Most people creating a small business opt for the legal structure of a limited liability company (LLC). But why is this company structure so popular and where can it become most profitable?
The United States requires no minimum capital for the startup of an LLC, however in Europe in countries such as Spain and Romania have considerably lower tax rates. To determine advantages and disadvantages in various regions worldwide we must first understand the legal specificalities of an LLC in each selected country. In this article, we will draw a comparison between two European states, Spain and Romania, and the U.S.
Universal requirements for opening an LLC
A limited liability company is widely chosen as a business structure due to its flexibility and easiness in the registration process. Most importantly, it provides limited liability in front of the law:
all the business’ obligations are settled through the business’ capital
the associates’ liability (if the LLC is found in debt or sued) is limited to the capital investment made
Therefore, an LLC presents little risk and many opportunities. Whether you would like to begin a startup in Europe or the U.S., most of the legal requirements are universal. Here we will discuss the most significant common steps in opening an LLC and how they specifically apply in Spain, Romania, and the U.S.
Find a name for your LLC
One of the first initiatives you should take towards establishing a limited liability company is finding a name for your business. The name can not coincide with any other registered company and needs to be certified by the competent authority in each country.
In Spain, it is the Central Registrar (Registro Mercantil) that checks the name availability and provides you with a certificate of uniqueness. In Romania, the business name must be submitted and then reserved through the Commerce Registrar (Registrul Comerțului).
As opposed to the European countries, the U.S.’ regulations concerning naming an LLC differ from one state to another. To find out what guidelines you must follow when choosing the company name, you will need to review the website of the agency responsible for business filings in the specific state where you wish to operate the LLC. In most states, that will be the Secretary of State.
Open a business bank account
If the business startup is conducted in Europe, the second recommended step is setting up a bank account where you will deposit the capital investment. The investment requirements are different in each European country.
The Spanish law imposes a minimum of 3000 EURO to open an LLC. The deposit then generates a bank certificate which will be presented together with the other constituent forms at the public notary. In Romania, the minimum capital is only 200 RON, approximately 40 EUROS. In comparison to Spanish regulations, the Romanian law states that the proof of investment must be submitted after the signing of the constituent documents, which we will talk about shortly.
Although starting an LLC business in the United States does not require you to possess a minimum investment sum, you will have to pay a small fee for the application set forth to begin the registration process. This fee depends on the state where the LLC will be located. It is also important to know that in the U.S. you are only allowed to create a bank account for the company after the establishment of its LLC status. You will need to provide the constituent acts and EIN (Employer Identification Number) to be approved for a Business Bank account.
Prepare and certify the constituent documents
This step is crucial for the well-functioning and recognition of a limited liability company. The constituent documents include the business’ essential information and its functioning rules. The way in which these documents are certified varies greatly between Europe and the United States.
What does it mean to draft constituent documents? Well, through the essential information we understand: the company’s name, its specific activity, the registered office (headquarter), the names and identification data of each associate. The functioning rules refer to the administrative structuring of the business – the roles and responsibilities of each associate (or of the sole associate), as well as the share percentage.
In Spain, the documents mentioned above pertaining to the functioning and organizing of an LLC comprise el estatuto. To have the LLC officially registered all the business associates must sign the public deed of incorporation at the notary. The public deed will include: el estatuto, the bank certificate confirming the investment, and the certificate of uniqueness acquired from the Central Registrar. Once the public deed is signed by all company members, the notary will record the LLC in the Company Registry, a process which can take up to a few weeks.
The legal regulations of establishing an LLC in Romania are similar to those in Spain. What is relevant to know is that prior to signing the public deed (the Act of Constitution), the business’ headquarter needs to be registered at the National Agency of Financial Administration. The company associates or the owner of the set location will write a self-declaration stating that the conditions of professional activity imposed by the building will be respected.
Then, the Act of Constitution is formulated and will contain all the information of a Spanish estatuto. Once it is signed at a public notary by all the business associates, the LLC can finally be registered at the Commerce Registrar through the following constituent documents: the signed Act of Constitution, the capital investment proof, the declared headquarter proof, and other self-declarations from company members who certify that they will abide by the regulations.
You might think that the paperwork imposed by European regulations is extensive. However, the procedure of opening an LLC is in fact one of the easiest ones compared to other types of company structures such as stock or cooperative corporations, which are ideal for larger businesses.
It is true that the United States’ laws make the requisites for constituent documents much simpler and subject to each state’s governing rules. After finding an available name for your business, you will need to prepare a document called Articles of Organization – the equivalent of a Spanish estatuto and a Romanian Act of Constitution. However, this document does not have to be certified by a public notary or brought with further documentation to a public registrar. Instead, it just needs to be filed in accordance with each state’s business filing conditions.
Once the Articles of Organization is submitted, it is recommended that the company associates compose an Operating Agreement.
What is an Operating Agreement? An Operating Agreement is a legal document that outlines the ownership and operation of an LLC. An interesting comparison is that most American states do not legally demand this document, whereas in Europe its particularities must be contained within the constituent documents. If this condition is not met, the LLC can not be certified and officially incorporated by the competent authority.
Register for taxes
After the legal certification of your LLC, it’s time to register the company for taxes. In Romania, this occurs automatically with the filing of the constituent acts at the Commerce Registrar – once the application is approved, you are granted the LLC’s Certificate of Incorporation and the business becomes functional from a taxation perspective as well.
