When starting a digital business in Spain, one of the crucial decisions entrepreneurs must make is the legal form of their business. The two most common options are to be self-employed as an individual or to incorporate a commercial company. We will now discuss the advantages and disadvantages of both options.
Self-Employed Individual
Advantages:
- Simplicity and low initial cost: No minimum amount is required to start. It is the simplest and most economical legal form.
- Flat contribution rate: New freelancers can benefit from a flat rate in Social Security contributions, paying a reduced contribution during the first year.
- Less administrative burden: Tax and commercial obligations are less complex compared to corporations. It is not necessary to keep accounts in accordance with the Commercial Code or to publish results.
- Flexibility: The self-employed can make decisions quickly without the need to go through the formality of meetings or councils.
Disadvantages:
- Unlimited personal liability: The self-employed person is liable with his personal assets for the debts and obligations of the business, which may put his personal financial situation at risk.
- Tax limitations: The ability to deduct expenses is more restricted and subject to greater scrutiny by the tax authorities.
- Lower financial credibility: Financial institutions and suppliers may perceive the self-employed as less reliable compared to corporations.
Incorporation of a Company
Advantages:
- Limited liability: In a partnership, the partners are not liable with their personal assets, but with the capital contributed to the company.
- Increased deductibility: Corporations can deduct a wider variety of business expenses, which can reduce the tax burden.
- Credibility and trust: Companies tend to be seen as more stable and reliable entities by banks, investors and suppliers.
- Limited Liability Company (LLC): Among the types of capital companies, it is the one preferred in practice by economic operators. Among the various reasons that justify this generalization, the following may be highlighted:
- It is the ideal type of company for the organization of companies with a reduced number of partners and of a closed nature, which, in turn, makes it the most attractive corporate form, in most cases, for small and even medium-sized companies and for those of a family nature.
- The flexibility of its legal regulation, which is manifested, fundamentally, in:
- the wide margin granted to the autonomy of the interested parties in the statutory configuration of the member’s position and the internal organizational structure;
- a simpler and less costly operating regime than that of the SA;
- The lower amount of the minimum capital required than in the case of the corporation, which after the reform of the LSC by the Crea y Crece Law is reduced to 1 euro, with a special protection regime for creditors as long as it does not reach 3,000 euros.
Disadvantages:
- Initial capital: Although the minimum capital requirement has decreased, an initial contribution is required for the incorporation of the company.
- Greater administrative complexity: Companies are subject to greater tax and commercial obligations, which implies a more complex and costly administrative management.
- Operating costs: Maintaining a company involves additional costs, such as formal accounting, audits and other professional services.
- Business decisions: Business decisions must go through formal procedures, such as shareholders’ meetings or boards of directors, which can slow down decision making.
The choice between being a self-employed individual or incorporating a company depends largely on the specific circumstances and objectives of each entrepreneur.
- For smaller scale projects or those who prefer a simpler and less costly structure initially, the figure of a self-employed individual may be the most appropriate option.
- On the other hand, for those seeking to limit their personal liability, benefit from a greater ability to deduct expenses and project an image of greater strength and credibility, incorporation, particularly an LLC, may be more suitable.
Carefully evaluating the advantages and disadvantages of each option, and considering factors such as the type of business, associated risks and growth expectations, is essential to making the most informed and strategic decision for the success of the venture.
When should I switch from self-employment to incorporation?
- Increased income: When the self-employed’s income increases, the tax burden may be a reason to incorporate a company.
- Protection of assets: To limit liability and protect personal assets, by incorporating a company, debts are assumed only with the company’s capital.
- Business growth: If significant growth is anticipated and you are looking for easier access to financing, incorporation may be the best option.
- Image and professionalization: Improving the image of the business in the eyes of clients and collaborators can be another important reason for incorporating a company.
Conclusion
The decision between being a self-employed individual or incorporating a company should be based on an individual analysis of each case, considering the objectives and economic forecasts of the business. While being self-employed as an individual is simpler and cheaper at the beginning, incorporating a company offers significant advantages in terms of limited liability and taxation as the business grows. Carefully evaluating these factors will help you make the best decision for the success of your venture.
This publication does not constitute legal (or tax) advice.
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