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When creating a company in Portugal, it is necessary to choose the legal form under which that company will operate. This choice depends not only on the number of founding partners but also on the purpose of the activity practiced by the entity in question, the liability of the partners in case of company debt, the share capital, among other factors.

NOTE: There are two main groups of companies:

  • Commercial companies: Their main objective is to be profitable, engaging in commercial activities (e.g., clothing store, manufacturing industry, etc.);
  • Civil companies: Their main objective is to engage in civic and social activities (e.g., volunteering organizations, sports associations, arts associations, etc.)

As this is an informative document about starting a startup in Portugal, we will not mention civil companies (we are excluding the following legal forms: Cooperative and Association). However, in addition to commercial companies, we will also include sole proprietorships, because a startup can arise from just one individual entrepreneur.

Making the separation by the number of founding partners, there are:

Sole proprietorships:

  • Individual Entrepreneur (“Empresário em nome individual” in portuguese)
    • A single person who starts their activity, on their own behalf. The person has unlimited liability for their assets, meaning that if their sole proprietorship has debts, personal assets can be seized for payment. It falls under category B of IRS (business income – producing and/or selling goods; professional income – providing services). There is no minimum share capital required, and the owner only needs to appoint an accountant for business volumes above €200,000. It is a legal form intended for micro-businesses.
  • Sole Proprietorship with Limited Liability (“Estabelecimento individual de responsabilidade limitada” in portuguese)
    • It is very similar to the Individual Entrepreneur, presenting only two differences: 1) the person has limited liability for their assets, meaning that if their sole proprietorship has debts, only the portion of the company’s assets may be affected; 2) There is a minimum share capital of €5000 (at least 2/3 in cash, with the possibility of the remainder being in assets, which can be seized). Currently, this legal form is rarely adopted.
  • Sole Quotaholder Private Limited Company (“Sociedade unipessoal por quotas” in portuguese)
    • It is a commercial company formed by only one partner who holds 100% of the quotas and, consequently, the share capital. The liability in the case of company debts is limited to the value of the quota (with €1 being the minimum for the share capital, although such a low value is not advisable due to the lack of guarantees the company would present in the face of any debt). The legal norms applicable to this type of company are the same as those of other private limited companies, that also work with quotas. In Portugal, the name of a sole quotaholder private limited company always ends with “Unipessoal Lda”.

Collective companies

  • Private Limited Company (“Sociedade por quotas” in portuguese)
    • This is the most common type of commercial company in Portugal. It requires a minimum of 2 partners, and the existence of industrial partners (partners who enter the company as workers without contributing to the share capital) is not allowed. The amount each partner contributes to the share capital makes them the holder of the corresponding quota (becoming the owner of x% of that share capital). The company’s assets are independent of the partners’ personal assets (limited liability). Both the debts and profits of the company are paid/distributed in proportion to each partner’s quotas. The minimum share capital is €1 per partner (although such a low value is not advisable due to the lack of guarantees the company would present in the face of any debt). In Portugal, the name of a private limited company always ends with “Lda” or “limitada”.
  • Public Limited Company or Joint-Stock Company (“Sociedade anónima” in portuguese)
    • It is a fairly common commercial company and generally larger in size than private limited companies, with a minimum limit of 5 shareholders. While in a private limited company the company’s assets are divided among the partners by quotas (each partner holds a percentage of the company), in public limited companies the share capital is divided into shares of the same nominal value (original monetary value designated by the company for each share, with a minimum of 1 cent), which are distributed in a certain way among the shareholders. As for the payment of each shareholder, only 30% of the nominal value of the shares needs to be paid as a deposit on the date of the company’s incorporation, with the remaining 70% able to be deferred for up to 5 years. Payments can be made in kind (assets instead of cash), although, if applicable, these cannot be deferred (these payments must be assessed by a Certified Public Accountant that is independent, not from the company). Every public limited company must have a responsible Certified Public Accountant. The minimum share capital is €50,000. The liability for debt is limited to the shares of each shareholder. In Portugal, the name of a public limited company always ends with “Sociedade Anónima” or “S.A.”.
  • General Partnership (“Sociedade em nome coletivo” in portuguese)
    • It is a type of commercial company that is rarely used nowadays. The partners (who must be at least 2) are personally liable for the possible debts of the company in an unlimited manner, therefore there is no minimum fixed share capital (the personal assets of the partners can be seized as payment if the company’s assets are insufficient in case of debt, being collected according to each one’s weight in the company). Industrial partners are allowed (a partner who joins the company as an employee without contributing to the share capital). In Portugal, common names in this type of company include “[first name] e Filhos” or “[first name] e companhia”.
  • Mixed liability company (“Sociedade em comandita” in portuguese)
    • It is a type of commercial company with a mixed liability regime. Composed of limited partners, who have limited liability for their contribution to the share capital, and general partners, who have unlimited liability and may be liable for debts with their own assets.
    • There are two types of mixed liability companies:
      • Simple: requires a minimum of two partners, operates similarly to private limited companies, but with mixed liability.
      • by Shares: requires a minimum of 5 shareholders, operates similarly to public limited companies, but again, with mixed liability.

