Advantages and disadvantages of setting up a community of property

Lawyer specialising in community of property
Published on: 7 April 2024

Table of contents

In our country, setting up a business is an increasingly simple process. However, all entrepreneurs are always faced with the same problem at the time of starting up. This is none other than choosing what type of company to set up. There are many options other than becoming self-employed or setting up a limited company.

In this regard, we would like to talk to you in depth about the advantages and disadvantages of setting up a community of property.

Definition of community of property

The community of property is considered, within the legal framework, to be the simplest system available to the self-employed when it comes to forming a partnership and starting a joint project. The minimum number of entrepreneurs required is two and they are known as community partners. This is mainly because they have a common right or object from which they expect to make a profit through their business activity. It is especially advisable when the business requires a low initial investment.

The form in which communities of property are set up

Signing the private contract

Self-employed persons who are going to form a community of property, i.e. the joint owners, must sign a private contract between themselves in which the following information must appear:

  1. ID number, name and surname of the members.
  2. Name of the community of property and its registered office and tax domicile.
  3. Activity for which it is created.
  4. Contribution of each member of the company and, based on this, the percentage of participation of each one.
  5. Agreed clauses: causes for dissolution, expected terms of duration, etc.
  6. Mechanism of administration of the community of property.

Once signed, it must be registered with the appropriate body within the administration of the autonomous community in which the company resides. A public deed is only necessary if real rights or real estate are contributed.

Other aspects to take into account

Although there is no maximum number of partners, the minimum is always two. On the other hand, none of them must contribute a minimum share capital, as this contribution can be either financial or labour-related. However, this does not mean that there should be no minimum capital, only that this may be considered as the common thing.

In contrast to limited liability companies and public limited companies, a community of property has no legal personality of its own. Therefore, it is the sole responsibility of the partners to meet their debts to third parties jointly and severally and without limitation. In other words, each self-employed member of the company has to support the community and the other partners with his present and future financial and real estate assets. This is specified in Article 395 of the Civil Code.

The only way to reduce and limit this liability is to apply, at the time of the incorporation of the community of property, to the Limited Liability Entrepreneur regime.

Taxation of the community of property

We have already mentioned that the comunidad de bienes do not have their own legal personality and, therefore, do not have to pay Corporation Tax, except in the case of capitalist partners, i.e. those who do not contribute work but do make an economic investment. This means that the profits are distributed in full among the partners with the sole obligation to pay personal income tax on their business activity.

Like the community of property itself, the community partners must also pay personal income tax. The only difference is that the company does so using Form 111 for quarterly returns and Form 115 for annual returns, while the self-employed members use Form 130 and Form 131, respectively.

On the other hand, the community partners are not obliged to file Value Added Tax returns on an individual basis. This is mainly due to the fact that it is the community of property that must pay this tax to the public administration. Specifically, it must do so on a quarterly basis by means of Form 303 and on an annual basis by means of Form 390. In addition, it will be responsible for filing the rest of the information returns that correspond to it depending on the activity in which it engages.

So, what are the main advantages and disadvantages of the community of property?

I am sure that you already have a pretty good idea of the main advantages and disadvantages of a community of property. However, we would like to highlight them a little better.

Advantages of the community of property

There are two main advantages of a community of property. Firstly, the formalities required to set up a community of property are much simpler than those required to set up a limited or public limited company. In this way, the business can be set up much more quickly than if any of the other options were chosen.

On the other hand, it is not necessary to have any minimum capital to set up a community of property, unlike the other types of company. This is ideal for entrepreneurs who have little liquidity at the time of starting up the business or who need to have all the financial investment possible to make it work.

In addition, with rare exceptions, joint ventures are not taxed under Corporation Tax, but rather under Personal Income Tax, which is usually more economically advantageous for the self-employed who form them.

Main disadvantages of the community of property

Undoubtedly, the main disadvantage of the community of property is that its members have unlimited and joint and several liability, except in the case of the Limited Liability Entrepreneur regime. However, this may not be sufficient in case the company incurs large debts towards a third party. In fact, in such cases, they may be liable with their savings, their vehicles or even their homes.

We cannot forget to tell you that, although the taxation of the community of property is advantageous for the self-employed who are part of it, this type of company, as a general rule, does not have the possibility of benefiting from grants and subsidies from public bodies. Therefore, before setting it up, it is important to have a civil law lawyer who is an expert in community of property, who will provide the necessary information on this issue in order to clarify whether it is really advisable to set it up or not.

In short, the community of goods has some very specific pros and cons, which must be taken into account when deciding whether to opt for them together with your partners or not. We hope we have been of help to you in resolving your doubts about this figure and in making your decision. If you have any doubts, contact G. Elías y Muñoz Abogados, and our expert lawyers will attend you with the maximum professionalism that this type of case requires.

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