The Sociedad Limitada (SL), the Spanish name for Limited Liability Company (LLC), is the most common form of company in Spain and is similar to a limited company in other countries. Like any form of company, a Sociedad Limitada (SL) is aimed at performing all sorts of commercial activities subject to commercial law. It is composed of a limited number of partners, it requires a minimum of capital, and the liability of the owners is also limited.
To incorporate a Sociedad Limitada in Spain the appointment of a company director is required. It can either be a Sole Director, Joint Directors, Joint and Several Directors, or a Board of Directors composed by a minimum of three members.
This article provides an overview of the implications and duties of a company Director of a Sociedad Limitada.
Duties of a company director
A company director manages and runs the day-to-day decisions of the company and has full authority to represent the company in all activities related to the company’s corporate purpose. This authority cannot be limited as regards to third parties.
In the case of the joint directors, each director can act independently and represent the company. However, in the case of joint and several directors, all members must agree on all acts or contracts entered into by the company.
The first director’s duty is to comply with tax and social security issues. Below are the instances in which a Director must register as an “autónomo” (freelancer), a legal figure in Spain, as regulated in the Additional Provision 27th of the General Law of the Spanish Social Security RDL 1/1994 of June 20th(Disposición Adicional 27ª de la Ley General de la Seguridad Social (RDL 1/1994 de 20 de junio):
- Directors with effective control of the company must register as an autónomo (freelancer) in Spain;
- If the director has been assigned a wage;
- Whenever the director has actual control of the company (at least half the capital);or when the director happens to be the ultimate beneficiary.
- When he has a stake equal to or greater than a third of the capital;
- When the director exercises functions of management and has a percentage of at least 25% of shares in the Company.
The role and responsibilities of the directors are usually regulated in the statutes of the company, or through a Shareholders’ Agreement, which will delimit their role and how to perform their obligations. However, the Spanish Corporations Act regulates a number of basic obligations that the directors must comply with as representatives of a company:
- Perform their duties diligently and loyally to defend the interests of the company.
- Must not use the name of the company to conduct business of their own, or take advantage of their position to make business operations for personal gain.
- Have the obligation to inform the other partners of any conflict of interests with the company, especially those involving competition.
- Must keep secret any confidential company information, even after their removal or resignation, and should never share any information that may entail negative consequences for the interests of the company.
If they fail to fulfil these obligationsthey may have to respond with their own assets for the damaged caused.
Directors are also responsible for the following duties:
- Lodge the incorporation deed at the Mercantile Register;
- Update the shareholders’ book;
- Call general meetings;
- Represent the company;
- Prepare and disclose the annual accounts and the directors’ report;
- Call a general meeting to dissolve the company, if it is to be dissolved;
- Challenge resolutions of the general meeting when they are contrary to the objects of the company; and
- Keep the minutes book
Third party liability
The Spanish Corporations Act states that a corporation may have a cause for dissolution when “it causes losses that reduce the company`s worth to less than half its initial capital.” To avoid this situation the company must raise its capital or reduce it to a sufficient extent, as long as it is not appropriate to request the filing for bankruptcy.
If the company is clearly in the event of dissolution the director is required to call a general meeting within 2 months to adopt the agreements to, either approve the dissolution of the company, increase capital, or agree on a capital reduction. If the director fails to comply with this obligation he or she may be liable for all amounts owed to any creditor acquiring the company after its dissolution.
Being a company director is a serious commitment. Directors represent the company and manage its daily activities, and in principle, are not liable for the acts or debts of the company, provided they act diligently and in accordance with the law. It is, therefore, imperative that directors know the limits of their duties in accordance with the law, statutes or, where appropriate, derivatives of a Partnership Agreement.