives. At Letslaw by RSM, we can guide you on the different available options and help you form the company in the most appropriate way.