Exercises: Types of business and legal structures

By size, businesses are broadly classified into micro-enterprises (fewer than $10$ workers), small businesses ($10$ to $49$), medium-sized businesses ($50$ to $249$), and large enterprises ($250$ or more). Classify: (a) the local greengrocer's, with $2$ employees; (b) the furniture factory in the industrial estate, with $120$; (c) a consultancy firm with $35$; (d) a supermarket chain with thousands of employees. Explain why size matters (grants, paperwork, bargaining power with banks).

Ana is a self-employed plumber (sole trader) and her business owes $20.000\ \text{€}$ to a supplier. If she cannot pay, she is liable with everything she owns, including her savings and, in the worst case, her home: that is unlimited liability. If the business were a private limited company, she would only lose the money invested in the company. Explain the difference between limited and unlimited liability and why a private limited company is said to "protect" personal assets.

The figure summarizes the four most common legal structures when setting up a business and their main characteristics. Below is a card with an unsolved practical case.

1. a) Choose the legal structure that fits Marta and explain why (she works alone, takes on low risk, and needs neither partners nor capital).
2. b) Now choose for three friends launching an app, contributing $6.000\ \text{€}$ between the three of them, who want to risk only that money, not their savings or homes.

When Ana, the self-employed plumber, forms a private limited company, a new 'person' is born: the company has its own assets, signs contracts and can owe money separately from Ana.

1. a) Explain what it means that a company has its own legal personality.
2. b) Argue why that separates the debts of the business from the personal debts of the partner.

Large companies divide their capital into shares: small pieces of ownership that can be bought and sold.

1. a) Explain what being a shareholder is (owner of a part, entitled to their slice of the profits) and what the difference is between being a shareholder and being the boss.
2. b) Argue why a factory that needs a lot of money may want to sell shares to many people.

The school cooperative sells healthy breakfasts at break time.

1. a) Explain how decisions are made in a cooperative (in an assembly, each member has one vote, however much money they have) and how the earnings are shared out (according to work done or what was agreed, not according to the capital contributed).
2. b) Compare it with a private limited company where one partner contributes $90\ \%$ of the capital: who calls the shots in each case?

Setting up a business requires paperwork.

1. a) Order from simplest to most complex: registering as self-employed (with the tax authorities and Social Security), forming a private limited company (deeds before a notary, the companies register, minimum capital), getting your national ID card.
2. b) Explain why many small businesses start out as sole traders and only become companies when they grow or the risk increases.

Legal detective: look at the signs or websites of three businesses in your area and find out their legal form (S.L., S.A., S.Coop. or just the owner's name).

1. a) Classify them and explain what each set of initials tells you.
2. b) Choose one and argue why you think it chose that form (size, number of partners, risk of the business).

Choose the most appropriate legal form for each case and justify it: (a) Lucía, a graphic designer working alone for several clients; (b) three friends with an app who want to risk only the $6.000\ \text{€}$ they contribute; (c) five workers at a closing workshop who want to buy it together and make decisions in an assembly; (d) a bicycle factory seeking investors who will contribute $200.000\ \text{€}$ and can sell their shares whenever they want.

To form a private limited company (SL), the law now requires a minimum share capital of just $1\ \text{€}$, but until it reaches $3.000\ \text{€}$ it imposes restrictions (for example, setting aside part of the profits as reserves); for a public limited company (SA), it requires $60.000\ \text{€}$.

1. a) Explain what this initial capital is and who the law protects by requiring it (think about suppliers selling on credit to the business).
2. b) Sara and Leo each contribute $2.000\ \text{€}$ for their video game studio: can they set up the private limited company (SL)? Do they have too much or not enough to reach the $3.000\ \text{€}$ without restrictions?
3. c) Years later, they want to go public (float on the stock market) to raise large-scale financing: which legal form will they need, and why?

Classify these organisations according to their ownership — private, public, or social (cooperatives and social economy) — and explain what changes in each case (who owns it and for what purpose it operates): (a) the public television channel; (b) the corner supermarket, owned by a family; (c) a farmers' cooperative selling its members' oil; (d) the city hospital; (e) a bicycle factory with $200$ shareholders.

