Setting Up a Company in Spain vs Registering as a Freelancer: What's the Best Option?
A common consideration when starting a business in Spain is whether you should become self-employed or freelance (autónomo), or if you should start your own limited company (Sociedad Limitada or SL). Of course, there are advantages and disadvantages for each of these setups, and the right choice will depend on your individual situation.
This article breaks down the important aspects of both business options and highlights the key factors you should be aware of when choosing which one best suits your activity.
What are the main distinctions?
There are 6 main points of difference in the creation and operation of autónomo and SL business types, which are:
Becoming autónomo doesn’t cost anything in terms of the initial investment in the business and the process is relatively quick and simple. It is done by registration with the tax authorities (Agencia Tributaria of Hacienda) and with Social Security (Seguridad Social).
However, to create an SL there are several additional steps, such as registering the company with the Mercantile Registry (Registro Mercantil Central), the signing of the public deed with a notary, and the provision of additional tax documentation. All these individual processes have a cost attached and take time. Furthermore, the initial investment required to set up an SL is a minimum share capital contribution of €3000.
An autónomo is responsible for all the debts of their business as no legal distinction is made between company assets and personal assets. Therefore, it means there may be a risk to property, savings, or personal possessions in the event of a large enough deficit.
On the other hand, an SL is incorporated to have its own legal personality, which is distinct to that of its owner(s) or partners, and therefore liability is limited only to the capital invested in the business. Any losses resulting from company debt would not affect personal finances.
As a freelancer, you will pay personal income tax (IRPF) on your net income after associated business costs. This is a progressive tax, meaning that the higher your income the higher the rate of payment, which ranges from 19% all the way up to 45%, should your annual income reach €60,000 or above.
The difference in taxation for an SL is that as a legal personality it is subject to corporate tax (Impuesto de Sociedades) at a fixed rate of 25% of profits. However, newly established companies may be entitled to a discounted rate during their first two years of operation.
Important Note: The payment of VAT (IVA) is common across both business types.
4. Social Security
Both autónomos and SLs are subject to social security payments. However, a self-employed person is eligible for a discounted rate for the first two years of their activity and, depending on their age, is entitled to a further discount during year three.
Whereas generally, with an SL, the company director must be registered with the Spanish social security and the cost starts at €350 per month.
5. Financing Options
With regards to external financing, it can be easier for an SL to find opportunities. Due to the legal situation of the company, it is seen by banks or lenders as being more solvent than an individual and therefore viewed as a more favourable type of borrower or investment.
Autónomos are required to complete basic accounting and to register their issued and received invoices. Tax declarations for IRPF and VAT must be made quarterly, with an annual declaration also required by the end of June each year.
When it comes to an SL, a complete accounting process is required with the company being subject to the Plan General Contable (general accounting standards). This means that documentation must be maintained for all financial operations, with corporate tax being paid annually and VAT either quarterly or monthly, depending on the level of income.
What to think about when making your choice
Ultimately, there is no concrete answer to whether you should choose autónomo over SL or vice versa. The most reliable method is to measure your current and expected business activities - along with your projected income - against the factors outlined above so that one option stands out as more applicable to your situation.
The choice generally comes down to how much money you will make and the size of the business. The process of becoming self-employed is quicker and cheaper for someone looking to get business activity off the ground and who is not yet sure about how much income will be generated, or what the opportunities for growth will be.
Additionally, while you can make the leap from autónomo activity to incorporating the business as an SL, this cannot be done the other way around.
When to go from self-employed to a limited company
Indeed, the time may come when it makes financial sense for you to make the switch from freelancer to company. In terms of income, this would generally be when you are making over €60,000 per year, due to the 45% IRPF rate applied on income above that threshold as a freelancer.
However, it could be financially beneficial to set up a company before this point, depending on your individual situation. Likewise, if you wish to increase the number of partners, take on employees, or sell shares in the business then an SL will enable you to grow.
Finally, if you plan to work with large established companies then it is typically preferable to be operating as an SL since at a commercial level your business will have an image of increased size and solvency.
Looking For Further Guidance?
If you need professional help, we’d love to hear from you. You can contact the team at Strong Abogados below to let us know more about your situation and to arrange a consultation.
You can also find out more about the steps to become autónomo in our article about Registering as a Freelancer in Spain. Additionally, the full process of creating an SL is explained in How to Set Up a Company in Spain: The 2021 Guide.