Practical guide to choosing the legal structure for your startup

Selecting the legal structure for your startup is not merely a formality, but a strategic decision that influences your speed of execution, access to capital, and personal risk. Making the right choice offers protection, order, and credibility from day one; a poor choice can hold you back just when you need to grow. To decide clearly, it’s important to understand what defines this choice and how to align the interests of the team and investors from the start.

The legal structure determines the extent of liability regarding debts and claims, directly affecting personal assets. It also defines how profits are taxed and the mechanisms for distributing them among company participants. It influences the ease of bringing in partners, issuing shares or participations, implementing incentive plans, and negotiating with investors. On a day-to-day basis, it affects incorporation procedures, accounting obligations, and compliance costs. Moreover, it sets the governance framework: how decisions are made, how conflicts are resolved, and what happens when partners join or leave.

In this post, you will learn which structures best fit each stage and how to avoid mistakes that can stall fundraising rounds. Keep reading and turn your legal choice into real traction.

Key factors to consider before deciding

Before selecting the legal structure, it’s advisable to prepare a 12 to 24-month forecast that includes estimated revenues, financing needs, team size, and main operational risks. This initial snapshot helps assess the project’s exposure level and, if relevant, opt for structures that limit personal liability when risk is significant (claims, supplier dependence, regulatory requirements).

The composition of the founding team should be clearly defined—number of partners, capital distribution, and roles—and, if appropriate, include a vesting scheme linking equity rights to continued involvement. From there, taxation should be analysed using comparative data (personal income tax versus corporate tax), applicable deductions, and the total cost of incorporation and compliance (notary, registry, accounting, and advisory services). Additionally, the sector may influence the entire legal structure through licenses, insurance, data protection, and consumer regulations, potentially requiring more formal governance.

Finally, if you plan to operate outside Spain or attract non-resident partners, consider the ease of bringing in foreign investment, setting up subsidiaries, or issuing convertible instruments, which typically calls for flexible articles of association and the ability to manage capital increases. Overall, this analysis integrates planning, risk, team, taxation, compliance, and internationalisation, guiding the practical choice between starting as a sole trader, incorporating a Limited Company from the start, or planning a transition to a Public Limited Company when complexity requires it.

To assist your decision, here are some useful questions to consider:

1. Number of partners: Is the project starting individually or with a team? What roles will each person assume?
2. Level of liability: What level of exposure are you willing to accept? Do you need limited liability from the outset?
3. Initial capital available: How much capital do you have? What initial capital is necessary to launch the project? What are its sources (personal funds, family loans, other financing)? Does the chosen structure require minimum share capital?
4. Tax considerations: Which tax regime is more efficient for you in the medium to long term?
5. External investment: Are you anticipating investor involvement (business angels or venture capital)? Which legal structures are standard and best regarded by investors in your sector and project stage?
6. Governance: How will decision-making be organised? Will you opt for sole management, joint responsibility, shared administration, or a board of directors?
7. Team incentives: Do you foresee stock options, phantom shares, or other participation schemes? Does the chosen legal form facilitate implementing these incentives?
8. Sector and compliance: What licences, mandatory insurance, GDPR, and consumer regulations apply?
9. Internationalisation: Does the business model have an international outlook? Will you operate in other markets, incorporate non-resident partners, or set up foreign subsidiaries? How does this affect your articles of association and taxation?

Answering these questions in detail allows you to compare alternatives (sole trader, SL, SA, etc.) critically, quantify their impact, and select the legal structure that best aligns with your goals, risk appetite, and growth pace. With this framework, the main legal forms for startups are described below.

Main legal structures for startups

Sole Trader

Suitable for validating an idea with low turnover and a need for simplicity. Enables a quick start with low incorporation costs and hands-on management. However, liability is unlimited, and profits are taxed as personal income from economic activities. This is often a temporary choice before migrating to a company structure. Anna Duran, founder of WeThink Human Talent, sums it up perfectly: “Starting as a sole trader gave me the freedom to test, make mistakes, and learn quickly. I didn’t have investors behind me or slow processes — just the direct responsibility to make my idea work. That agility was key to validating my model before scaling.”

Limited Company (SL, including Single-Member SL)

The standard legal form for startups in Spain with one or more partners. It limits liability to the capital contributed and allows for tailor-made articles of association and shareholder agreements adjusted for investment and growth.

The SL supports partner entry and exit, capital increases, and incentive plans (stock options and phantom shares), fitting most early funding rounds. José Miguel Ávila, founder of Qass, explains: “It allowed us to open the door to investment, share responsibilities among partners, and project confidence to clients. The legal structure became a tool for growth, not just a formality.”

However, this type of company requires formal accounting, filing annual accounts, and corporate compliance. It’s advisable to draft the articles carefully, considering pre-emption rights, drag-along/tag-along clauses, and administration governance.

Public Limited Company (SA)

Offers greater formality and flexibility to issue different classes of shares, structure significant funding rounds, and access capital markets. It entails higher costs and obligations (board of directors, mandatory audits in certain cases, stricter formalities), so it is rarely the first choice in very early stages.

Some startups migrate from SL to SA when size and investment levels justify it. It has a higher minimum share capital requirement (€60,000) and more complex administration.

Civil Company and Joint Ownership

Simple arrangements for low-risk collaborations without scaling or investment ambitions. Incorporation costs are low, but participants have broad liability. Their suitability for startups with growth ambitions is limited, as these are not commercial companies, restricting their usefulness for scalable projects, external investment, or internationalisation.

Turn Your Legal Decision into a Competitive Advantage: Define the ideal structure for your startup by using the “Choice of Legal Form” tool and consult the procedures for starting up.