Two friends set up a private limited company (SL) fifty-fifty: each contributes $1.500\ \text{€}$. In the first year they earn $4.000\ \text{€}$ and decide to share out half and leave the other half in the company to grow.

1. a) Calculate how much each one receives.
2. b) Explain what advantage leaving profits inside the company has (reserves to buy a machine without taking out a loan).
3. c) Argue how the split would change if one had contributed $70\ \%$ and the other $30\ \%$ (the usual practice is to share according to the capital contributed, unless agreed otherwise).

The cousins Ainhoa and Nerea inherit the family bakery. Ainhoa wants to carry on as a sole trader in her own name; Nerea proposes a private limited company between the two of them. The business handles debts with suppliers of around $25.000\ \text{€}$.

1. a) Analyse what each one risks in each option.
2. b) Recommend one form, bearing in mind that there are two partners, that there are debts and that the business is stable, and point out one drawback of your recommendation.

The company 'BikeSur' has accumulated debts of $40.000\ \text{€}$ and is closing down.

1. a) If it was a sole-trader business, explain how much the owner can end up losing.
2. b) If it was a private limited company whose partners had contributed $5.000\ \text{€}$, explain how much they lose at most and what happens to the rest of the debt.
3. c) Argue why the law allows limited liability despite that risk for suppliers (it wants to encourage people to start businesses).

Leo has been a self-employed designer for three years and is doing well: he invoices $3.000\ \text{€}$ a month, has hired an assistant and is going to ask for a loan to set up a studio.

1. a) Point out three signs that he might be better off switching to a private limited company (he has employees, the debts are growing, he is taking on more risks).
2. b) Explain what will hold him back (paperwork, formation costs, more accounting obligations) and what you would recommend to him.

Your class creates a cooperative to sell breakfasts at break time for one term. Design its three basic rules and justify them:

1. a) How people join and leave the cooperative (do they have to contribute money? is it returned when they leave?).
2. b) How the earnings are shared out (by hours worked, equally, reinvested?).
3. c) How decisions are made (assembly, one student one vote, simple majority).

Marcos works as a self-employed plumber. He is offered a comprehensive renovation project budgeted at $45.000\ \text{€}$. To take it on, he needs to take out a bank loan of $30.000\ \text{€}$ to acquire machinery and a van, as well as hire two labourers. His personal assets include a primary residence valued at $140.000\ \text{€}$ and $12.000\ \text{€}$ in savings.

1. a) Design an asset-risk comparison evaluating what would happen if the client goes bankrupt and leaves the project unpaid: contrast the outcome if Marcos remains an individual sole proprietor (autónomo) versus if he previously incorporates a Limited Liability Company (SL).
2. b) Advise Marcos with a reasoned recommendation: weigh the protection of his home against the greater management obligations, incorporation costs, and accounting formalities of an SL for this specific case.

The eight female workers of a bankrupt printing shop want to rescue the business by contributing their severance packages. Four of them can contribute $15.000\ \text{€}$ each (due to having greater seniority), while the other four only have $3.000\ \text{€}$ each. They are hesitating between establishing a Worker-Owned Cooperative (Sociedad Cooperativa de Trabajo Asociado) or a Limited Liability Company (SL).

1. a) Evaluate the distribution of voting power and surplus in both corporate models based on the disparity in contributed capital. Predict what internal tensions may arise in the assembly or general meeting depending on the formula chosen.
2. b) If the printing shop urgently needs external bank financing to renew its machinery, anticipate and justify what specific obstacles or strengths the project will face depending on the legal form adopted.

In a forum on business start-ups, you read the following statement: 'Incorporating a Limited Liability Company is always the best option for any business, as it guarantees that you will never be liable with your personal assets and provides more prestige.'

1. a) Critically refute this statement: outline two real-world situations where the supposed asset protection of an SL proves ineffective (for example, regarding personal bank guarantees or debts with Social Security and the Tax Agency).
2. b) Design two entrepreneurship cases with opposing characteristics (taking into account initial investment, risk, and partners) and justify why for one it is more efficient to start activities as an individual sole proprietor (autónomo) and for the other it is essential to resort to a commercial company.

