When starting a business, as well as the factors affecting the practical life of the company decisions have to be taken regarding the fiscal regime and type of company structure to be utilised. We will explain both in simple terms here
FISCAL REGIMES
There are two ways you can operate your accounting and reporting structure-regime simplificado (simplified regime) and regime geral (general regime).
Regime Simplificado
The simplified regime is designed for smaller businesses with lower turnovers that do not need, or could not afford an accountant. Once your turnover reaches a certain amount you are obliged, in fact, to change to the general regime.
Both individuals and companies can work under this regime. Rather than facturas (invoices) recibo verdes (green receipts) are used, a type of pro-forma that allows you to easily calculate IVA (VAT) and tax deductions.
When entering the simplified regime, there are a number of options regarding the charging of Iva and the method and amount of income tax deduction. Professional advice should be sought to ensure you make the correct choices and understand the requirements, as failure to comply will result in fines.
The simplified regime is good for small businesses, and those starting up. There is no requirement to retain the services of a TOC (accountant); administration and running costs are kept to a minimum. However, there are also serious downsides to this regime. All costs the person has are disregarded, as there is a set formula for assuming how much of your income is profit (varying from 20% to 65% depending on the type of activity). This does work well for some activities, however it is considered to be a lot higher than one would normally expect for a well run company, thus more tax will be paid. Once you have chosen this regime, you are forced to stay in it for 3 years, or until your sales turnover reaches 149 739,37€ for two consecutive years, or 25% greater than this in one year. If your business grows nicely (bit does not hit this limit), and has costs higher than that assumed by this regime, you could end up paying a lot more tax.
Regime Geral
The general regime is what most people consider a “normal” trading shell. It is compulsory to employ a TOC and provide quarterly returns of IVa and formal company accounts at the end of the trading year. Actual costs can be deducted and equipment etc. acquired can be written off. There are many other financial benefits that will give a fiscal benefit to a healthy company.
Pagamento especial por conta is a tax that companies within this regime must pay. This tax is 1% of turnover (not profit) and is paid every year after the first 2 years of activity. The minimum payment is 1,250 euros and the maximum payment is 70,000 euros.
It is possible to change from the general regime to the simplified regime if you wish.
In summary, the general regime is for small and medium sized businesses that can afford the services of an accountant, have a degree of allowable costs and want to maximise the fiscal benefits available.
COMPANY STRUCTURES
One of the key choices you must make at the inception of your business is the type of company you wish to use. There are both practical and fiscal considerations which will affect your choice.
Empresário em Nome Individual or Empresa Individual
This is a type of company where it is run by one person who has sole responsibility for the actions and liabilities of the company. The owner of the company is personally (and without limitation) responsible for any debts the company has.
There is no need for any social capital, as there is no limit to the liability of the owner.
Within this form of company, the owner has total control but also total liability. The profits of the company form part of the yearly personal IRS of the owner, leading to simplified administration.
It is difficult to attract outside investment to a company of this type, as there are no shares to sell.
This form of company is recommended for activities that have a low risk, and do not need investment on a large scale.
Sociedade por Quotas
This type of company is the most commonly used, particularly for small and medium sized companies. A minimum of two share holders (which can be individuals or companies) are required, and the liability of the shareholders is limited to the amount of the capital (capital social). A minimum capital if 5,000 euros is required, divided into shares (quotas) between the shareholders (socios).
This type of company must have a manager (gerente) appointed which can be, but does not have to be, one of the shareholders.
The personal responsibility of the shareholders is limited to their share of the capital. Their personal wealth and goods are safeguarded (therefore the personal risk is minimal), however the appointed manager of the firm is personally and totally liable for debts to the state (IVA and Social Security). By having more than one shareholder, experience, investment and knowledge can be shared. If credit is required, banks will often look favourably upon this type of company, as there are a number of shareholders who can each act as guarantors.
If the company is formed with a large amount of capital, the personal risk to the shareholders is greater.
It should be noted that no one person has total control over the company, which can be a negative point when important decisions need to be taken and an accord is needed.
This type of company is taxed under the IRC (corporation tax) regime, and profits/losses can not be utilised by the shareholders as part of their personal IRS.
A company of this form is recommended when a limited liability is desirable, and when it is beneficial to work in partnership with one or more other parties, either for financial or practical reasons.
Sociedade Unipessoal por Quotas
This is a type of company, which is effectively the same as a Sociedade por Quotas, with the only difference being that there is one unique shareholder, rather than a number of shareholders.
The rules regarding capital and liability etc are the same.
This form of company is recommended in cases where a higher risk is inherent, but with low initial investment. Importantly, when this is compared to an empresa individual, the main fiscal difference is that the profits and losses stay within the company, rather than being part of the owners IRS.
Sociedade Anónima
Another type of company with limited liability, with a minimum social capital of 50,000 euros, and a minimum of 5 shareholders (or investors).
Companies of this type have a more complicated organisational structure, more complicated administration, higher initial investment and higher running costs. For these reasons, it is unlikely that anyone starting their first business would consider a Sociedade Anónima.
Other types of Sociedade
There are two other types of company that are worth mentioning, sociedades em nome colectivo and sociedades em comandita.
Sociedades em nome colectivo In this form of company, the shareholders (socios), are personally responsible for all the debts and responsibilities of the company. There has to be a minimum of two shareholders.
Sociedades em comandita This is an unusual form of company, that has shareholders with limited responsibility (those who have contributed to the initial share capital), and shareholders that have unlimited responsibility (those who assume the management and control of the company on a day to day basis). The minimum number of shareholders is two (or five if the share capital is held in “acções”).
CONCLUSION
Whilst there are many different types of company that can be formed, historically the most popular are those that reduce the liability of the shareholders.
At the time of writing (July 2006) the Portuguese government is in the process of implementing a number of measures that will simplify, amongst other things, the formation and administration of companies. This will both reduce the time and costs business owners incur. More information can be found at http://www.ucma.gov.pt/simplex/
DISCLAIMER This information has been provided in good faith and using sources current as of July 2006. The simple information contained here is no substitute for professional advice. Please contact us if you require assistance and we will direct you to one of our recommended professionals. All text copyright Azul Homes LDA 2006.
