At the time of setting up a new business it is important to make a good choice of the legal form of our enterprise. There are two distinctive options: trading as a self employed individual(Autonomo) or as a Spanish limited company (Sociedad Limitada)

There is not a straightforward answer to which is the best for you, but surely before taking any step you want to consider the following criteria.

Limited Liability

In the case of a self employed individual the liability is unlimited. There is no difference between personal or business assets. On the contrary, for a Sociedad Limitada the liability is limited to the company capital.

Only the assets owned by the company and not by its owners are used as guarantee for payments.

However, we have to add that the administrator does lie responsible for the way he runs the company, which always should be in honesty and good faith.

Number of Partners.

Generally, in cases with more than one partner it is common to form a limited company. In this way it is easier to sell your shares to step out of the partnership or sell the business itself.

Trust.

The fact that for a limited company it is mandatory to deposit its books and accounts in the Trade Registry (Registro Mercantil) normally offers a better image to clients and suppliers than a self employed individual.

Investors and Partners

If it is in our business plan to appeal to investors or recruiting new partners in the future certainly you need to create a framework in which new member can be incorporated with all legal guarantees.

Deductions.

When an individual buys a car it is assumed that he will give it some private use. Under this assumption, the self employed cannot deduct depreciation of the car and he will only be able to claim 50% of the IVA. The same will happens with anything that can be used for business and private purposes. (Mobile phone, utility bills, etc…)

Therefore, with equal turn over and the same set of expenses, a limited company will obtain a lower accounting profit in most cases. This is specially so if the business structure is bigger than simply a freelancer. If the business will have considerable expenses ( rentals, vehicles, outsourcing…) the SL structure is more tax efficient.

Tax

The most relevant factor to analyse is the tax. After a threshold and depending on the structure the tax saving can compensate greatly for the greater initial costs.

This subject requires a separate article and some calculations.

Read: In what cases is trading as a limited company more tax efficient?

Final Considerations and Summary.

Limited Companies are more expensive to set up and maintain. For a company with share capital of 3006€ and 60000€ turnover, the difference with respect to a self employed individual could be about 1700€ the first year (when it is set up) and 650€ the others. This is so because a SL Company has far more fiscal and administrative obligations that keep your accountant much busier. In case of liquidating the company, there are also numerous administrative works to do. As we have mentioned, this cost can be absorbed by the tax savings obtained.

On the other hand, generally speaking, Limited Companies offer greater guarantee to supplier, and clients. It conveys the image of a better established business, with ambitions to grow. It poses an ample variety of potential deductions of its profit. And, of course, the liability is limited to its capital. Additionally they are easier to sell: totally or a portion of it to a new partner.

The third option

It is also worth considering the option in the middle: a partnership between self-employed individuals. This is called a Sociedad Civil and it has features of both, company and sole trader structure.

Read more about this option in our article: Partnership business: Sociedad Civil

Please feel free to contact us at info@limitconsulting.com for customised advice on your business plan.