Three business partners found a video game company as an SL (limited liability company) with a capital of $18.000\ \text{€}$: Mara contributes $10.000\ \text{€}$, Íker $5.000\ \text{€}$, and Zoe $3.000\ \text{€}$. Mara and Íker have other jobs and do not contribute time, while Zoe works full-time developing the video games. At the end of the year, the company obtains a net profit of $24.000\ \text{€}$.

1. a) Analyze the distribution of votes and the distribution of dividends that would strictly correspond according to capital shares. Justify why this standard distribution turns out to be unfair to Zoe.
2. b) Design a legal and compensation solution that fairly compensates Zoe's work without infringing upon the ownership rights of Mara and Íker, differentiating labor compensation from return on capital.
3. c) Suppose that Mara intends to unilaterally approve the full reinvestment of profits into a risky project that Zoe rejects. Determine whether Mara has the necessary majority and formulate a clause or shareholders' agreement that prevents majority abuses.

A business report states: "Cooperatives are an outdated and inoperative formula in today's market, because democratic management slows down decisions and they lack incentives to attract capital."

1. a) Rebut this argument by analyzing the resilience and behavior of cooperatives compared to public limited companies (corporations) during recessions or sectoral crises.
2. b) Design a cooperative enterprise project designed to meet an unmet need in a rural area or in a vulnerable neighborhood. Justify the chosen type of cooperative and explain how its founding principles become a competitive advantage over a large corporation.
3. c) Anticipate two financial or operational barriers that this project will face and formulate a strategy to overcome them without distorting its democratic identity.

The courier company "Última Milla" operates as a social economy entity: it decides its lines of action in a workers' assembly, offers permanent contracts to people at risk of exclusion, and reinvests $50\ \%$ of its profits in socio-labor integration projects.

1. a) Contrast the cost structure of "Última Milla" with that of a multinational delivery platform based on hourly contracts or freelance delivery workers. Analyze how this affects its break-even point.
2. b) Design a value proposition and marketing strategy that allows "Última Milla" to attract and retain customers without having to compete in a price war.
3. c) Predict what ethical and governance dilemmas the assembly will face if the company incurs losses for two consecutive quarters and needs to raise external capital to renew its vans.

"Lácteos de la Sierra", a family-owned high-quality yogurt company with a turnover of $3$ million euros, needs a capital injection of $5$ million euros to open an automated industrial plant. The founding family is torn between applying for a long-term syndicated loan or transforming the company into a Sociedad Anónima (SA) and selling $45\ \%$ of the capital on a stock market (such as BME Growth).

1. a) Evaluate the advantages and disadvantages of both options, considering the risk of financial bankruptcy (leverage), the loss of management autonomy, and corporate transparency obligations.
2. b) Suppose that, after going public, a large multinational competitor buys $45\ \%$ of the listed shares on the market and convinces one of the family heirs to sell it an additional $6\ \%$. Predict the consequences for the control of the company and explain to what extent the rules governing the transfer of shares in an SA facilitate or prevent this outcome compared to an SL.

Three 4th-year ESO students have devised an innovative school product and you want to sell it continuously at fairs and online. You expect revenues of $900\ \text{€}$ per quarter with a production cost of $300\ \text{€}$ (gross profit of $600\ \text{€}$ per quarter among the three of you, that is, $200\ \text{€}$ quarterly per person). You have no debts or employees.

1. a) Evaluate the real economic viability of registering as self-employed or setting up a Sociedad Limitada (limited liability company) compared to the fixed costs of social security contributions, agency fees, notary fees, and taxes required by regulations in Spain. Interpret the results by calculating the final net balance of the activity.
2. b) Design an operational alternative or adapted legal formula (such as a school cooperative or a non-profit youth association) that allows you to test the product and invoice without incurring losses due to formalization costs.
3. c) Determine what specific thresholds of turnover, asset risk, or need for bank financing would mark the exact moment when making the jump to a Sociedad de Responsabilidad Limitada would become essential.