How to choose the appropriate legal form for your startup:

To choose the appropriate legal form, from the ones mentioned above, it is necessary to take into account:

  • Size of the company;
  • Number of partners;
  • Legal and tax liability;
  • Business objectives.

That being said, and moving on to 3 specific examples:

Early-Stage Technology Startup (Sole Proprietorship):

  • Description: A startup founded by a single entrepreneur, focused on developing artificial intelligence software for small businesses.
  • Number of Partners: 1
  • Size: Early-stage microenterprise.
  • Preference for Liability: Desire to limit personal liability.
  • Appropriate legal form: Sole Quotaholder Private Limited Company (SQPLC).
    • Reasons: A SQPLC can be an excellent option for individual entrepreneurs who want to start a business without having to assume unlimited personal liability for the company’s debts and obligations. Additionally, it is a relatively simple and straightforward structure, which can be advantageous for a startup in its early stage, as it reduces administrative complexity and associated costs.

Growing Biotechnology Startup (Small Business):

  • Description: A startup founded by three scientists, focused on research and development of innovative treatments for neurodegenerative diseases.
  • Number of Partners: 3
  • Size: Growing small business.
  • Preference for Liability: Desire to separate personal liability of partners from business.
  • Appropriate legal form: Private Limited Company.
    • Reasons: With multiple partners and a highly technical activity, a private limited company offers a flexible structure that eases management and internal organization. Additionally, it provides limitation of partners’ liability to the invested share capital, which is crucial in a research and development field that may involve risks and legal challenges.

Large-Scale Renewable Energy Startup:

  • Description: A startup founded by a group of investors, engineers, and energy specialists, with the goal of developing and implementing large-scale solar and wind energy projects.
  • Number of Partners: 10 (including institutional investors, engineers, and energy specialists)
  • Size: Macro company, with significant growth projections and complex operations.
  • Preference for Liability: Desire to separate personal liability of partners from business and ensure transparency in management.
  • Appropriate legal form: Public Limited Company (PLC)
    • Reasons: For a larger-scale startup like this, a public limited company would be the most suitable choice. This is because a PLC offers a flexible structure for raising capital through the issuance of shares, which is crucial for financing large-scale projects. Additionally, a PLC provides greater transparency in management, more structured corporate governance, and easier transfer of shareholdings (sale and exchange of shares), which can be important for attracting institutional investors and strategic partners. With that said, a PLC facilitates capital raising and personal separation of partners from the company’s commercial operations.

As for the remaining legal forms not mentioned in the examples, all, except for the Sole Proprietorship with Limited Liability, have at least a part of the partners with unlimited liability regarding debt related to the commercial activities of the company.

Nowadays, in general, modern startups are increasingly opting for companies with limited liability regimes, in order to reduce the risk taken by the partners, as well as to create a clear distinction between the personal assets of the partners and the assets of the company. This is the main reason why legal forms such as individual entrepreneur, general partnership, and mixed liability company are somewhat falling into disuse. Nevertheless, there are still situations where this type of structure may be suitable: some family businesses, traditional businesses, or partnerships of professionals (businesses with a certain personal closeness with the partners)

As for the Sole Proprietorship with Limited Liability, there is a minimum capital requirement (€5000) and some lack of flexibility in terms of structure. This is on contrast to the sole quotaholder private limited company, which not only has a minimum share capital of only €1 (lower entry barrier), but also can be easily converted into a private limited company in terms of legislation if more partners appear. These are the main reasons why Sole Proprietorships with Limited Liability are increasingly being replaced by sole quotaholder private limited companies.

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