Spain operates slightly different in terms of taxes. With the public deed signed at the notary you will have to go to the Spanish Tax Agency (Agencia Tributaria). Here, you will: register the deed by getting it stamped; receive your Tax identification number (CIF) for the company.
The CIF works to identify the LLC with the tax authorities. In order to request the company’s CIF, you will need to fill out an application form found on the agency’s website and to set up an appointment with the local tax agency office to present it.
In the United States, a tax identification number is also required to file taxes for your business; this is called an Employer Identification Number (EIN). However, an EIN must be obtained only if the LLC has more than one member or has employees. In the case that you are the sole associate of your company, the business will be taxed as a sole proprietorship and therefore does not demand an EIN.
Nevertheless, as previously mentioned, to apply for a Business Bank account for your company you will need to dispose of an EIN. A single-member LLC will generally not be able to open this specific type of account.
Advantages and disadvantages: what does it mean to do business in Europe vs the U.S.?
Now that we have gone through the major requirements of opening a limited liability company in two European countries as well as in the U.S., the question that arises is: where would an LLC be most profitable or most advantageous?
The answer is not a straightforward one. There are advantages and disadvantages concerning an LLC business even within countries of the European Union and therefore that much more between the European space and the U.S. Legal regulations is not the only element which must be considered when choosing the location of your startup. Marketing culture is also a very relevant factor that can determine your business’ success.
To gain a comparative view on business in Europe vs the U.S., we will discuss three legal specificalities as applied to the startup of an LLC in the countries analyzed in this article: residency requirements, taxation, and data privacy regulations.
To open an LLC in Spain as a foreigner you are required to obtain a NIE, which is an identification number that allows you to operate freely in Spain. The process of receiving a NIE differs based on your citizenship. If you are an EU citizen, the process will be fairly quick; as a non-EU individual, the time period depends on the corresponding Immigration Office. If you’re considering a
limited liability country in Spain, it is important to take an interest in what applying for a NIE entails based on your own citizenship.
As a non-resident you can startup an LLC on Romanian territory if you meet the legal conditions. According to the OUG 44/2008 law, you must:
be above 18 years old
not have been charged for any financial crimes
have a declared headquarter (registered office)
To legitimize a declared headquarter, you will need to own a document stating the location’s right of use. This is an important aspect not only for ensuring you meet the residency requirements, but for the legal establishing of an LLC.
There are generally no residency restrictions for someone who wants to open an LLC in the United States. A non-U.S. citizen can own and operate an LLC within U.S. tax codes without having to reside in the state’s jurisdiction. There are certain conditions that must be followed, however, depending on the state in which the LLC conducts its business.
According to Investopidia .com, it is registered that Europe has the lowest corporate tax rate at an average of 19.35% in 2019, as compared to an average of 27.21% in the Americas.
Spain’s income tax stands at 25%. However, for startups, the numbers reach 15% for the first 300,000 EURO of profits and then move up to 20% for the following two years after the initial sum has been exceeded. The Value Added Tax (VAT) is a consumption tax added to the value of goods and services. The VAT rate in Spain is at 21%.
Creating an LLC in Romania may seem attractive to foreign investors due to the relatively low tax rates as opposed to Western Europe and Spain, for example. An LLC can pay up to 3% in taxes if the company does not have employees. If the business exceeds 1 million euros in profits, the income tax rate shifts to 16%. The standard VAT in Romania is at 19%, though add-ons occur when dealing with various services.
The U.S. presents a different taxation system than Europe. For tax purposes, an LLC can either be considered a sole proprietorship, a partnership, or a corporation (based on how many members the LLC has). A single-member LLC is a sole proprietorship; a company with at least two members is regarded as a Partnership unless it files to be treated as a corporation. Therefore, the owner of an LLC disposes of more flexibility in how they wish to have the company taxed.
The business is considered a pass-through entity (“disregarded entity”) unless it meets each state’s requirements for a corporation. As a pass-through entity, the LLC does not pay taxes on business income; rather, the company members pay taxes on their shares of the profits. The self-employment rate in the U.S. is at 15.3% in 2021. Both sole proprietors and Partnership members pay the self-employment tax rate on their share of the business’ capital.
There is no federal business tax for sole proprietors and no business tax in most states. If the LLC is considered a corporation, it is taxed at such instead of a pass-through entity. In this case, state taxes might be applicable.
Data privacy regulations
SPAIN and ROMANIA
The GDPR (General Data Protection Regulation) was implemented by the European Union in 2018. Therefore, Spain enjoys a legal framework of data privacy and protection that ca be beneficial for your company. The regulation protects how EU citizens’ data is accessed and used, and it extends its influence on all businesses that trade with the EU. As a member state of the EU, Romania finds itself within the same legal framework as Spain when discussing data privacy laws. If personal data protection is a key element in choosing the location of your LLC, then European Union laws may prove to be an advantage.
As opposed to the European Union, the U.S. does not have a single principal data protection legislation. Instead, data privacy laws are passed on both a federal and state level with the purpose of protecting the data of U.S. residents. Comprehensive consumer data privacy laws have been enacted in only three states – California, Colorado, and Virginia. These laws provide the right to refuse the sell of personal information and the right to access and delete personal data. Data privacy regulations in the U.S. might represent a disadvantage to you if your business relies on privacy quality.
So, Europe or the U.S. for an LLC?
Both regions can be very profitable business spaces and many of the requisites of opening an LLC in Spain, Romania and the U.S are similar. Whether you find advantages or disadvantages along the incorporation process in each country or in the legal specificalities addressed above may determine where you want to open your LLC.
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