Buying dormant limited liability companies
The purchase of dormant limited liability companies is a common routine in Spain. Dormant companies are usually limited liability companies with no activity. Entrepreneurs see in them a business opportunity, as they believe that it is more profitable than creating a new company. However, before investing in this type of purchase, it is necessary to take into account some legal and tax aspects.
In this article, we’ll analyze the main characteristics of dormant limited liability companies so that you can make the best decision in your particular case.
Why it is not a good idea to buy a dormant company 👀
Many people think that buying a dormant company is a good idea, as they can save time and costs compared to a newly created company. However, this is not always the case.
Here’s why buying a dormant company is not a good idea.
👉 6 reasons not to buy a dormant company
1️⃣ Cannot operate instantly.
The first reason is that when it comes to investing in a limited liability company, it is important to take into account the time it will take to get it running. Some people mistakenly believe that buying a dormant limited company will save them time, but in reality, it will not.
Keep in mind that it does not save time and the costs are virtually the same as a newly formed company.
To illustrate, the process of registration in the Registry of companies of a newly created company takes 15 days. When you buy an inactive company you have to change the administrator and the period to register the new position in the Mercantile Registry is the same, 15 working days. This will prevent, for example, operating with the bank account that the company has opened since the bank will not authorize the operative until the change of administrator has not been registered.
2️⃣ Same or even more formalities than incorporation.
Secondly, the formalities can be more cumbersome than setting up a company from scratch. Among other things you will have to modify:
– Purchase and sale of shares. To acquire an inactive company implies buying the shares of the one who holds them. You will have to prepare an agreement of purchase and sale of the shares with whoever holds them.
– Change of shareholders. When buying the shares, you become a shareholder of the company and this implies that you have to register it in the register of shareholders that every company has to have.
– Change of director. In addition, the normal thing is that the person who acquires the company wants someone of his confidence to manage the company. To do so, you’ll have to prepare the minute of the shareholders’ meeting appointing the new director and dismissal of the previous one.
– Bylaws. It is probable that the bylaws of the inactive company are standard bylaws, so you’ll have to adapt them to your corporate purpose. The modification of the bylaws is subject to registration in the Registry of companies.
– Registered office. Every company must have a registered office and this must be reflected in the bylaws. When buying an inactive company the common thing is that you need to change the registered address. The reason you have to modify the bylaws is to reflect that agreement to change the address has been approved by the shareholders’ meeting.
– Bank account. If the inactive company has a bank account, you’ll have to notify the bank of the change of administrator so that they allow you to operate with it. The bank will not allow you to operate it until the change of directors has been registered in the Registry of companies. In addition, it’s possible that this bank or the particular office where the account is opened does not adapt to your needs, so you’ll have to close it.
3️⃣ You would probably be assuming liabilities.
Thirdly, dormant companies usually have no assets, but what about liabilities? Be very careful and make sure that it does not have debts. The buyer will be responsible for all the debts and obligations of the company.
When buying a dormant company, the buyer assumes all the risks of the company. That is, if the company has any legal or tax problems, the buyer will be responsible for solving them.
4️⃣ Same expenses, 0 income.
Fourthly, dormant companies do not generate income and therefore cannot meet their business expenses. Even if dormant, you’ll have to cover the formal expenses (cost of having the company).
5️⃣ No tax exemption.
Fifthly, dormant companies are not exempt from filing annual accounts and corporate income tax, so you’ll have to make the relevant administrative declarations even if the company has had no activity. Therefore, you’ll have to review the previous declarations submitted by the previous owner.
6️⃣ Risk obtaining financing.
Finally, inactive companies often have problems obtaining credit, as lenders consider these companies to be a higher risk. They do not benefit.
While it’s true that an inactive company usually has a definitive NIF granted, keep in mind that as soon as you create a newly created company you can apply to be assigned a provisional NIF. This is granted almost immediately. With this you can start operating and, once the company is registered in the commercial register, you can apply for the definitive NIF.
At Luxton Legal, we recommend that you choose to create a limited company from scratch. This way you’ll be able to adapt it to suit your needs from the outset. We will be happy to help you and guide you step by step through the whole procedure. Don’t hesitate to contact us!